Pact Group Holdings Ltd
Annual Report 2019

Plain-text annual report

t r o p e R l a u n n A 20 19 Our vision is to enrich lives everyday through sustainable packaging and manufacturing solutions Contents Overview A View from the Chairman A Message from the CEO About Pact Group Financial and Operational Highlights Performance Review of Operations & Financial Performance Strategic Priorities Innovation Awards Governance Sustainability Review Corporate Governance Overview 2 4 6 12 14 26 32 34 36 36 39 46 57 58 108 109 116 119 Financial Reports Directors' Report — Remuneration Report Auditor's Independence Declaration Financial Statements Directors' Declaration Independent Auditor's Report Shareholder Information FY20 Shareholder Calendar Corporate Directory OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION A View from the Chairman 2 Dear Fellow Shareholders, On behalf of the Board of Directors of Pact Group, I am delighted to present to you our 2019 Annual Report. Overview FY19 was a challenging year for Pact, with earnings impacted by higher raw material costs, energy costs and weaker demand conditions in some sectors. Notwithstanding these challenges however, the Group delivered 10% revenue growth and made improvements on many fronts including the delivery of operating efficiencies, securing long term customer agreements in our pooling and reuse businesses and making further progress in the pooling services in Australia, we have secured growth in our hanger reuse business and have been successful in leveraging Government support and partnership for several exciting initiatives to help develop the recycling circular economy. Pact is the largest processor and consumer of post-industrial recycled resin in Australasia. I am proud of the progress we have made and reaffirm our commitment to becoming the number one partner for sustainable choices in the packaging industry. Board Changes I would like to take this opportunity to highlight some changes to our Board of Directors since our last Annual Report. transformation of our packaging network. The Group balance sheet One of the Board’s top priorities in FY19 was to establish the right was also well managed, operating cashflow was strong and leverage leadership for the Group. In that context, and following a global was improved in the second half. Debt facilities were extended, search, we were delighted to announce the appointment of Sanjay reducing near term financing risk, and a subordinated term loan Dayal as our new Managing Director and Group Chief Executive facility was established, increasing the Group’s funding flexibility. Officer, effective from 3 April 2019. Sanjay brings to Pact extensive Along with disciplined capital management, these measures will operational, manufacturing and supply chain experience and provide the capacity required for Pact to continue to progress a strong focus on customers, quality, performance and driving restructuring activities and complete existing growth projects. opportunities for organic growth. Importantly for Pact, Sanjay has “ Pact is Australia’s most innovative packaging company. Our technical, design and engineering experts challenge conventional thinking and identify new opportunities through insight led innovation “ Innovation led and managed complex major integration and restructuring initiatives. Such experience will be extremely valuable as we progress Pact is Australia’s most innovative the optimisation of our packaging network and drive value from packaging company. Our the integration of our recent acquisitions and growth initiatives. technical, design and engineering Sanjay previously held senior executive positions at BlueScope Steel, experts challenge conventional including Chief Executive, Building Products, Corporate Strategy thinking and identify new and Innovation, following several other senior positions in Asia and opportunities through insight led Australia with the Company over a nine year period. Prior to that, innovation. We continue to receive Sanjay had a long and successful career with Orica and ICI. prestigious industry awards and customer recognition for our innovative packaging solutions. Following Sanjay’s appointment, I resumed my role as Non-Executive Chairman of the Group. We were thrilled to make the In August of this year Peter Margin resigned from our Board. Peter Australian Financial Review and had been a director of Pact since our IPO and was Chairman of the BOSS Magazine’s Most Innovative Audit, Business Risk and Compliance Committee. Peter brought a List for the seventh year in wealth of knowledge and experience to Pact, but with expanded succession, one of only three executive duties outside of Pact he is unable to continue to commit companies to do so. Pact ranked the time required as a Director of the Group. On behalf of the Board second on the Manufacturing and I would like to thank Peter for his outstanding service to Pact and Consumer Goods list from more wish him the very best for the future. than 800 organisations across Australia and New Zealand. In 2019 we were recognised for designing and manufacturing a Thank you On behalf of the Board of Directors I would like to express my thanks and appreciation to our shareholders for your continued household mobile garbage bin support and to also thank all of our customers, suppliers and other made from 60% recycled milk stakeholders. I would also like to thank our dedicated management bottles. It is particularly pleasing to note that five of our winning team and employees across the Group for their commitment and nominations from the past seven years have been for innovative contribution throughout the year. sustainability solutions that increase the reuse and recycling of plastic material. Sustainability It has been a challenging year, but the Group remains committed to driving business transformation and is focussed on delivering improvements in its core business fundamentals. I am confident that Sustainability lies at the heart of our Group vision, it shapes our we have the platforms and leadership in place to drive sustainable core values and is a consideration in all of our business decisions. We recognise that our business activities have a direct impact on and profitable growth in the business and maximise long-term shareholder value. the communities in which we operate, and our customers are increasingly looking to us to deliver innovative solutions to support their own sustainability targets. In FY19 we have built upon our commitment to sustainability and have made significant progress towards our 2025 End of Waste Sustainability Promise to reduce, reuse and recycle. We have expanded our returnable produce crate Raphael Geminder Non-Executive Chairman PAC T 2019 A NNUA L R EP OR T 3 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONA Message from the CEO 4 A Message from the CEO Dear Shareholder, I am very pleased to present to you my first report since joining Pact as Managing Director and Group Chief Executive Officer in April 2019. People and Safety second half, and resin costs reduced. This enabled us to recover some of the adverse pricing lags which had impacted earnings in recent periods. Recent acquisitions performed in-line with expectations and we continued to manage our controllables, delivering significant Since joining Pact, I have talked extensively to our people. I believe efficiencies in our operations and reducing overheads. that we have highly capable and dedicated employees across the Group and a talented and experienced management team which it Growth and Efficiency is my privilege to lead. Our people are critical to Pact’s success and It is pleasing to note that several important growth and efficiency I would like to take this opportunity to recognise their outstanding projects were delivered or progressed in the period despite the contribution and thank them for their commitment, particularly in challenges that we have faced in FY19. what has been a challenging year. The Group has : We are committed to creating a high performance and collaborative workplace culture and foster employee engagement through our annual Applause reward and recognition program, which celebrates innovative thinking, operational excellence, safety commitment and sustainability initiatives. • progressed our packaging network redesign — closing two facilities, rationalising another, and establishing an import supply model for some product categories; • grown our asset pooling operations — securing a long-term contract to supply returnable produce crate pooling services to We also remain committed to providing a safe work environment for ALDI, which commenced in August 2019; and all of our employees. There is an ongoing focus on training, processes and systems for our people and I have been pleased to see an improvement in our safety metrics this year. Our Lost Time Injury Frequency Rate (LTIFR) improved to 4.7 in FY19 compared to 5.5 in the • delivered growth in reuse services — securing a long-term contract to supply garment hanger reuse services to a large retailer in the US, which is expected to commence in the second half of FY20. prior year. However, there is still room for improvement and driving Improving the Fundamentals and Strategic Review improved engagement and safety outcomes will be one of my key priorities in the year ahead. No injuries are ever acceptable, and Zero Harm will remain our goal. Change in Operating Model In my first few months with Pact I have spent a significant amount of time within our operations, understanding our business, products and processes, and engaging with our customers. I have been impressed by Pact’s market leading manufacturing and innovation capability and the strong relationships that we have established with many leading During FY19 we implemented a new operating model and changed the Group’s reporting segments to align with our three key product and trusted brands. portfolios: • Packaging and Sustainability • Materials Handling and Pooling • Contract Manufacturing Services This change increases the transparency of performance at a product level and will help drive improved decision-making across the business. Group Performance and Business Overview Yet our performance across a number of metrics does not reflect our capability. Delivering further improvements in our fundamentals, including safety, efficiency, quality and delivery is critical to enable us to grow our core business and improve our capital returns. Our customers must remain at the heart of everything we do. Our goal will be to exceed their expectations in quality, service, value and innovation. Our future direction will be guided by the outcomes of a strategic review that I have initiated. This review will clarify the activities and The Group delivered revenue of $1.8 billion in FY19, 10% higher than operations which are core to Pact’s continued success and will guide the prior year, with growth driven by the Asian acquisition that was future resource allocation and capital investment. Our industry is completed in the second half of FY18 along with the acquisition of TIC Retail Accessories completed in October 2018. Underlying revenues going through change and we need to ensure that we are leveraging our strengths to realise the opportunities of the future. were generally in-line with the prior year. The impact of growth in demand for packaging in Asia and growth in crate pooling volumes Outlook in Australia, together with higher pricing, reflecting the partial pass Looking forward, we remain focussed on maximising long-term through of higher input costs, was offset by lower underlying net shareholder value. We will focus on developing clarity in our strategy, volumes due to weaker demand conditions in some sectors. improving the performance of the core business, seeking opportunities In the Packaging and Sustainability segment we experienced subdued demand in the dairy, food and beverage and agricultural sectors in Australia and New Zealand, exacerbated by the drought conditions in for organic growth and driving further efficiencies in our operations. Our outlook for FY20 is that we expect EBITDA (before significant items) to modestly improve, subject to global economic conditions. Australia. Fewer available infrastructure projects adversely impacted I look forward to updating you on our progress. volume in the Materials Handling and Pooling segment, whilst weaker demand in in the home care sector impacted volumes in the Contract Thank you. Manufacturing Services segment. Group EBITDA of $231 million was 3% lower than the prior year. Earnings were impacted by higher raw material and energy costs and weaker underlying volumes. Pleasingly pricing was improved in the Sanjay Dayal Managing Director & Group CEO PAC T 2019 A NNUA L R EP OR T 5 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION About Pact Group 6 Pact is a leading provider of specialty packaging solutions, servicing both consumer and industrial sectors. Pact specialises in the manufacture and supply of rigid plastic and metal packaging, materials handling and pooling solutions, contract manufacturing services, recycling and sustainability services. Headquartered in Melbourne, Australia, Pact has an extensive manufacturing and supply network across Australasia. Pact caters to a diverse range of industries, including the food, dairy, beverage, agricultural, chemical and industrial sectors. We deliver products and services to a broad range of trusted global and regional brands. The Group has more than 6,000 employees and generated revenues in excess of $1.8 billion in FY19. Our Product Portfolio Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services FY19 revenue $1,208M FY19 revenue $296M FY19 revenue $372M • Packaging for consumer and industrial use • Recycling and sustainability services • Closed loop pooling • Integrated contract services • Plastic materials handling products • Infrastructure and industrial products manufacturing services focused on home, personal care and health and wellness sectors Australia, New Zealand, China, Indonesia, Philippines, Singapore, Thailand, Hong Kong, South Korea, Nepal, India Australia, New Zealand, China, Hong Kong, USA, India, Bangladesh, UK, Sri Lanka Australia PAC T 2019 A NNUA L R EP OR T 7 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONStrong regional footprint with operations across 15 countries China Korea Hong Kong United States Philippines India Sri Lanka Nepal Bangladesh Singapore Thailand Indonesia Australia New Zealand UK 8 Our Market Leading Platforms Our Packaging and Sustainability platform FY19 Revenue Other 10% Health and wellness 5% Oils and lubricants 6% Personal care 7% Sustainability 8% Chemicals 8% Food, dairy and beverage 56% • Market leader in rigid plastic packaging in Australia and New Zealand with a growing position in Asia • Leading supplier of sustainability services • Regional scale with extensive manufacturing footprint • Leading postions in consumer and industrial sectors supported by scale and innovation Our Materials Handling and Pooling platform FY19 Revenue1 Infrastructure and other industrial products 17% Materials handling other 10% Environmental (garbage bins) 17% • Largest provider of returnable produce crate (RPC) pooling services in Australia and New Zealand • Comprehensive service • Largest provider of garment hanger offering reuse services in Australia and New Zealand with a growing presence in the UK and the USA • Asset tracking technology • Extensive manufacturing and product design capability Pooling 56% • Leading supplier of plastic materials handling products Our Contract Manufacturing platform FY19 Revenue Other 3% • A leading supplier of contract Oils and lubricants 7% manufacturing services in Australia • Broad manufacturing Personal care 17% for the home, personal care and health and wellness categories Health and wellness 19% Home care 54% capability for liquid, powder, aerosol and therapeutic nutraceutical products • Strong innovation and product development capability • Strong customer relationships 1 Assumes a full year contribution from TIC Retail Accessories PAC T 2019 A NNUA L R EP OR T 9 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION“ In FY19 we have built upon our commitment to sustainability and have made significant progress towards our 2025 Sustainability Promise to reduce, reuse and recycle ”Raphael Geminder Non-Executive Chairman 10 Case study Pact wins both Sustainable Design and Beverage Categories in Australasia’s Peak Packaging Awards In FY19 Pact won both the Sustainable Packaging Design and Beverage Category for Lewis Road’s post-consumer sourced 100% recycled plastic polyethylene terephthalate (rPET) milk bottle range. An Australasian first in its category, Lewis Road’s rPET bottle range equates to approximately 340 tonnes of plastic per annum that has been reused and diverted from landfill. The Australasian Packaging Innovation & Design Awards (PIDA) recognise companies and individuals making a significant difference in their field across Australia and New Zealand. The PIDAs, which are co-ordinated by the Australian Institute of Packaging (AIP) and Packaging New Zealand, are the exclusive feeder program for the prestigious WorldStar Packaging Awards. PACKAGING INNOVATION & DESIGN OF THE YEAR GOLD AWARD GOLD AWARD PAC T 2019 A NNUA L R EP OR T 11 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial and Operational Overview FY19 Revenue up 10% to $1.834 billion FY19 EBITDA1 down 3% to $231 million FY19 NPAT1 of $77 million, 18% lower than FY18 Earnings impacted by higher raw material and energy costs, along with lower volumes in some sectors Strong focus on efficiency and overhead cost reduction Transformation of the Group’s packaging network progressed Crate pooling operations expanded TIC Retail Accessories acquisition completed 5 Year Financial History 9 4 2 1 1 8 3 1 5 7 4 1 4 7 6 1 4 3 8 1 FY15 FY16 FY17 FY18 FY19 Revenue $m 9 0 2 0 2 2 3 3 2 7 3 2 1 3 2 FY15 FY16 FY17 FY18 FY19 EBITDA1 $m 3 5 1 3 6 1 9 6 1 5 6 1 8 4 1 FY15 FY16 FY17 FY18 FY19 EBIT1 $m Balance sheet capacity improved and strong operating cashflow maintained New Group CEO appointed and review of business strategy initiated 5 8 4 9 0 0 1 5 9 7 7 FY15 FY16 FY17 FY18 FY19 NPAT1 $m 1 Before significant items. 12 Performance PAC T 2019 A NNUA L R EP OR T 13 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONReview of Operations and Financial Performance The Group has reported revenue1 of $1,834.1 million for the year ended 30 June 2019, up 10% compared to the prior corresponding period (pcp). The statutory net loss after tax for the year was $289.6 million, compared to a statutory net profit after tax (NPAT) of $74.5 million in the pcp. NPAT before significant items5 for the year was $77.3 million (pcp: $94.7 million). Overview • Revenue1 up 10% to $1,834.1 million (pcp: $1,674.2 million) • TIC Retail Accessories acquisition completed on 31 October 2018 • EBITDA3 down 3% to $230.7 million (pcp: $237.3 million) • EBIT4 down 10% to $148.4 million (pcp: $164.5 million) • NPAT5 down 18% to $77.3 million (pcp: $94.7 million) • Asset impairment expenses of $381.8 million (fixed assets, goodwill and inventory) recognised in the period, reflecting trading conditions and a moderated long-term outlook for Australian packaging assets • Earnings impacted by lags in recovering higher raw material costs and Australian energy costs, and lower volumes in some sectors • Strong focus on efficiency and overhead cost reduction • Transformation of the Group’s packaging network progressed with two facilities closed in the period, another rationalised and an import supply model for certain product categories established — recent acquisitions performing in line with expectations • Crate pooling operations expanded, with services supporting fresh produce supply into ALDI commencing in August 2019 following long-term contract win • Long-term contract win with a major retailer in the USA will expand reuse services in FY20 • Group operating model changed to improve focus on product portfolio performance • New Managing Director and Group CEO appointed, and review of business strategy initiated • Balance sheet capacity improved and near-term refinancing risk reduced with extension of debt and establishment of a new subordinated loan facility • No ordinary dividends declared Key Financial Highlights – $millions Revenue1 Packaging & Sustainability Materials Handling & Pooling Contract Manufacturing Services EBITDA3 EBIT4 NPAT5 Statutory Net (Loss)/Profit After Tax Total Dividends – cents per share 2019 1,834.1 154.6 51.1 25.1 230.7 148.4 77.3 (289.6) - 2018 1,674.2 152.8 44.6 40.0 237.3 164.5 94.7 74.5 23.0 Change % 9.6% 1.2% 14.5% (37.2%) (2.8%) (9.8%) (18.3%) (488.8%) (100.0%) 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 25 for definitions. 14 Group Results $’000 Revenue1 Other income (excluding interest revenue) Expenses EBITDA3 EBITDA margin Depreciation and amortisation EBIT4 EBIT margin Significant items (before tax) EBIT after significant items Net finance costs and loss on de-recognition of financial assets Income tax expense Significant tax items Net (loss) / profit after tax 2019 1,834,076 12,709 (1,616,091) 230,694 12.6% (82,290) 148,404 8.1% (423,304) (274,900) (38,980) (32,117) 56,410 (289,587) 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 Change % 9.6% (2.8%) (9.8%) (294.7%) (488.8%) Revenue EBITDA Group revenue of $1,834.1 million increased 9.6% ($159.9 million) EBITDA of $230.7 million was $6.6 million (2.8%) lower than the pcp. compared to the pcp, driven primarily by a full year impact of the Earnings were favourably impacted by the incremental contribution acquisition of the Asian packaging operations (excluding Japan) of from recent acquisitions along with lower costs from efficiency Closure Systems International and the Guangzhou China facility of improvements and overhead reduction initiatives. These benefits Graham Packaging Company (the “Asian acquisition”, undertaken in were more than offset by lower underlying volumes, the adverse the second half of FY18) and the acquisition of TIC Retail Accessories impact of lags in recovering higher resin costs, particularly in the (“TIC”, completed 31 October 2018). first half, higher raw material costs in the contract manufacturing Excluding the contribution from acquisitions, revenue was generally in line with the pcp. The impact of higher pricing, reflecting the partial pass through of higher input costs, and benefits from favourable foreign exchange translation were offset by lower net volumes. Packaging volumes were adversely impacted by weak business and significant increases in Australian energy costs compared to the prior year. Energy costs were only partly recoverable in the market. The second half improved with lower resin costs and improved pricing in the contract manufacturing business, allowing the recovery of some of the previously incurred lags. agricultural demand due to continued drought conditions along EBITDA margins at 12.6% were 1.6% lower than the pcp. Margins with generally subdued demand in the dairy, food and beverage were improved in the second half, compared to the first half of the sectors in Australia and New Zealand. Underlying sales in Asia were year, as a result of improved pricing, efficiency and higher relative improved. Materials Handling volumes were impacted by fewer margins in the acquired TIC business. available infrastructure projects. Bin sales were generally in line with the pcp following a stronger second half. Contract manufacturing volumes were softer in the home care category. Volumes in the health and wellness sector were flat following weaker demand conditions in the second half. PAC T 2019 A NNUA L R EP OR T 15 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONEBIT Net Finance Costs and Loss on De-recognition EBIT of $148.4 million for the year was $16.1 million or 9.8% lower of Financial Assets than the pcp with higher depreciation and amortisation from Net financing costs for the year of $39.0 million were $6.9 million acquisitions, the new crate pooling business and capital investment higher than the pcp. The increase was due to the impact of higher in growth and efficiency projects in the New Zealand packaging average net debt during the period, following the funding of business and the contract manufacturing business. The increase acquisitions in both the current and prior years, along with higher was mitigated by lower depreciation in the Australian packaging interest costs on longer term debt due largely to a key facility being business as a result of the impairment of fixed assets. extended from three years to a seven year term. Interest cover of EBIT margins of 8.1% were 1.7% lower than the pcp. 5.9x was lower than the pcp but remains well within targeted levels. Further detail on revenue and earnings in each of the Group’s Income Tax Expense and Significant Tax Items operating segments is contained in the Review of Operations below. The income tax expense for the year of $32.1 million represents an Significant Items effective rate of 29.4% of net profit before tax and significant items, essentially in line with statutory tax rates payable by the Group Pre-tax significant items for the year were an expense of $423.3 across its main operating jurisdictions. This compares to $37.8 million. This represents an impairment expense of $368.8 million million in the pcp at an effective tax rate of 28.5%. The Group tax ($136.3 million fixed assets; $232.4 million intangible assets), rate has increased due to higher effective Australian taxable income inventory write-downs of $13.0 million, costs associated with following the TIC acquisition. business restructuring programs of $37.8 million and acquisition costs of $3.7 million. Business restructuring costs were largely related to the rigid packaging network transformation. Pre-tax significant items in the prior year of $23.3 million related to costs associated with business restructuring programs of $10.1 million, acquisition costs of $4.4 million and deferred settlement costs of $8.8 million. The latter represented revisions to earn-out provision estimates, mostly due to stronger than expected earnings from Pascoe’s. The significant tax item for the year is a benefit of $56.4 million relating to the significant items noted above. In the prior year the significant tax item was a benefit of $3.1 million. Net (Loss) / Profit after Tax The statutory net loss after tax for the year was $289.6 million, compared to a net profit after tax (NPAT) of $74.5 million in the pcp. Excluding significant items, NPAT was $77.3 million compared to $94.7 million in the pcp. 16 Balance Sheet $’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 debt8 2019 49,950 384,349 638,542 477,054 71,563 2018 67,980 385,636 755,413 584,193 57,365 1,621,458 1,850,587 667,253 733,490 565,373 600,134 1,298,863 1,267,387 583,200 599,273 322,595 683,540 Change % (26.5%) (0.3%) (15.5%) (18.3%) 24.8% (12.4%) 9.9% (5.8%) 2.5% (44.7%) 14.1% Net debt at the end of the financial year was $683.5 million, an increase of $84.3 million compared to the pcp. The increase was primarily due to payments for acquisitions of $78.7 million. The decrease in property plant and equipment of $116.9 million relates primarily to the asset impairment write-down of $136.3 The group has several revolving debt facilities, two term facilities, a subordinated term debt facility and a working capital facility with total commitments of $1,062.2 million, of which of which $314.2 million is undrawn at 30 June 2019. The facilities are spread across multiple maturities, with the working capital facility revolving with an million, partly offset by increases from acquisitions of $25.3 million. annual review. The debt facilities include a $383.5 million loan facility Additions from capital expenditure and foreign exchange translation maturing in January 2022, a $184.3 million loan facility maturing in January 2023, a $301.1 million loan facility maturing in March 2023, a $120 million term facility maturing in December 2024, and a subordinated term debt facility of USD 35 million, swapped into AUD ($50.3 million), maturing July 2025. The working capital facility is $23 million at 30 June 2019. Average tenor is 3.6 years. Financing metrics Gearing6 Interest cover7 2019 3.0x 5.9x 2018 2.5x 7.4x Change 0.5 (1.5) As at 30 June 2019 gearing was 3.0x, an increase from 2.5x in the pcp, impacted by the funding of growth projects and acquisitions, including TIC, along with EBITDA performance. were offset by depreciation charges. The decrease in the Group’s intangible assets of $107.1 million was due primarily to the goodwill impairment expense of $232.4 million, partly offset by $120.0 million goodwill arising on acquisitions and an increase in foreign exchange translation. The goodwill arising on acquisitions represents $127.8 million in provisional goodwill relating to the TIC acquisition less a reduction of $7.8 million recognised in the period in relation to the Asian acquisition from the prior year. The increase in the Group’s other assets of $14.2 million is largely attributable to higher deferred tax assets. Similarly, the reduction in other liabilities, payables and provisions of $34.8 million is primarily a result of lower deferred tax liabilities, in addition to lower trade and other payables, partly offset by a higher business restructuring provision. During the period the Group extended debt of $380 million from July 2020 to January 2022 at competitive terms and also gained approval from lenders for the establishment of a subordinated debt facility. Following that approval, the Group entered into a $50 million, six year subordinated unsecured term loan. Funds from the loan were used to pay down senior debt, providing the Group with greater funding flexibility and balance sheet capacity to continue planned rationalisation activities and complete existing growth projects. PAC T 2019 A NNUA L R EP OR T 17 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION   Cash Flow $’000 — Key items Net cash flows provided by operating activities Payments for property, plant and equipment Purchase of businesses and subsidiaries, net of cash acquired Net proceeds from issuance of shares Payment of dividend 2019 108,683 (69,455) (78,725) – (38,236) 2018 150,423 (90,180) (127,863) 172,573 (72,648) Change % (27.7%) (23.0%) (38.4%) (100.0%) (47.4%) Statutory net cash flow provided by operating activities, including Payments for purchase of businesses and subsidiaries, net of cash proceeds from the securitisation of trade debtors, was $108.7 acquired, in FY19 was $78.7 million. This includes $46.3 million for million in FY19, $41.7 million lower than the pcp. The inflow from the TIC acquisition (representing cash consideration paid of $28.3 securitisation of trade debtors was $13.6 million in the financial year million and deferred consideration paid of $20.8 million, less $2.8 compared to $3.2 million in the pcp. Excluding securitisation inflows, million cash acquired) and $32.4 million paid in relation to the statutory operating cashflow was $52.2 million lower than the pcp. Asian acquisition and the acquisition of Pascoe’s completed in prior Net receipts and payments were $41.4 million lower as a result of years. The prior year outflow of $127.9 million related to $122.4 cash rationalisation costs of $26.1 million, lower earnings and higher million for the Asia acquisition, $10.3 million for the acquisition working capital requirements during the year, including increased of ECP Industries and final adjustments relating to previous year inventory levels and lower creditors following changes to the resin acquisitions of $4.8 million. sourcing model in Australia (which resulted in significant volumes shifting from domestic supply to import). Tax cash flows were also $5.3 million higher and interest cash flows $5.5 million higher, the latter in line with the higher net interest expense noted above. The dividend payment of $38.2 million in FY19 represents the final dividend of 11.5 cents per share in relation to FY18. Payments for property, plant and equipment were $69.5 million in Review of operations the financial year compared to $90.2 million in the pcp. The decrease During the period the Group changed operating segments from of $20.7 million reflects lower capital expenditure relating to the Pact Australia and Pact International to: establishment of crate pooling operations in Australia, and lower - Packaging and Sustainability expenditure relating to the investment in facilities in New Zealand to support a new contract with a key customer in the dairy sector, which was largely incurred in FY18. These reductions were partly offset by increased efficiency related expenditure in the contract - Materials Handling and Pooling - Contract Manufacturing Services Reporting and management structures have been realigned to manufacturing business and the impact of acquisitions, notably a full improve focus on the performance of these segments. year contribution from the Asian acquisition. Prior year comparatives have been restated on a consistent basis. Inter-segment revenue eliminations of $43.0 million (pcp: $32.7 million) are not included in the segment financial information below. 18 Packaging and Sustainability The Packaging and Sustainability segment is a market leader in rigid plastic packaging in Australia and New Zealand with a growing presence in Asia. The business is also a leader in select rigid metals packaging sectors in Australia and New Zealand and also a leading supplier of sustainability, environmental, reconditioning and recycling services in Australia and New Zealand. Packaging & Sustainability contributed 66% of the Group’s revenue in FY19. $’000 Revenue1 EBITDA3 EBITDA Margin % EBIT4 EBIT Margin % 2019 1,208,468 154,577 12.8% 97,409 8.1% 2018 1,101,971 152,796 13.9% 100,417 9.1% Change % 9.7% 1.2% (1.1%) (3.0%) (1.0%) Revenue for the Packaging and Sustainability segment at EBITDA for the segment of $154.6 million was $1.8 million $1,208.5 million was $106.5 million (9.7%) higher than the (1.2%) up on the pcp with the Asian acquisition and the pcp. Revenue was positively impacted by a full year impact of acquisition of ECP Industries contributing $10.5 million. the acquisition of the Asian packaging operations of Closure Excluding acquisitions, EBITDA was $8.7 million (5.7%) lower Systems International (excluding Japan) and the Guangzhou than the pcp due mainly to higher Australian energy costs China facility of Graham Packaging Company (the “Asian in the first half of the year, which could only be partially acquisition”), completed in the second half of FY18, which recovered in the market, and lags in the recovery of higher contributed incremental revenue of $95.5 million in the raw material costs. Lags from the first half of the year were period. In addition, ECP Industries (acquired November 2018) partly recovered in the second half with the remaining contributed an incremental $2.4 million in revenue. Both impact expected to be recovered in future periods. Earnings acquisitions are performing in line with expectations. benefitted from the continued focus on efficiency and Excluding acquisitions, revenue for the segment was $8.6 million (0.8%) higher than the pcp. Revenue benefitted from sell price increases to partly recover increased input costs and restructuring activities in Australia, lowering costs to serve, and favourable foreign exchange translation. These benefits mitigated the impact of the lower net volumes noted above. favourable foreign exchange translation. Overall underlying EBIT of $97.4 million was $3.0 million (3.0%) lower than volumes were around 4% lower. The segment experienced the pcp. Increased depreciation and amortisation related weaker volumes into the agricultural sector due to ongoing primarily to the full year effect of the Asian acquisition, capital drought conditions in Australia, and lower volumes into the investment in growth projects, notably in New Zealand, partly dairy, food and beverage sectors in Australia and New Zealand. offset by lower depreciation relating to assets impaired in the Underlying sales were ahead of the pcp in the Asian packaging Australian Packaging business. business, and in the Sustainability business which benefitted from increased recycled resin and reconditioning volumes. Margins were lower than the pcp as a result of higher input costs and lower margins in the acquired Asian businesses. Margins were, however, improved compared to the first half of the year as a result of improved pricing and the partial recovery of lags. PAC T 2019 A NNUA L R EP OR T 19 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONMaterials Handling and Pooling The Materials Handling and Pooling segment is a leading Australian supplier of polymer materials handling products and a leading supplier of custom moulded products for use in infrastructure and other projects. The business is also the largest supplier of returnable produce crate pooling services in Australia and New Zealand. From 31 October 2018 the segment also includes TIC Retail Accessories (TIC), a closed loop plastic garment hanger and accessories re-use business operating across multiple countries, including Australia. Materials Handling and Pooling contributed 16% of the Group’s revenue in FY19. $’000 Revenue1 EBITDA3 EBITDA Margin % EBIT4 EBIT Margin % 2019 296,386 51,054 17.2% 35,710 12.0% 2018 220,134 44,575 20.2% 32,006 14.5% Change % 34.6% 14.5% (3.0%) 11.6% (2.5%) Revenue for the Materials Handling and Pooling segment EBITDA for the segment of $51.5 million was $6.5 million of $296.4 million was $76.3 million (34.6%) higher than (14.5%) ahead of the pcp. The result includes $9.9 million from the pcp. This included $76.3 million of revenue related to TIC. Excluding TIC, EBITDA was $3.4 million lower than the the acquisition of TIC, which has performed in line with pcp. Earnings were adversely affected by lower net volumes expectation to date. Excluding TIC, revenue was flat compared to the pcp with sell price increases to recover higher input costs offset by marginally lower volumes. The Australian crate pooling business, supporting fresh produce supply to Woolworths, continued to perform well with revenue ahead of the prior in the period, unfavourable product mix and higher energy and input costs only partly recovered in the market. The segment was also impacted by some higher costs associated with the expansion of crate pooling operations in Australia to support new volumes with ALDI in FY20. This new contract win commenced on schedule in August. year. Volumes into other sectors were mixed with growth in EBIT of $35.7 million was $3.7 million (11.6%) higher than industrial bin volumes, assisted by a large council project won the pcp. The increased depreciation expense compared to in the second half of the year, offset by fewer infrastructure the pcp related primarily to the TIC acquisition and higher projects available in the period. The business was also depreciation for the Australian crate pooling business with all adversely impacted by the drought conditions impacting facilities and equipment fully commissioned in FY19. agricultural demand in Australia and adverse weather conditions affecting its New Zealand pooling business. Margins were lower than the pcp as a result of unfavourable product mix, higher input costs and lower margins in the acquired TIC business relative to the rest of the segment. Margins were improved compared to the first half of the year as a result of improved pricing and the partial recovery of lags. 20 Contract Manufacturing Services The Contract Manufacturing Services segment is a leading supplier of services for the home, personal care and health and wellness categories in Australia. The business includes manufacturing capability for liquid, powder, aerosol and nutraceutical products. Contract Manufacturing Services contributed 20% of the Group’s revenue in FY19. $’000 Revenue1 EBITDA3 EBITDA Margin % EBIT4 EBIT Margin % 2019 372,263 25,063 6.7% 15,285 4.1% 2018 384,760 39,880 10.4% 32,083 8.3% Change % (3.2%) (37.2%) (3.6%) (52.4%) (4.2%) Revenue for the Contract Manufacturing Services segment of the lower net volumes noted above but also by lags in the $372.3 million was $12.5 million (3.2%) lower than the pcp. recovery of significantly higher USD denominated raw material Volumes in the health and wellness sector weakened in the prices, particularly in the first half, which were exacerbated second half, impacted by changes in Chinese regulations and by the decline in the Australian dollar relative to the US dollar customer overstocking, and were flat for the full year versus during that period. Improved pricing was delivered in the the pcp. Sales into the home care sector were lower, adversely second half to recover some of these adverse lags. impacted by weaker demand for pest control products following a dryer summer and by customer offshoring. Lower net volumes were mitigated by higher pricing in the second half. EBITDA for the segment of $25.1 million was $14.8 million (37.2%) lower than the pcp. Earnings were impacted by EBIT of $15.3 million was $16.8 million lower than the pcp, with higher depreciation following the commissioning of efficiency and capacity related asset programs. Margins for the segment were lower than the pcp but improved in the second half relative to the first half. PAC T 2019 A NNUA L R EP OR T 21 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONPerspectives for FY20 Packaging & Sustainability Other events of significance Acquisitions • Continue delivering benefits from network restructuring; On 31 October 2018 the Group purchased 100% of the net assets • Demand environment expected to remain subdued in Australia and New Zealand; • Contract wins expected to drive modest volume growth in Asia; • Growth in recycling and sustainability services expected; and of TIC Retail Accessories (‘TIC’) for a provisional consideration of $160.8 million. Consideration comprised of cash consideration paid at completion of $28.3 million, shares issued as consideration of $60.0 million, deferred consideration of $42.5 million and contingent consideration of $30.0 million. TIC is a closed loop plastic • Resin input costs assumed to be in line with Q4 FY19, resulting in garment hanger and accessories reuse business. The acquisition of modest recovery of lags. Materials Handling & Pooling TIC expands the Group's closed loop pooling platform and provides the opportunity for future growth in this market. • Commencement of crate pooling services for ALDI from 1 August Overview of Business Strategy 2019; • EBITDA benefit from a full year contribution from TIC; and • Expansion of reuse services to support a major retailer in USA expected H2 FY20 Contract Manufacturing Services • Lower volumes expected from customer destocking, in the first half, and customer offshoring; • Raw material input costs expected to remain high in line with FY19; • New management appointed; and • Increased focus on efficiency and reducing cost to serve. 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 cost of production; and • M&A — growth through disciplined M&A in existing sectors and close adjacencies. Organic Growth The Group’s core business benefits from: • leading sector positions in rigid plastic packaging, sustainability, Depreciation, amortisation, net financing costs and tax pooling services, materials handling and contract manufacturing • Depreciation, amortisation and net financing costs, on a services; comparable basis2, expected to be slightly higher than FY19; and • a diverse customer base with long-term relationships; • The effective tax rate is expected to be between 29.0%-29.5% • a highly diversified product portfolio; Outlook The Group expects EBITDA (before significant items) 2 in FY20 to modestly improve, subject to global economic conditions. • regional scale and broad end-market reach; • an extensive manufacturing capability and supply network; and • world-class innovation. 22 Key to the Group’s ability to grow organically is its ability to leverage M&A differentiating characteristics to create a competitive advantage. A core focus of the Group is innovation. Pact is widely recognised for our dedication to supplying some of the most innovative products in the market, supported by our in-house innovation capability and extensive global licencing arrangements. The Group’s commitment The Group has a track record of success in identifying acquisition opportunities, executing transactions in a disciplined and systematic manner, and delivering cost synergies and operational efficiencies through integration. Acquisitions have driven growth and enabled the Group to expand and diversify its product and customer to innovation has been recognised through multiple industry and portfolio. customer awards. Organic growth opportunities exist for the Group through increasing demand for sustainable packaging solutions, increased use of returnable packaging and materials handlings products and 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 in year increased demand for private label products. In addition, the Group three. will seek to drive growth through utilisation of its Asian platform The acquisition of TIC Retail Accessories in FY19 leveraged and expanded the Group’s demonstrated capability in closed loop asset pooling and added further scale to the Group’s portfolio, expanding its geographic reach in the materials handling sector. In the prior year the acquisition of CSI Asia (excluding Japan) and Graham Packaging (China) also 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. Whilst M&A remains a core pillar of the Group’s strategy, the Group’s priority focus is to restore margins, with a focus on volume and efficiency, within the business. Strategic Review A detailed business strategy review has commenced under the leadership of the Group’s new Managing Director and Group CEO. The review will clarify what is critical to Pact’s continued success and will enable the Group to maximise long-term shareholder value. and the expansion of pooling operations. Organic growth will be supported in FY20 by the commencement of pooling operations to support ALDI. Efficiency The Group is committed to delivering operational excellence and the lowest cost of production. In the period, the Group continued to drive the implementation of its operational excellence programs, with a strong focus on efficiency and overhead cost reduction, helping to mitigate higher input costs. In addition, the Group continued to progress the transformation of the packaging network with two facilities closed, another rationalised and an import supply model for certain product categories established. The network redesign is a program of inter-dependent projects designed to create an integrated regional supply network delivering efficiencies and improved customer satisfaction through: • a reduced manufacturing footprint; • • integrated sales and operation planning; increased automation; • an import supply chain that leverages the Asia acquisition The Group will continue to review all areas of the business for efficiency opportunities in the pursuit of operational excellence to deliver benefits in FY20 and beyond. PAC T 2019 A NNUA L R EP OR T 23 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONBusiness Risks Consumer demand There are various internal and external risks that may have a Changes in demand for Pact’s products or adverse activities in material impact on the Group’s future financial performance and key industry sectors which Pact and its customers service may economic sustainability. The Group makes every effort to identify be influenced by various factors. These industry sectors include material risks and to manage these effectively. consumer goods (eg. food, dairy, beverages, personal care and 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 Pact operates in a highly competitive environment due to factors including actions by existing or new competitors, price, product selection and quality, manufacturing capability, innovation and the ability to provide the customer with an appropriate range of products and services in a timely manner. Any deterioration in the Group's competitive position as a result of actions from competitors may result in a decline in sales revenue and margins, and an adverse effect on the Group's future financial performance. other household consumables) and industrial (eg. surface coatings, petrochemical, agriculture and chemicals) industry sectors. Factors which may influence these sectors include climate change, seasonality of foods and edible oils production, an increased focus in Australian and New Zealand supermarket chains on private brands and different substrates, and reputation of products, substrates (e.g. 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. Strategic acquisitions Pact’s 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. Foreign exchange rates Pact’s financial reports are prepared in Australian dollars. However, a substantial proportion of Pact’s sales revenue, expenditures and cash flows 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, the Hong Kong dollar, the UK pound and the Bangladesh taka 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. 24 Supply chain Compliance risks The ability for the supply chain to meet the Group’s requirements Pact is required to comply with a range of laws and regulations, including the sourcing of raw materials, is reliant on key and those of particular significance to Pact are in the areas of relationships with suppliers. The price and availability of raw employment, including modern slavery, work health and safety, materials, input costs, including energy, and future consolidation property, environmental, competition, anti-bribery and corruption, in industry sectors could result in a decrease in the number customs and international trade, taxation and corporations. of suppliers or alternative supply sources available to Pact. Changes in Government policy may also have an adverse effect on Additionally, Pact may not always be able to pass on changes in the Group’s financial performance. input prices to its customers. Any of these factors may have an adverse effect on the Group's future financial performance. Information security Interruption to operations Pact operates across a diverse geographical footprint and Data security is fundamental to protect privacy of information and to protect critical intellectual property. Advances in technology have resulted in an increased volume of data being stored electronically. situations may arise in which sites are not able to operate. Factors There is an increasing risk of and sophistication to cyber-attacks and include emergency situations such as natural disasters, failure of crime, which may lead to systems and data breaches, interruption information technology systems or security, or industrial disputes. to operations and an adverse effect on the Group’s future financial Any of these factors may lead to disruptions in production or performance. increase in costs and may have an adverse effect on the Group’s financial performance. Footnotes (1) AASB15: Revenue from Contracts with Customers was adopted in the period on a modified retrospective basis. Refer to Note: 6.2 Accounting Policies in the Full Year Consolidated Financial Report. The impact to revenue in the period has not been material. (2) On a comparable basis, excluding impacts which will arise in FY20 from the adoption of AASB16 by the Group. In addition, this report includes certain non-IFRS financial information which have not been subject to audit by the Group’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. (3) 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. (4) 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. (5) 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. (6) 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 (7) Interest cover is a non-IFRS financial measures which is calculated as rolling 12 months EBITDA divided by rolling 12 months net finance costs and losses on de-recognition of financial assets. (8) Net debt is a non-IFRS financial measure and is calculated as interest-bearing liabilities less cash and cash equivalents PAC T 2019 A NNUA L R EP OR T 25 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONStrategic Priorities Creating long-term value Pact is a diversified provider of speciality packaging and materials handling solutions generating over $1.8 billion in revenue in FY19. It has grown from a rigid packaging business generating revenue of $200 million in 2002. The Group has diversified its product and service portfolio through The Group has broad-end market reach and an attractive and diverse transformational investments in areas offering attractive growth customer base, including supply to trusted major regional and global opportunities. Today, Pact is: • The largest manufacturer of rigid packaging products in Australasia, with a growing presence in Asia. • A leading supplier of recycling and reconditioning services. • The leading supplier of returnable produce crate pooling services in Australia and New Zealand. Pooling provides a sustainable packaging alternative to single-use packaging for fresh produce. • A leading global supplier of closed loop plastic garment hanger and accessories reuse services. Reuse is an innovative and sustainable supply chain solution which reduces plastic waste. • A leading contract manufacturing services business for the home, personal care and health and wellness categories in Australia. brands. Priorities The Group is focused on delivering long-term value for all stakeholders. Pact’s priorities are: • Delivering improvements in core business fundamentals. • Continuing progress towards our 2025 End of Waste Sustainability Promise. • Completing a detailed strategy review. The review will define the strategic priorities for the next stage of the Group’s evolution and enable the creation of long-term value for all of its stakeholders. 26 Core Business Fundamentals — Packaging Network Redesign The restructuring of our packaging network is a priority. The program targets the delivery of our scale advantage and will create an integrated supply network, delivering efficiencies and improved customer satisfaction. The future: an integrated supply network • Reduced manufacturing footprint • 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 three to five years The opportunity • Improved operations management and higher asset utilisation • Improved productivity • Improved quality • Lower freight costs • Improved inventory control and reduced warehousing costs • Improved training and safety FY19 Outcomes • Two facilities (food packaging) closed in the second half of FY19, including one of the largest facilities in Australia • A further facility (beverage closure) has been rationalised • Import supply chain established for select product categories • An additional two facilities closed in FY18 PAC T 2019 A NNUA L R EP OR T 27 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONProgress towards our 2025 End of Waste Sustainability Promise Sustainability is a core pillar of Pact’s commitment to its employees, Reduce customers and the communities in which it operates. Pact actively reduces the impact of packaging on the environment through unique and innovative sustainability services. Pact is the largest processor and consumer of post-industrial resin in Australia and New Zealand. • Decreased consumption of Expanded Polystyrene (EPS) by 30% (715 metric tonnes) • Successfully transitioned 100% of New Zealand largest supermarket’s EPS trays to recycled polyethylene terephthalate (rPET) trays effectively diverting 107 million single-use EPS trays per • We offer several schemes for hard to recycle packaging. annum from landfill • We launder, recondition and refurbish bulk packaging. • We actively replace single-use packaging with pooling and reuse solutions. • We design products which minimise the impact on the environment. Reuse • Grown the use of Returnable Produce Crates (RPC’s) in one of Australia’s major supermarket’s supply chain by 4%, and in the process reduced single use corrugate secondary packaging by 927 tonnes In FY18 Pact launched its 2025 Promise. The Group made significant progress towards achieving its 2025 promise in FY19 across its service • Secured contract to provide major US retailer for the supply of garment hanger reuse services in FY20 portfolio. Recycle In FY18, Pact launched its 2025 End of Waste Sustainability Promise. The Group made significant progress towards achieving its 2025 Promise • Grown recycling capability and leveraged government co- investment support in FY19 across its service portfolio. • Increased our consumption of recycled resin by 2,712 tonnes • Launched numerous new products that have been light-weighted and/or contain recycled content 28 P A C T ' S 2 0 2 5 P R O M I S E I S We have made a promise to become the number one partner of sustainable choices for our customers. OUR TARGETS REDUCE REUSE RECYCLE Eliminate all non recyclable packaging that we produce Have solutions to reduce, reuse and recycle all single use secondary packaging Offer 30% recycled content across our packaging portfolio PAC T 2019 A NNUA L R EP OR T 29 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONGrowth in Sustainability Services Crate pooling Pact has built a world class produce crate pooling platform for two of Australia’s largest supermarkets delivering market leading quality and efficiency. Quality - World standard in hygiene and food safety - Unique grower interface providing extensive data analytics for improved supply chain control has delivered market leading grower satisfaction - Low environmental footprint - Innovation capability, supported by global technology partners, to deliver tailored product and design solutions Efficiency - National crate pool delivers significant cost efficiencies to both growers and retailers - Low cycle times and improved asset availability - Patented IntellicrateTM system - Innovation and technology developments will further enhance asset tracking and enable real time decision-making Reuse services Pact’s reuse platform is an innovative and sustainable supply chain solution which reduces waste and cost. A global leader in reuse services - A long-term partnership with a major US retailer for the supply of reuse services will establish Pact as the global leader in garment hanger reuse - Partnership reflects Pact’s proven capability in supporting global retailers reduce waste and improve their environmental footprint - Provides a major step into the largest retail market in the world - Leverages established manufacturing and reuse operations in Asia - $30 million revenue from 300 million hangers annually - $10 million cash investment, with operations expected to commence H2 FY20 30 Shampoo bottles made entirely of recycled content and 20% lighter than the previous bottle Dishwashing liquid bottles, 75% of each made from plastic sourced from recycled milk, juice and water bottles Personal care bottles made from 100% recycled content and 25% lighter than the previous bottles PAC T 2019 A NNUA L R EP OR T 31 Recycling Pact is partnering with governments in other jurisdictions to expand the Group’s local recycling capability. Support from the New Zealand Waste Minimisation Fund will enable Pact to produce an extensive range of 100% recycled PET food grade packaging products, including meat trays, bakery trays, deli containers, food containers, produce containers and beverage bottles. A new plant in Auckland will have the ability to process around 10,000 tonnes of recycled PET every year. This new capability will enable Pact to substitute imported resin with recycled food-contact approved resin, enhancing the circular economy. OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONInnovation Pact Group ranked second on the Manufacturing & Consumer Goods category in the 2019 Australian Financial Review (AFR) BOSS Most Innovative Companies list, from more than 800 nominated organisations across Australia and New Zealand In 2019 Pact Group named as one of Australasia’s Most Innovative Companies for the seventh consecutive Year. Pact Group ranked second on the Manufacturing & Consumer Goods list, from more than 800 nominated organisations across Australia and New Zealand. The assessment measures a top innovation implemented in the past 12 months. Specifically, the judges look at how valuable the problem is that the innovation is solving, the quality and uniqueness of the solution, and the level of impact that the innovation has had. Also assessed are internal elements such as innovation culture, strategy, resources and process, which demonstrate a sustainable and repeatable approach to innovation. 32 Case study 250 used milk bottles in landfill R O 250 recycled milk bottles to make a wheelie bin In Australia, there are approximately 70,000 tonnes of bailed post- consumer milk bottles per annum destined for landfill. Pact’s 2019 Australian Financial Review BOSS Most Innovative Companies nomination was for designing and manufacturing a household mobile garbage bin (or wheelie bin) made from 60% recycled milk bottles. Each bin is made using up to 4.8kg of recycled milk bottle plastic, or 250 milk bottles — the average number every Australian household consumes each year. Pact’s 2019 nomination forms part of the Group’s End of Waste strategy to create large sinkholes for recycled content into innovative solutions such as mobile garbage bins, telecommunication pits, freeway noisewalls walls, slip sheets and underground cable covers that create a true circular economy for packaging waste. Of the seven years Pact has made the list, five of the Group’s winning nominations have been for innovative sustainability initiatives that increase the circularity of plastic material. PAC T 2019 A NNUA L R EP OR T 33 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONAwards We’re very proud that throughout FY19 we received multiple awards and recognition for our unwavering focus on sustainable packaging innovation. Corporate Australian Financial Review (AFR) BOSS Most Innovative Companies List 2019, 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 — 2019 Leading Creative Packaging Solutions Provider of the Year Industry 2019 Winner Australasian Packaging Innovation & Design Awards (PIDA) — Sustainable Packaging Design Category — Lewis Road’s 100% rPET Milk Bottle Range 2019 Winner Australasian Packaging Innovation & Design Awards (PIDA) — Beverage Category — Lewis Road’s 100% rPET Milk Bottle Range 2019 Runner Up Australasian Packaging Innovation & Design Awards (PIDA) — Health, Beauty and Wellness Category — Essano 100% rPET Shampoo and Conditioner bottle range 2019 Product of the Year — ALDI Green Action Cleaners 500ml 2019 Canstar Blue — ALDI Almat Laundry Liquid 2019 Choice Awards — ALDI Trimat Laundry Power PACKAGING INNOVATION & DESIGN OF THE YEAR GOLD AWARD GOLD AWARD SILVER AWARD PACKAGING INNOVATION & DESIGN OF THE YEAR HEALTH, BEAUTY & WELLNESS 34 Governance PAC T 2019 A NNUA L R EP OR T 35 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONSustainability Review Pact is committed to sustainability and this is embedded in the way we work. Our vision is to enrich lives everyday through sustainable Our annual Sustainability Review is prepared based on the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (G4 packaging and manufacturing solutions. version) and, addresses the challenges and opportunities facing At Pact we understand that our business operations have an impact on many people, including our employees, customers, shareholders, suppliers and the broader communities in which we operate. Our sustainability framework is built around four pillars that provide the business with a clear focus and drive our sustainability practices: our business. The Review allows our stakeholders to see how we’ve addressed our responsibilities and showcases examples of our approach to sustainability in action. The Review is available on the Company’s website: www.pactgroup.com/sustsainability/ People Providing an honest, safe and respectful workplace with highly motivated and engaged talent Environment Reducing our environmental impact Society Investing in programs that positively impact the societies in which we operate Ethics & Governance Conducting our business responsibly and with integrity Corporate Governance The Board recognises the importance of good corporate The annual Corporate Governance Statement outlines the key governance and its role in ensuring the accountability of the Board aspects of the Group’s corporate governance framework and and Management to shareholders. The Board’s role is to ensure that the Group is properly managed to protect and enhance shareholder interests and that the Group, including the Company, Directors, Officers, and Employees, practices. 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. operate in an appropriate environment of control and corporate The 2019 Corporate Governance Statement is available on the governance. The corporate governance framework adopted comprises of principles and policies that are consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (fourth edition). website: www.pactgroup.com.au/investors/corporate-governance/ corporate-statement. 36 Financial Reports PAC T 2019 A NNUA L R EP OR T 37 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report Consolidated Financial Report For the year ended 30 June 2019 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 2019. This Consolidated Financial Report was issued in accordance with a resolution of the Directors on 14 August 2019. 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 Consolidated 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 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 1.4 Revenue from contracts with customers 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 these judgements and estimates under different assumptions and conditions and may materially affect financial results or the financial Section 4: Our Capital Structure 4.1 Net debt position reported in future periods. Key judgements and estimates, 4.2 Contributed equity and reserves which are material to this report, are highlighted in the following notes: 4.3 Managing our financial risks • Note 1.2 Taxation • Note 2.1 Business combinations • 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 Actuarial assessments To assist in identifying key accounting estimates and judgements, they have been highlighted as follows: 38 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 Accounting policies 6.3 Other (losses) / gains 6.4 Pact Group Holdings Ltd — Parent entity financial statements summary 6.5 Deed of Cross Guarantee 6.6 Auditors remuneration 6.7 6.8 Segment assets and segment liabilities Revenue from services rendered 6.9 Geographic revenue 6.10 Subsequent events Directors’ Declaration Independent Auditor’s Report 39 57 58 59 60 61 62 64 67 67 68 70 72 74 76 83 84 85 88 89 96 98 99 100 101 101 104 104 105 106 106 107 107 107 108 109 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 2019. Left to right: Jonathan Ling, Peter Margin, Ray Horsburgh, Raphael Geminder, Lyndsey Cattermole, Sanjay Dayal, Carmen Chua PAC T 2019 A NNUA L R EP OR T 39 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report 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 Myer Holdings Ltd, 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). 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 and Libery Infrabuild. Former listed company directorships in last three years Chairman of Calibre Global Limited (2012–2015), Chairman of Toll Holdings Limited (2007–2016). 40 Directors’ Report 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 Nufarm Limited and Costa Group Holdings Limited. Former listed company directorships in last three years Non-Executive Director of PMP Limited (retired August 2016), Huon Aquaculture Limited (retired August 2016) and Bega Cheese Limited (retired January 2019). 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. He was the Chief Executive Officer and Managing Director of GUD Holdings Limited from 2013 to 2018, and Chief Executive Officer and Managing Director of Fletcher Building Limited during the period 2006 to 2012. He also held leadership roles with Nylex, Visy and Pacifica. 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 Independent Non-Executive Director and Chairman of Pro Pac Packaging Ltd. Carmen Chua Independent Non-Executive Director Member of the Board since 1 September 2018. Carmen is based in Hong Kong and has broad base management experience in the packaging and material science industry. Carmen was most recently the Global President for Laird PLC. Previously she held position of VP and GM of Materials Group at Avery Dennison Corporation from 2008 to 2016. Carmen has also held leadership positions across sales, marketing and business development with organisations such as Worldmark International, Dell Corporation and Adampak. Carmen has a Bachelor of Arts (Hons) from University Science Malaysia, a Master of Business Administration from the University of Portsmouth, UK and Advanced Management Program from Wharton School of Business. PAC T 2019 A NNUA L R EP OR T 41 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report Executive Sanjay Dayal Managing Director and Group Chief Executive Officer Member of the Board since 3 April 2019. Sanjay joined Pact Group from BlueScope Steel where he held the position of Chief Executive, Building Products, Corporate Strategy and Innovation. This followed several other senior positions in Asia and Australia over a nine year period with the company. Prior to BlueScope, Sanjay had a very successful career with Orica and ICI, including Regional General Manager for Manufacturing and Supply Chain and General Manager for the DynoNobel Integration, based out of London. Sanjay holds a Bachelor of Technology (Chemical Engineering) from Indian Institute of Technology, Delhi. 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 ten 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. 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: Relevant Interest in Ordinary Shares 133,951,614 391,329 35,257 31,179 44,971 30,000 40,000 Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Carmen Chua Sanjay Dayal 42 Directors’ Report Directors’ meetings 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 Carmen Chua(1) Sanjay Dayal(2) Former Director’s Malcolm Bundey(3) Directors’ Meetings Audit, Business Risk and Compliance Committee Nomination and Remuneration Committee Meetings held 12 12 12 12 12 10 2 Meetings attended 12 11 12 12 12 10 2 Meetings held NM 6 6 NM 6 NM NM Meetings attended NM 6 6 NM 6 NM NM Meetings held 4 4 4 4 NM NM NM Meetings attended 4 4 4 4 NM NM NM 1 1 NM NM NM NM NM — Not a member of the relevant committee (1) Carmen Chua was appointed as a Non-executive Director on 1 September 2018 (2) Sanjay Dayal was appointed as an Executive Director on 3 April 2019 (3) Malcom Bundey resigned as an Executive Director on 10 September 2018 Principal activities Pact is a leading provider of specialty packaging solutions, 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 and recycling and sustainability services. 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 page 14. Dividends The Directors have determined to not pay a final dividend after the end of the financial year (2018: 11.5 cents, 65% franked). The table below shows dividends paid (or payable) during the year ended 30 June 2019 and the comparative year. Dividends Current year to 30 June 2019 Final Dividend (per ordinary share) Interim Dividend (per ordinary share) Prior year to 30 June 2018 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 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 PAC T 2019 A NNUA L R EP OR T 43 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report Other events of significance Please refer to the Review of Operations and Financial Performance on page 14. Significant events after balance date In the opinion of the Directors, there have been no other material matters or circumstances which have arisen between 30 June 2019 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 occasion, 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 2019. 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 Directors' and Officers' 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. 44 Directors’ Report 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. Non-audit services During the year, EY, the Company’s auditor, performed other assignments in addition to it's 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: $ Tax services 2019 158,000 2018 356,000 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 auditors 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 2019 A NNUA L R EP OR T 45 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report Remuneration report (audited) This Remuneration Report for the year ended 30 June 2019 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 2019 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 Group 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 Carmen Chua Other KMP Sanjay Dayal Richard Betts Other KMP Malcolm Bundey Position Term as KMP in 2019 Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Full Year(1) Full Year Full Year Full Year Full Year Appointed 1 September 2018 Managing Director and Group CEO Chief Financial Officer Appointed 3 April 2019 Full Year Former Managing Director and CEO Resigned 10 September 2018 (1) Mr Geminder held the position of Executive Chairman from 10 September 2018 to 3 April 2019. For the remainder of the year he held the position of non-Executive Chairman. There have been no other changes to KMP after the reporting date and before the date the financial report was authorised for issue. 46 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. The Group did not engage any remuneration consultants during the year. PAC T 2019 A NNUA L R EP OR T 47 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 twelve 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 2019 year was as follows(1): Executive KMP remuneration component at target Fixed Remuneration Short term incentives Long Term incentives (LTIP) Total Sanjay Dayal % 51% 49% - 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). 48 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. The CEO’s participation in the current year has been assessed on a pro rata basis from his commencement of employment on 3 April 2019. Participation in the STI for both the CEO and CFO 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 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 51 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 fixed annual remuneration for the CEO and 30% of fixed annual remuneration for the CFO. 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 the prior year’s full year financial results. The number of performance rights granted to the CEO are on a pro rata entitlement based on a commencement date of 3 April 2019. The number of performance rights granted to the CFO represents the entitlement for that full year. For details on the performance rights granted for the FY2018 LTIP and FY2017 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 commences on the first day of that fiscal year and is measured over 3 years. PAC T 2019 A NNUA L R EP OR T 49 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). 50 Directors’ Report — Remuneration Report (cont.) 4. Executive remuneration outcomes for FY2019 Business performance in FY2019 The Group’s FY2019 financial performance reflects a challenging operating environment with earnings impacted by higher raw material and energy costs and weaker demand conditions in some sectors. 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) 3 month average share price (1 April to 30 June) Earnings per share1(cps) Earnings per share1 growth % Cumulative TSR %2 2015 67,632 85,214 42.7% 208,678 5.3% 19.5 4.68 4.28 29 45.0% 31.1% 2016 85,051 94,310 10.7% 220,157 5.5% 21.0 6.03 5.46 32 10.3% 71.6% 2017 90,341 100,003 6.0% 233,116 5.9% 23.0 5.99 6.44 33 3.1% 106.9% 2018 74,488 94,661 (5.3%) 237,251 1.8% 23.0 5.27 5.57 30 (9.1%) 88.1% 2019 (289,587) 77,307 (18.3%) 230,694 (2.8%) - 2.79 2.51 23 (23.3%) 1.8% (1) Before significant items (refer to note 1.1 in the Consolidated Financial Report). (2) Cumulative TSR has been calculated using the same start date for each period (1 July 2014). The three month average share price has been used in all periods (the three month average share price for the starting period was $3.41). STI Outcomes — Executive KMP The table below outlines the components of the STI, and how performance has been measured in fiscal year 2019. Performance measure Weighting EBITDA 64% Overview of performance v target EBITDA decrease of 2.8% compared to last year, minimum EBITDA hurdle of 95% Cash Conversion 8% of 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 2019. 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. Sanjay Dayal – CEO Year Grant date 2019 LTIP 27 March 2019 Performance rights granted 69,7841 Fair value of right $17,446 Value of rights included in compensation for the year $2,025 Performance period 1 July 2018 to 30 June 2021 (1) The performance rights granted to Mr Dayal were on a pro-rata basis aligning with his commencement date of 3 April 2019. Richard Betts – CFO Year Grant date Performance rights granted 2018 LTIP 15 November 2017 33,182 2019 LTIP 14 November 2018 43,301 Fair value of right $87,932 $32,909 Value of rights included in compensation for the year $29,311 $10,970 Performance period 1 July 2017 to 30 June 2020 1 July 2018 to 30 June 2021 The performance measure for the LTIP is achievement of relative TSR targets. The vesting conditions have been outlined on page 50. All performance rights granted to the former CEO Mr Bundey were forfeited following his departure from the company. PAC T 2019 A NNUA L R EP OR T 51 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) Executive KMP remuneration for the year ended 30 June 2019 Executive Year Short term benefits Salary and fees STI and bonuses $ 269,886 - $ - - 556,728 59,000(5) - 530,485 Non- monetary benefits (1) $ - - 50,558 49,584 Mr Sanjay Dayal (CEO) Mr Richard Betts (CFO) 2019 2018 2019 2018 Former Executive $ 22,677 - 2,802 10,351 KMP Mr Malcom Bundey 2019 958,848(6) 2018 1,230,000 (Former CEO) Total Executive 2019 1,785,462 KMP remuneration 2018 1,760,485 - - 59,000 31,059 48,793 91,437 (16,346) 74,272 81,617 (5,995) - 141,021 Post- employment benefits Other Benefits (2) Super- annuation Long- term benefits Long Service Leave(3) $ - - - - - - - - Share based payments LTIP (4) Initial Grant Performance related % Total $ 2,025 - 40,281 29,311 $ - - - - $ 319,588 - 734,369 644,731 (656,030)(7) 138,889(8) 540,309 647,275 333,334 2,310,700 138,889 1,594,266 333,334 2,955,431 (613,724) 676,586 % 1% - 14% 5% (121%)(7) 28% (35%)(9) 23% $ 25,000 - 25,000 25,000 18,750 25,000 68,750 50,000 (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 are the movement in the annual leave provision for Mr Dayal, Mr Betts and Mr Bundey. (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. (5) Mr Betts received a discretionary bonus for duties performed following the departure of the former CEO. (6) Mr Bundey received a motor vehicle allowance as part of his salary and fees. (7) Following Mr Bundey’s cessation of employment 421,801 unvested LTIP rights were forfeited. Negative percentage is due to the reversal of share based payment expense in the current year. (8) The initial share grant was approved at the AGM on 16 November 2016, where shares totalling $1 million will be issued to Mr Bundey on 3 December 2018. Mr Bundey ceased to be a KMP on 10 September 2018, but continued to be employed until 8 March 2019. (9) Negative percentage is due to the reversal of share based payment expense in the current year (refer footnote 7). 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 2019. The table below has not been prepared in accordance with Australian accounting standards. The benefits disclosed below excludes the expense for options that are unvested. Mr Sanjay Dayal Mr Richard Betts Former KMP Mr Malcolm Bundey Fixed Remuneration(1) $ 294,886 581,728 STI and bonuses(2) $ - 59,000 Other Benefits(3) $ 22,677 53,360 Performance rights vested in 2019 $ n/a (4) n/a (5) Initial share grant $ - - Total $ 317,563 694,088 977,598 - 79,852 n/a (6) 1,000,000 (7) 2,057,450 (1) Fixed remuneration includes salary and fees, and superannuation contributions, calculated on the same basis as the remuneration table above. (2) Mr Betts received a discretionary bonus for duties performed following the departure of the former CEO. (3) Other benefits includes motor vehicle lease payments and FBT payments made by the Company on behalf of Mr Betts and Mr Bundey, and movement in the annual leave provision for Mr Dayal, Mr Betts and Mr Bundey, both shown on an accruals basis. (4) Not applicable as the first opportunity for performance rights to vest for My Dayal will be on 30 June 2021 (the vesting of the 2019 LTIP), therefore no benefits were received during the current financial year. (5) Not applicable as the first opportunity for performance rights to vest for Mr Betts will be on 30 June 2020 (the vesting of the 2018 LTIP), therefore no benefits were received during the current financial year. (6) All performance rights granted to Mr Bundey are no longer eligible to vest following his departure from the company. (7) On 3 December 2018 Mr Bundey was issued 209,205 shares at $4.78 per share in relation to an initial share grant at the commencement of his employment on 1 December 2015. 52 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 Sanjay Dayal, is employed under an employment contract with a notice period for termination of three months. There is no fixed term. Mr Dayal’s remuneration package consists of the following components: • The CEO receives fixed remuneration of $1,225,000 per annum. • The CEO has a maximum STI of 100% of fixed annual remuneration. 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 pages 49 and 50. • 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 $581,728 per annum. • The CFO has a maximum STI of 50% of annual base salary (fixed remuneration excluding superannuation). 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 pages 49 and 50. • 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 3 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 2019 A NNUA L R EP OR T 53 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 NEDs do not participate in any incentive programs. 2019 2018 $112,750 $112,750 $30,750 $7,688 $30,750 $7,688 $30,750 $7,688 $30,750 $7,688 The remuneration of NEDs for the year ended 30 June 2019 is detailed in the following table. Non executive KMP remuneration for the year ended 30 June 2019 Ms Lyndsey Cattermole Mr Raphael Geminder Mr Jonathan Ling Mr Peter Margin Mr Ray Horsburgh Ms Carmen Chua Total non-Executive KMP remuneration Short-term benefits Post-employment benefits Fees $ 117,009 117,009 - - 143,500 143,500 151,187 151,187 109,989 109,989 93,958 - 615,643 521,685 Superannuation $ 11,116 11,116 - - - - - - 10,449 10,449 - - 21,565 21,565 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Total $ 128,125 128,125 - - 143,500 143,500 151,187 151,187 120,438 120,438 93,958 - 637,208 543,250 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 2019: KMP Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Carmen Chua Sanjay Dayal Richard Betts Former KMP Malcolm Bundey(1) Balance 1 July 2018 131,668,287 275,419 28,080 17,467 41,632 - - 5,581 Movements 2,283,327 115,910 7,177 13,712 3,339 30,000 40,000 3,703 Balance 30 June 2019 133,951,614 391,329 35,257 31,179 44,971 30,000 40,000 9,284 - - - (1) Equity holdings for Mr Bundey in the above table is for his tenure during the year as a KMP (from 1 July 2018 to 10 September 2018). Mr Bundey was issued 209,205 shares on 3 December 2018, which he still holds at 30 June 2019. 54 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 2019: $’000’s Related parties — Directors' interests(1) 2019 2018 Sales 13,789 11,469 Purchases Other expenses 6,667 5,958 11,043 12,312 Net amounts receivable 609 2,573 (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 49.8% (2018 40%), 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 of sales under this arrangement is approximately $4.2 million (2018: $4.3 million). The supply arrangement is at arm’s length terms. Mr Jonathan Ling was appointed as an Independent non-Executive Director and Chairman of Pro-Pac on 8 April 2019. Terms and conditions of transactions with related parties The Group leased 13 properties (10 in Australia and three 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 2019 was $6.4 million (2018: $6.1 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered into, and are therefore at arm’s length. Terms and conditions of transactions with related parties As detailed above, all transactions with related parties are made at arm’s length. 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. PAC T 2019 A NNUA L R EP OR T 55 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 57. 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 Sanjay Dayal Chairman 14 August 2019 Managing Director and Group Chief Executive Officer 56 PAC T 2019 A NNUA L R EP OR T 57 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Consolidated Statement Of Comprehensive Income For the year ended 30 June 2019 $’000 Revenue Raw materials and consumables used Employee benefits expense Occupancy, repair and maintenance, administration and selling expenses Interest and other income Other (losses) / gains Depreciation and amortisation expense Impairment expense Finance costs and loss on de-recognition of financial assets Share of profit in associates (Loss) / profit before income tax expense Income tax benefit / (expense) Net (Loss) / profit for the year Net (Loss) / profit attributable to equity holders of the parent entity Notes 1.1, 1.4 5.2 6.3 3.2 3.2 4.1 2.3 1.2 2019(1) 2018 1,834,076 1,674,188 (734,260) (843,167) (410,018) (430,035) (306,299) (341,539) 11,199 11,068 (22,404) (55,889) (72,745) (82,290) - (368,765) (32,695) (39,675) 2,159 2,336 109,125 (313,880) (34,637) 24,293 74,488 (289,587) 74,488 (289,587) 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 (losses) / gains taken to equity Foreign currency translation gains / (losses) Income tax on items in other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive (loss) / income for the year Attributable to: Equity holders of the parent entity Total comprehensive (loss) / income for the Group (10) 125 (6,453) 10,932 1,762 6,231 (283,356) 2,293 (78) (692) 1,648 76,136 (283,356) (283,356) 76,136 76,136 cents Basic earnings per share Diluted earnings per share 1.1 1.1 (85.3) (85.3) 23.4 23.3 (1) Reflects the adoption of AASB 15 Revenue from contracts with customers from 1 July 2018. Comparatives have not been restated. The Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 58 Financial Report — Consolidated Statement of Financial Position As at 30 June 2019 $’000 Current assets Cash and cash equivalents Trade and other receivables Inventories Contract assets Current tax assets 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 Current tax liability 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 2019(1) 2018 4.1 3.1 3.1 1.2 3.2 2.3 3.2 1.2 3.1 1.2 5.2 3.4 5.2 3.4 4.1 1.2 49,950 145,282 211,846 8,895 3,360 349 14,617 434,299 718 4,392 638,542 24,353 477,054 42,100 1,187,159 1,621,458 365,615 - 36,292 13,914 2,369 418,190 66,313 7,270 32,358 733,490 4,296 36,946 880,673 1,298,863 322,595 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 1,850,587 418,184 19,075 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 4.2 4.2 1,750,476 (896,911) (530,970) 322,595 1,690,476 (902,984) (204,292) 583,200 (1) Reflects the adoption of AASB 15 Revenue from contracts with customers from 1 July 2018. Comparatives have not been restated. The Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. PAC T 2019 A NNUA L R EP OR T 59 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Consolidated Statement of Changes in Equity For the year ended 30 June 2019 $’000 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 Year ended 30 June 2019 1,690,476 (928,385) As at 1 July 2018 Adjustment on adoption of AASB 15 - - Restated balance as at 1 July 2018 1,690,476 (928,385) Loss for the period - Other comprehensive income / (loss) - - Total comprehensive income Issuance of share capital - - Total equity transactions Dividends paid - Share based payments expense - Transactions with owners in their - - - 60,000 60,000 - - 111 - 111 - (4,691) (4,691) - - - - 22,965 - 22,965 - 10,932 10,932 - - - - - 2,325 (204,292) 1,155 2,325 (203,137) (289,587) (10) (289,597) - - (38,236) - - - - - - - (168) 583,200 1,155 584,355 (289,587) 6,231 (283,356) 60,000 60,000 (38,236) (168) capacity as owners Balance as at 30 June 2019 - - 1,750,476 (928,385) - (4,580) - 33,897 (168) (38,236) 2,157 (530,970) (38,404) 322,595 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 Balance as at 30 June 2018 1,517,097 (928,385) - - - - - - - - - - - - - 175,559 (2,986) 806 173,379 - - 173,379 (1,490) - 1,601 1,601 - - - - - - - 23,043 - (78) (78) - - - - - - - 1,100 (206,257) 74,488 125 74,613 - - - - (72,648) - (72,648) - - - - - - - - 1,225 1,225 405,108 74,488 1,648 76,136 175,559 (2,986) 806 173,379 (72,648) 1,225 101,956 1,690,476 (928,385) 111 22,965 2,325 (204,292) 583,200 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 60 Financial Report — Consolidated Statement of Cash Flows For the year ended 30 June 2019 $’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 2019 2018 4.1 2.1 1,160,215 944,281 (1,931,802) (38,438) 168 13,611 (39,352) 108,683 998,426 874,417 (1,658,784) (33,148) 151 3,181 (33,820) 150,423 (69,455) (78,725) 88 867 (147,225) 433,786 (376,630) - (38,236) 18,920 (19,622) 67,980 1,592 49,950 (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 The Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. PAC T 2019 A NNUA L R EP OR T 61 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 2019. 1.1 Group results $’000 Year ended 30 June 2019 Revenue EBITDA(1) EBIT(2) $’000 Year ended 30 June 2018 Revenue EBITDA(1) EBIT(2) Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Eliminations Total 1,208,468 154,577 97,409 296,386 51,054 35,710 372,263 25,063 15,285 (43,041) 1,834,076 230,694 148,404 - - Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Eliminations Total 1,101,971 152,796 100,417 220,134 44,575 32,006 384,760 39,880 32,083 (32,677) 1,674,188 237,251 164,506 - - (1) EBITDA - Earnings before finance costs and loss on de-recognition of financial assets, net of interest income, tax, depreciation and amortisation and significant items. (2) EBIT - Earnings before finance costs and loss on de-recognition of financial assets, net of interest income, tax and significant items. Pact’s chief operating decision maker is the Managing Director and CEO, who has a focus on the financial measures reported in the above table. As required by AASB 8: Operating Segments, the results above have been reported on a consistent basis to that supplied to the Managing Director and CEO. The Group has adopted a new operating model in the current year. The Managing Director and CEO monitor results by reviewing the reportable segments based on a product perspective as outlined in the table below. The resource allocation to each segment, and the aggregation of reportable segments is based on that product portfolio. Prior year comparatives have been restated on a consistent basis. Reportable segments Packaging and Sustainability Products/services Manufacture and supply of rigid plastic Australia and metal packaging and associated New Zealand services Recycling and sustainability services China Indonesia Philippines Singapore Materials Handling Manufacture and supply of materials Australia and Pooling handling products and the provision of New Zealand associated services Pooling services China Hong Kong United States of America Contract Manufacturing Contract manufacturing and packing Australia Services services Thailand Hong Kong South Korea Nepal India India Bangladesh United Kingdom Sri Lanka 62 Financial Report — Notes to the Financial Statements 1.1 Group results (continued) Net (loss) / profit after tax The reconciliation of EBIT before significant items shown above and the net (loss) / profit after tax disclosed in the Consolidated Statement of Comprehensive Income is as follows: $’000 EBITDA Depreciation and Amortisation EBIT Significant items Acquisition costs(1) Deferred settlement costs (earn-out)(2) Inventory write downs and related disposal costs Impairment expenses • Tangible asset write downs • Intangible assets Business Restructuring Programs(3) • restructuring costs • asset write downs Total significant items EBIT after significant items Net finance costs(4) Net (loss) / profit before tax Income tax benefit / (expense) Net (loss) / profit after tax Notes 2019 230,694 2018 237,251 (82,290) 148,404 (72,745) 164,506 3.1, 3.2 (3,666) - (13,031) (136,330) (232,435) (37,842) - (37,842) (423,304) (274,900) (38,980) (313,880) 24,293 (289,587) (4,411) (8,781) - - - (8,524) (1,589) (10,113) (23,305) 141,201 (32,076) 109,125 (34,637) 74,488 (1) Acquisition costs include professional fees, stamp duty and all other costs associated with business acquisitions. (2) Adjustments to contingent consideration provisions raised in the comparative year relate 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 $695,000 (2018: $619,000). PAC T 2019 A NNUA L R EP OR T 63 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 1.1 Group results (continued) Basic and diluted earnings per share Earnings per share (EPS) (cents) — basic Earnings per share (EPS) (cents) — diluted Calculated using: • Net profit attributable to ordinary equity holders ($’000s) • Weighted average of ordinary shares (shares) — basic • Weighted average of ordinary shares (shares) — diluted 2019 (85.3) (85.3) 2018 23.4 23.3 (289,587) 74,488 339,600,703 318,642,850 340,687,214 319,695,783 Earnings per share is calculated by dividing the net (loss) / 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. 1.2 Taxation Reconciliation of tax expense $’000 Accounting (loss) / profit before tax Income tax calculated at 30% (2018: 30%) Adjustments in respect of income tax of previous years Impairment of goodwill Tax on unremitted foreign income Overseas tax rate differential Sundry items Income tax (benefit) / expense reported in the Consolidated Statement of Comprehensive Income Comprising of: • Current year income tax (benefit) / expense • Deferred income tax (benefit) / expense • Adjustments in respect of previous years income tax 2019 (313,880) (94,164) (344) 69,340 1,879 (2,115) 1,111 2018 109,125 32,737 (345) - 443 (1,300) 3,102 (24,293) 34,637 17,065 (41,014) (344) 35,303 (321) (345) Included in the above is a tax benefit on significant items of $56.4 million for the year ended 30 June 2019 (2018: $3.1 million). 64 Financial Report — Notes to the Financial Statements 1.2 Taxation (continued) 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 Net payments / (receipts) 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 • • Other Intangibles 2019 Current Income tax Asset/(Liability) (19,075) (15,899) (154) - - 38,438 188 (138) 3,360 2019 Deferred Income tax (35,860) 39,848 102 1,762 - - (390) (308) 5,154 12,522 13,688 1,694 533 4,864 4,616 4,183 42,100 (23,730) (8,659) (4,557) (36,946) 2018 Current Income tax Asset/(Liability) (16,913) 2018 Deferred Income tax (32,772) (35,303) 977 - - 33,148 (1,073) 89 321 (632) (692) 806 - (3,102) 211 (19,075) (35,860) 12,517 9,813 - 1,319 87 5,071 2,197 31,004 (51,587) (9,754) (5,523) (66,864) 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. PAC T 2019 A NNUA L R EP OR T 65 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION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. 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 their 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 facts and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or in the Consolidated Statement of Comprehensive Income. Australian tax consolidated group Pact Group Holdings Ltd (the head entity) and its wholly-owned Australian subsidiaries formed a tax consolidated group (Australian tax consolidated group), effective January 2014. The Australian tax consolidated group continues to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach in determining the appropriate amount of current and deferred taxes to allocate to members of the tax consolidated group. The head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. A tax funding agreement is in place such that Pact Group Holdings Ltd pays/receives any taxes owed by/ owed to the Group to/from the Australian Tax Office. Assets or liabilities arising under this tax funding agreement are recognised as amounts receivable from or payable to the head entity. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidated entities. 66 Financial Report — Notes to the Financial Statements 1.3 Dividends $’000 Dividends paid during the financial year Proposed dividend(1) 2019 38,236 - 2018 72,648 38,236 (1) The Directors have determined to not pay a final dividend after the end of the financial year (2018: 11.5 cents, 65% franked). Franking credit balance Franking account balance as at the end of the financial year at 30% (2018: 30%) Franking credits / (debits) that will arise from the payment / (refund) 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 2019 21,519 2018 5,038 (16,829) 10,103 - 4,690 (10,651) 4,490 1.4 Revenue from contracts with customers The Group has adopted AASB 15: Revenue from Contracts with Customers from 1 July 2018. AASB 15 replaces all revenue recognition requirements under AASB 111: Construction Contracts and AASB 118: Revenue, and it applies to all revenue arising from contracts with customers, unless those contracts or transactions are captured in the scope of other standards (refer Note 6.2 Accounting policies). Disaggregation of revenue from contracts with customers $’000 Year ended 30 June 2019 Australia New Zealand Asia Revenue from contracts with customers Revenue from asset hire services(4) Inter-segment revenue Revenue Packaging and Sustainability(1) Materials Handling and Pooling Contract Manufacturing Services(1) Eliminations Total(3) 664,215 294,482 210,024 1,168,721 - 39,747 1,208,468 178,148 - 42,296 220,444 72,704 3,238 296,386 372,207 - - 372,207 - 56 372,263 - 1,214,570 294,482 - 252,320 - - 1,761,372 72,704 - - (43,041) (43,041) 1,834,076 (1) 0.2% of total revenue for Packaging and Sustainability is recognised over time, while 99.8% is recognised at a point in time. (2) 2% of total revenue for Contract Manufacturing Services is recognised over time, while 98% is recognised at a point in time. (3) If revenue from contracts with customers continued to be measured and disclosed under the previous revenue standard AASB 118, revenue would have been $1,752.5 million in the current year. (4) Revenue from asset hire services is accounted for under AASB 117: Leases. PAC T 2019 A NNUA L R EP OR T 67 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 2019 acquisitions: $’000 Consideration paid or payable Comprising of: • Cash consideration paid • Shares issued as consideration • Contingent consideration • Deferred consideration(1) • Assets Inventory - Cash - Trade and other receivables - - Property, plant & equipment - Intangibles - Other assets • Liabilities - Trade payables and other provisions - Employee benefits provisions - Deferred tax liability Fair value of identifiable net assets Provisional goodwill arising on acquisition TIC Retail Accessories 160,794 28,333 60,000 30,000 42,461 2,814 19,432 16,502 8,571 1,300 3,330 (17,749) (780) (390) 33,030 127,764 (1) On 26 April 2019 the Group paid $20.8 million deferred consideration to the vendor. The remaining deferred consideration of $21.7 million is payable on 31 October 2020. On 31 October 2018 the Group purchased 100% of the net assets of TIC Retail Accessories (TIC) for a provisional consideration of $160.8 million. TIC is a closed loop plastic garment hanger and accessories re-use business. The acquisition of TIC expands the Group's closed loop pooling platform and provides the opportunity for future growth in this market. Provisional goodwill of $127.8 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 TIC’s reputation for quality and service. Goodwill is allocated to the Materials Handling and Pooling reportable segment. This goodwill will not be deductible for tax purposes. The assessment of separately identifiable intangible assets is ongoing and is expected to be completed by 31 October 2019. The fair value of TIC’s trade and other receivables acquired amounted to $19.4 million. It is expected that the stated fair value amount will be collected. From the date of acquisition to 30 June 2019 TIC contributed $77.3 million of revenue and other income, and $8.6 million to net profit before tax of the Group. If the combination had taken place at 1 July 2018, contributions to revenue for the period ended 30 June 2019 would have been $36.7 million higher and the contribution to profit before tax for the Group would have been $6.2 million higher. 68 Financial Report — Notes to the Financial Statements 2.1 Businesses acquired (continued) The fair value contingent consideration is dependent on EBITDA hurdles over the two years ending 31 October 2020, with a range of outcomes from $0-$30.0 million. The contingent consideration represents managements best estimate. Included within the Consolidated Statement of Comprehensive Income are acquisition-related costs of $1.3 million. The costs include advisory, legal, accounting and other professional fees. Completion of prior year acquisition accounting During the period a total amount of $32.4 million was paid in relation to the Pascoe’s Group and CSI International and Graham Packaging Group acquisitions made in prior years. 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 CGU’s, or group of CGU’s, 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 2019 A NNUA L R EP OR T 69 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 2019(1) Pact Group Industries (ANZ) Pty Ltd Jalco Group Pty Ltd Australian Pharmaceutical Manufacturers Pty Ltd Jalco Automotive Pty Ltd Pact Group Holdings (Australia) Pty Ltd Pact Group Finance (Australia) Pty Ltd Power Plastics Pty Ltd Pascoes Pty Ltd Bidware Pty Ltd Jalco Powders Pty Ltd Jalco Plastics Pty Ltd Jalco Australia Pty Ltd Jalco Care Products Pty Ltd Packaging Employees Pty Ltd Middleton Asset Financing & Leasing Pty Ltd Jalco Cosmetics Pty Ltd 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 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 TIC RA AU Pty Ltd(2) Pact Group Industries (Asia) Pty Ltd Viscount Plastics (China) Pty Ltd Ruffgar Holdings Pty Ltd Davmar Investments Pty Ltd(2) * There is currently an option granted to a 3rd party to purchase 50% shares in this entity. This option has not been exercised. 70 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(13) Roots Investment Holding Private Limited(8) TIC Group (HK) Ltd(2) (14) TIC Group (Asia) Ltd(2) (14) Talent Group Development Ltd(2) (14) Fast Star International Holdings Ltd(2) (14) TIC Group Ltd(2) (14) 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(5) TIC RA NZ Ltd(2) (6) China Guangzhou Viscount Plastics Co Ltd(7) Langfang Viscount Plastics Co Ltd(7) Changzhou Viscount Plastics Co Ltd(7) Pact Group Closure Systems (Guangzhou) Co. Ltd(8) Pact Group Closure Systems (Tianjin) Co. Ltd)(8) Graham Packaging (Guangzhou) Co. Ltd)(10) Dongguan Top Rise Trading Co. Ltd(2) (11) Regent Plastic Products Ltd(2) (9) Ningbo Xunxing Trade Co. Ltd(2) (12) India Closure System International (I) Private Limited(13) AMRS Business Services Private Limited(2) (14) Indonesia PT Plastop Asia Indonesia(15) PT Plastop Asia Indonesia Manufacturing(15) Korea Closure System International (Korea), Ltd (8) Nepal CSI Nepal Private Limited(13) Philippines Plastop Asia Inc(16) Closure System International (Philippines), Inc(13) Singapore Asia Peak Pte Ltd(13) United States of America Pact Group (USA) Inc(17) United Kingdom TIC Group (Europe) Ltd(2) (17) (1) All entities are wholly owned unless otherwise stated (2) Entities acquired in the 2019 financial year (see Note 2.1) (3) Owned by Skyson Pty Ltd (4) Owned by Snopak Manufacturing Pty Ltd (5) Owned by Sulo MGB Australia Pty Ltd (6) Owned by Pact Group Holdings (NZ) Ltd (7) Owned by Viscount Plastics (China) Pty Ltd (8) Owned by Pact Group Holdings (Hong Kong) Limited (9) Owned by Talent Group Development Ltd (10) Owned by Roots Investment Holding Private Limited (11) Owned by TIC Group (Asia) Ltd (12) Owned by Fast Star International Ltd (13) Owned by Pact Group Industries (Asia) Pty Ltd (14) Owned by Davmar Investments Pty Ltd (15) Owned by Asia Peak Pte Ltd (16) Owned by Ruffgar Holdings Pty Ltd (17) Owned by Pact Group Industries (ANZ) Pty Ltd 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 2019 A NNUA L R EP OR T 71 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 have significant influence or joint control over: Entity $’000 Principal place of operation About Pact’s ownership interest Carrying Value 2019 2018 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(1) 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% 205 202 50% 732 694 50% 1,256 1,997 50% 19,323 15,552 Indonesia and home care markets. 50% 2,837 1,063 (1) Ownership interest at 30 June 2019 and 30 June 2018. 72 Financial Report — Notes to the Financial Statements 2.3 Associates and joint ventures (continued) Summary of associates and joint venture financial information at 30 June $’000 Summarised statement of financial position Current assets Non-current assets Current liabilities Net assets Carrying amount of the Group’s investment Summarised statement of comprehensive income Revenue Expense Net profit after tax Group’s share of profit for the year 2019 2018 24,984 34,978 (11,918) 48,044 24,353 39,470 (34,812) 4,658 2,336 18,604 27,351 (7,575) 38,380 19,507 34,745 (30,426) 4,319 2,159 Dividends received from associates and joint ventures during the year was $0.9 million (2018: $1.6 million). The joint ventures and associates had no contingent liabilities or significant capital commitments at 30 June 2019 (2018: nil). 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 their investments in associates and joint ventures, where they consider 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. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognises the loss within ‘Share of profit in associates’ in the Consolidated Statement of Comprehensive Income. PAC T 2019 A NNUA L R EP OR T 73 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: $’000 Trade receivables(1) Allowance for expected credit losses Other receivables(2) Total current trade and other receivables (1) Below is a breakdown of the ageing of trade receivables: Ageing of trade receivables as at 30 June ($’000) 0 1 2 4 6 , 1 8 2 6 6 , 2019 103,812 (993) 42,463 145,282 2018 107,951 (605) 54,388 161,734 1 3 9 6 3 , 0 4 9 0 3 , 0 7 7 3 , 4 3 1 3 , 9 9 8 3 , 0 0 0 1 , Not due < 30 31–60 > 61 Days 2019 2018 Days (2) At 30 June 2019 $26.3 million (2018: $32.4 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. 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 2019, trade receivables with an invoice value of $1.0 million (2018: $0.6 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 • debtors securitisation programs which allow Pact to sell receivables, at a discount to a third party on a non- recourse basis. The securitisation programs have a committed facility limit of $130.0 million (2018: $115.0 million). Expected credit loss model Information about the credit risk exposure on the Group’s trade receivables using a provision matrix has not been disclosed due to the immaterial amount of expected credit losses as at 30 June 2019. 74 Financial Report — Notes to the Financial Statements 3.1 Working capital (continued) Trade and other receivables (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. For trade and other receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses (ECLs). Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. 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 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 2019 98,216 21,448 92,182 211,846 2018 98,886 22,844 89,226 210,956 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 2019 A NNUA L R EP OR T 75 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 Total current trade and other payables 2019 304,602 61,013 365,615 2018 341,077 77,107 418,184 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 2019 669,175 310,225 2018 851,994 303,205 136,196 1,115,596 184,407 1,339,606 76 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 2019 At 1 July 2018 net of accumulated depreciation Additions and transfers Acquisition of subsidiaries and businesses Disposals Asset write downs(2) Foreign exchange translation movement Depreciation charge for the year At 30 June 2019 net of accumulated depreciation Represented by: At cost Accumulated depreciation 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 and impairment Property(1) Plant and equipment Capital work in progress Total Freehold: 40–50 years Leasehold: 10–15 years 3–20 years n/a 43,852 11,936 1,119 - - 1,245 (4,777) 53,375 611,901 62,988 24,194 (357) (136,330) 7,272 (73,481) 496,187 99,660 (11,706) - - - 1,026 - 88,980 755,413 63,218 25,313 (357) (136,330) 9,543 (78,258) 638,542 79,625 (26,250) 1,227,245 (731,058) 88,980 1,395,850 (757,308) - 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) - (1) Property consists of the following: leasehold improvements of $28.8million (2018: $20.6 million) and accumulated depreciation of $11.6 million (2018: $9.9 million), and freehold property of $50.8 million (2018: $59.3 million) and accumulated depreciation of $14.6 million (2018: $26.1 million). (2) The impairment loss of $136.3 million represented the write-down of certain property, plant and equipment in the Pact Australia segment as a result of challenging trading conditions and a moderated long-term outlook. The recoverable amount was based on value in use and was determined at the level of the CGU. The CGU consisted of the Australian packaging assets. In determining value in use, cash flows were discounted at a rate of 14.3% (2018: 12.1%) on a pre-tax basis. The decrease in the recoverable amount reflects challenging trading conditions and a moderated long-term outlook. The recoverable amount of Australian packaging assets is $178.9 million. PAC T 2019 A NNUA L R EP OR T 77 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Property, plant and equipment (continued) 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. 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. 78 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 2019 At 1 July 2018 net of accumulated amortisation and impairment Additions Intangible asset arising on acquisition(2) Impairment expense Foreign exchange translation movements Amortisation At 30 June 2019 net of accumulated amortisation and impairment Represented by: At cost Accumulated amortisation and impairment Customer contracts(1) Other intangibles(1) Goodwill Total 23,070 - - - - (2,810) 9,843 2,332 - (1,303) (64) (1,222) 551,280 - 119,983 (231,132) 7,077 - 584,193 2,332 119,983 (232,435) 7,013 (4,032) 20,260 9,586 447,208 477,054 28,106 (7,846) 14,949 (5,363) 678,340 (231,132) 721,395 (244,341) (1) Customer contracts are recognised at cost and amortised over their useful lives. 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) Includes the goodwill arising on acquisition of TIC RA AU Pty Ltd and a reduction of $7.8 million goodwill which has been recognised in the period in relation to the prior period acquisition of CSI International and Graham Packaging Group acquisition (Asia acquisition). $’000 Year ended 30 June 2018 Customer contracts(1) Other intangibles (1) Goodwill Total 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 Represented by: At cost Accumulated amortisation and impairment 25,881 - - - (2,811) 23,070 28,106 (5,036) 10,395 145 - (4) (693) 9,843 511,057 - 46,392 (6,169) - 551,280 547,333 145 46,392 (6,173) (3,504) 584,193 12,684 (2,841) 551,280 - 592,070 (7,877) PAC T 2019 A NNUA L R EP OR T 79 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) $’000 Goodwill and intangible assets with indefinite lives are allocated to the following group of CGU’s and segments(1): Packaging and Sustainability Contract Manufacturing Services Materials Handling and Pooling 2019 258,628 21,031 169,311 448,970 The table below shows the allocation of goodwill and intangible assets to CGU’s and segments in the comparative period, prior to the change in operating segments for the current year: $’000 Goodwill and intangible assets with indefinite lives are allocated to the following group of CGU’s and segments(1): Pact Australia Pact International (1) This is the lowest level where goodwill is monitored. Change in Operating Segments and impairment 2018 310,834 242,208 During the year, the Group changed operating segments (refer Note 1.1). Operating segments represents the group of Cash Generating Units (CGU) at which goodwill is allocated and monitored. Immediately after the reallocation of goodwill, impairment testing was performed on the new operating segments, being Packaging and Sustainability, Contract Manufacturing Services and Materials Handling and Pooling. Australian Accounting Standards require that when operating segments containing goodwill are reorganised, an entity must undertake detailed impairment testing immediately prior to and post the reorganisation. When there are indicators of impairment of fixed assets contained within the CGUs in the operating segments, an entity must also complete detailed impairment testing of fixed assets prior to impairment testing for goodwill (refer Note 3.2 for the impairment of fixed assets). Immediately prior to the reallocation of goodwill, impairment testing was performed on the previous operating segments, being Pact Australia and Pact International. The calculation of value in use for both Pact Australia and Pact International are sensitive to the following assumptions: • Gross margins and raw material price movement – Gross margins reflect current gross margins adjusted for any expected (and likely) efficiency improvements or price changes. • Cash Flows – Cash flows are forecast for a period of five years. 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. • Discount rates – The discount rates are 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 within the operating segments operate. Foreign currency cash flows are discounted using the functional currency of the CGUs within the operating segments, and then translated to Australian Dollars using the closing exchange rate. 80 Financial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) The discount rates and terminal growth rates applied to cashflow projections are detailed below. Pact Australia Pact International Discount rate (pre-tax) Terminal growth rate 2019 15.0%-18.6% 1.0% 2019 2018 2018 12.0% 9.8%-20.5% 9.8%-20.5% 2.1%-7.7% 1.2%-7.7% 2.2% Impairment testing identified the carrying value of goodwill within Pact Australia exceeded the recoverable amount. A $231.1 million impairment expense was recognised in the current period. The decrease in the recoverable amount reflects challenging trading conditions and a moderated long-term outlook. Goodwill (net of the impairment) was allocated to the new operating segments on a relative fair value basis. Annual impairment testing The discount rates and terminal growth rates applied to cashflow projections are detailed below. The calculation of value in use for the segments below are sensitive to the following assumptions: • Gross margins and raw material price movement — Gross margins reflect current gross margins adjusted for any expected (and likely) efficiency improvements or price changes. • Cash Flows — Cash flows are forecast for a period of five years. 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. • Discount rates — The discount rates are 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 within the operating segments operate. Foreign currency cash flows are discounted using the functional currency of the CGUs within the operating segments, and then translated to Australian Dollars using the closing exchange rate. Discount rate (pre-tax) Terminal growth rate Packaging and Sustainability Materials Handling and Pooling 9.8%-20.5% 11.8%-14.3% 1.0%-1.2% 1.0%-7.2% Contract Manufacturing Services 14.3% 1.0% PAC T 2019 A NNUA L R EP OR T 81 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) The recoverable amount of Packaging and Sustainability was 1.08 times the carrying amount of $896.1 million, including non-current assets and net working capital. To illustrate sensitivity to these assumptions in the table above, if they were to differ such that the expected growth rates for Packaging and Sustainability were to decrease by 1.0% or discount rates increase by 0.7%, across the forecast period, without implementation of mitigation plans, the recoverable amount would be equal to the carrying amount. The recoverable amount of Materials Handling and Pooling was 1.14 times the carrying amount of $342.9 million, including non-current assets and net working capital. To illustrate sensitivity to these assumptions in the table above, if they were to differ such that the expected growth rates for Materials Handling and Pooling were to decrease by 2.0% or discount rates increase by 1.1%, across the forecast period, without implementation of mitigation plans, the recoverable amount would be equal to the carrying amount. The recoverable amount of Contract Manufacturing Services was 1.05 times the carrying amount of $149.4 million, including non-current assets and net working capital. To illustrate sensitivity to these assumptions in the table above, if they were to differ such that the expected growth rates for Contract Manufacturing were to decrease by 0.7% or discount rates increase by 0.4%, across the forecast period, without implementation of mitigation plans, the recoverable amount would be equal to the carrying amount. How Pact accounts for goodwill 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 CGU’s), to which the goodwill relates. When the recoverable amount of the CGU (or group of CGU’s) is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a CGU (or group of CGU’s) 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 CGU’s retained. Key estimates and judgements — impairment of goodwill and other intangibles The recoverable amount of each of the CGU’s 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 have used their current expectations and what is considered reasonably achievable when assigning values to key assumptions in their value in use calculations. 82 Financial Report — Notes to the Financial Statements 3.3 Commitments and contingencies Operating leases $’000 Operating lease and rental expense(1) 2019 73,923 2018 61,501 (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: Within one year After one year but not more than five years More than five years Total lease expenditure commitments(2) 66,096 185,458 148,731 400,285 59,774 180,773 125,712 366,259 (2) Excludes commitments for option periods. Including option periods for leases where the exercise of the option to extend the lease term is reasonably certain applying the Group’s AASB 16 accounting policy, would increase the lease expenditure commitments by $278.1 million (refer Note 6.2). 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. Capital expenditure commitments Capital expenditure commitments contracted for at reporting date, but not provided for are: Payable within one year Payable after one year but not more than five years Total Contingencies 7,395 449 7,844 17,061 16 17,077 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 2019 A NNUA L R EP OR T 83 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 3.4 Other provisions Total other provisions at 30 June comprise of: $’000's 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 2019 At 1 July 2018 Provided for during the year Utilised Transfers Foreign exchange translation movement At 30 June 2019 2019 2018 13,914 13,914 22,765 9,593 32,358 4,424 4,424 19,233 9,584 28,817 Business restructuring(1) Fixed rent provision(2) Make good on leased premises(3) 4,424 37,842 (28,907) 548 7 13,914 19,233 4,284 (669) (235) 152 22,765 9,584 395 (146) (313) 73 9,593 Total 33,241 42,521 (29,722) - 232 46,272 (1) Business restructuring – The business restructuring programs relate to the optimisation of business facilities across the Group. (2) Fixed rent provision – 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 minimum non-cancellable 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. 84 Financial Report — Notes to the Financial Statements Section 4 — Our capital structure This section details specifics of the Groups’ 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 Pact has the following non-current interest bearing loans and borrowings at 30 June 2019: $’000 Syndicated Facility Agreements(1) Subordinated Debt Facility(1) Capitalised borrowing costs Total non-current interest bearing loans and borrowings 2019 689,232 50,287 (6,029) 733,490 2018 671,279 - (4,026) 667,253 (1) The group has several revolving debt facilities, two term facilities, a subordinated term debt facility and a working capital facility with total commitments of $1,062.2 million, of which of which $314.2 million is undrawn at 30 June 2019. The facilities are spread across multiple maturities, with the working capital facility revolving with an annual review. The debt facilities include a $383.5 million loan facility maturing in January 2022, a $184.3 million loan facility maturing in January 2023, $301.1 million loan facility maturing in March 2023, a $120 million term facility maturing in December 2024, and a subordinated term debt facility of USD 35 million, swapped into AUD ($50.3 million), maturing July 2025. The working capital facility is $23 million at 30 June 2019. 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 2019 was assessed to be insignificant. The computation of the fair value of borrowings is derived using significant observable inputs (Fair Value Hierarchy Level 2). PAC T 2019 A NNUA L R EP OR T 85 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 4.1 Net Debt (continued) The carrying amount and fair value of the Group’s non-current borrowings are as follows: Syndicated Facility Agreements Subordinated Debt Facility Total borrowings (b) Defaults and breaches 2019 $’000s 2018 $’000s Carrying Value 689,232 50,287 739,519 Fair Value 689,232 50,287 739,519 Carrying Value 671,279 - 671,279 Fair Value 671,279 - 671,279 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 Finance costs are recognised as an expense when incurred. 2019 32,250 - 1,499 266 1,581 35,596 4,079 39,675 2018 26,152 (110) 1,260 333 1,521 29,156 3,539 32,695 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. • 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 2019 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. 86 Financial Report — Notes to the Financial Statements 4.1 Net Debt (continued) Reconciliation of net profit after tax to net cash flows from operations $’000 Net (loss) / profit for the year Non cash flows in operating (loss) / profit: Depreciation and amortisation Loss / (gain) on sale of property, plant and equipment Share of net profit in associates Share based payments expense Impairment expense Other Changes in assets and liabilities: Decrease / (increase) in trade and other receivables Decrease / (increase) in inventory Increase in current tax assets Decrease / (increase) in deferred tax assets (Decrease) / increase in trade and other payables (Decrease) / increase in employee entitlement provisions Increase in other provisions (Decrease) / increase in current tax liabilities (Decrease) / increase in deferred tax liabilities Net cash flow provided by operating activities Non-cash activities 2019 (289,587) 2018 74,488 82,290 269 (2,336) (168) 368,765 2,794 39,961 11,977 (3,360) (11,076) (54,468) (1,921) 12,809 (20,037) (27,229) 108,683 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 $’000 Acquisition of assets, liabilities and business via issue of shares Notes 2.1 2019 60,000 2018 - 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 twelve 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. PAC T 2019 A NNUA L R EP OR T 87 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 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)(2) Transaction costs taken to equity Tax benefit on transaction costs End of the year (1) Shares issued as consideration 2019 Number of shares 2018 $’000s Number of shares $’000s 332,483,890 11,509,705 - - 343,993,595 1,690,476 299,234,086 33,249,804 - - 1,750,476 332,483,890 60,000 - - 1,517,097 175,559 (2,986) 806 1,690,476 On 14 November 2018, 11,300,500 shares in the Company were issued for $5.31 as consideration for the acquisition of TIC Retail Accessories (refer Note 2.1). This includes 3,766,834 shares that are divided into four tranches. Each of these tranches are subject to contractual trading restrictions from the date of issue to the dates as follows; 31 January 2019, 30 April 2019, 31 July 2019 and 31 October 2019. The remaining 7,533,666 shares are subject to customary voluntary escrow restrictions across four tranches, and are required to be held in escrow from the date of issue to the dates as follows; 31 January 2020, 30 April 2020, 31 July 2020 and 31 October 2020. (2) Employee share issue On 3 December 2018, 209,205 shares were issued to the former CEO, Mr Malcolm Bundey, as part of his employment arrangements. The associated share based reserve has not been transferred out to contributed equity. 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. Reserves $’000 Foreign currency translation reserve(1) Cash flow hedge reserve(2) Common control transaction reserve(3) Share based payments reserve(4) Total reserves 2019 33,897 (4,580) (928,385) 2,157 (896,911) 2018 22,965 111 (928,385) 2,325 (902,984) (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 representing the fair value of employee rights. 88 Financial Report — Notes to the Financial Statements 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 2019 At 30 June 2019, the Group hedge cover is 51% interest rate debt, swaps to lock in the and therefore if interest rates amount of interest that Pact will be required (2018: 37%) of its long term variable debt excluding working capital facilities. increase, the amount to pay. Sensitivity analysis performed by the Group showed that a of interest Pact is required to pay would also increase. • Considers alternative financing and mix of fixed and variable debt, as appropriate. +1 percentage point movement in AUD interest rates would reduce net profit after tax by $0.9 million and increase equity by $0.3 million (2018: $1.2 million reduction in net profit after tax and increase equity by $0.2 million). 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 $1.4 million (2018: $1.3 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 $0.4 million (2018: $0.6 million). (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. 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 entity’s functional currency, (ii) financing activities, and (iii) net investments in foreign subsidiaries. PAC T 2019 A NNUA L R EP OR T 89 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) The Group currently operates in twelve countries outside of Australia, with the following functional currencies(1): Country of domicile New Zealand Thailand Singapore China Philippines Indonesia Hong Kong Nepal India South Korea Bangladesh United Kingdom Functional currency NZD THB USD RMB PHP IDR HKD / USD NPR INR KRW BDT GBP (1) TIC RA AU Pty Ltd is domiciled in Australia and has USD as its functional currency. 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 2019 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 5%. 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 has entities Pact utilises borrowing in the At 30 June 2019, 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 that 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 2019 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 compared to the hedge of the asset, while the AUD, then the foreign currency interest cost amount of AUD- provides a natural hedge of the AUDNZD ($10.0) million to $12.0 million AUDCNY ($13.0) million to $16.0 million AUDUSD ($2.0) million to $2.0 million AUDPHP ($2.0) million to $2.0 million equivalent profit offshore profit. Sensitivity analysis performed by management showed would decrease and the balance sheet net investment value would decline. 90 that a 10% +/- movement in its major translational currencies during the year, would have the following impact on net profit after tax: AUDNZD ($2.0) million to $3.0 million AUDUSD ($1.0) million to $1.5 million Financial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) Effect on financial position and performance – hedging instruments Pact Group has entered into foreign exchange forward contracts to minimise the variability of cash flows relating to stock and capital purchases denominated in foreign currencies. Furthermore, the Group has also entered into Interest rate swaps to minimise the variability of cash flows relating to the floating component of debt. The impact of hedged instrument and hedged item on the consolidated statement of financial position of the Group is as follows: $’000 Year ended 30 June 2019 Foreign exchange forward contracts Interest rate swaps Hedged item Committed purchases Floating component of debt 65,910 350,000 Year ended 30 June 2018 Foreign exchange forward contracts Committed 81,239 Interest rate swaps purchases Floating component of debt 250,000 Notional amount Carrying amount Asset/ (Liability) Change in fair value for measuring ineffectiveness for the period Cash flow hedge reserve 349(1) (556)(2) (1,774)(2) (4,296)(3) 2,683(1) (79) (2) (616) (3) (2,655) (93) (5,453) (4,248) 448 543 (805) (431) (1) The carrying amount is included in Other current financial assets in the consolidated statement of financial position. (2) The carrying amount is included in Other current financial liabilities in the consolidated statement of financial position. (3) The carrying amount is included in Other non-current financial liabilities in the consolidated statement of financial position. The effect of cash flow hedge noted in Other (losses)/gains line item in the consolidated statement of comprehensive income is as follows: $’000 Year ended 30 June 2019 Committed purchases Floating component of debt Year ended 30 June 2018 Committed purchases Floating component of debt Total hedging gain/(loss) recognised in OCI Amount reclassified from OCI to profit or loss (93) (4,248) 543 (431) (73) - 1,829 - The impact of hedging on cash flow hedge reserve contained within the other comprehensive income/(loss) is as follows: $’000 Opening balance of cash flow hedge reserve Effective portion of changes in fair value arising from: - Foreign exchange forward contracts - Reversal of prior year cash flow hedge reserve Tax effect Closing balance of cash flow hedge reserve Interest rate swaps 2019 111 (93) (4,248) (111) (239) (4,580) 2018 (1,490) 543 (431) 1,490 (1) 111 PAC T 2019 A NNUA L R EP OR T 91 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 2019 The Directors have assessed that due to the Group’s access cannot meet its adequate amount of to undrawn facilities and forecast positive cash flows into the obligations to committed credit facilities. future they will be able to pay their debts as and when they fall repay its financial liabilities as and when they fall due. • Maintains a balance between continuity of funding and flexibility through the use of bank overdrafts, loans and debtor securitisation. due, and therefore it is appropriate the financial statements are prepared on a going concern basis. 92 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 2019 Financial assets(1) Cash and cash equivalents Trade and other receivables Foreign exchange forward contracts(2) Total inflows Financial liabilities(1) Trade and other payables Foreign exchange forward contracts(2) Interest rate swaps Interest bearing loans and borrowings(3) Total outflows Net outflow Year ended 30 June 2018 Financial assets(1) Cash and cash equivalents Trade and other receivables Foreign exchange forward contracts(2) Total inflows Financial liabilities(1) Trade and other payables Foreign exchange forward contracts(2) Interest rate swaps Interest bearing loans and borrowings(3) Total outflows Net outflow ≤ 6 months 6–12 months 1–5 years > 5 years Total 49,950 145,282 63,183 258,415 (417,285) (63,334) (1,814) (14,891) (497,324) (238,909) 67,980 161,734 84,439 314,153 (418,184) (81,824) (266) (12,132) (512,406) (198,253) - - 72 72 - 718 - 718 - - - - 49,950 146,000 63,255 259,205 - (72) (1,238) (14,648) (15,958) (15,886) (14,643) - (3,183) (643,184) (661,010) (660,292) - - - (181,559) (181,559) (181,559) (431,928) (63,406) (6,235) (854,282) (1,355,851) (1,096,646) - - 1,597 1,597 - 2,570 - 2,570 - - - - 67,980 164,304 86,036 318,320 - (1,608) (198) (11,934) (13,740) (12,143) (17,594) - (176) (610,055) (627,825) (625,255) - - - (124,528) (124,528) (124,528) (435,778) (83,432) (640) (758,649) (1,278,499) (960,179) (1) The Group’s principal financial instruments comprise cash, receivables, payables, bank loans, bank overdrafts, finance leases and derivative instruments. (2) Foreign exchange forward contracts are recorded as a net balance in the Consolidated Statement of Financial Position, where in this table the contractual maturities are the gross undiscounted cash flows. (3) 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 Total liabilities from financing activities 1 July 2018 (671,279) (671,279) Cash flows (57,156) (57,156) Foreign exchange movement (11,084) (11,084) 30 June 2019 (739,519) (739,519) PAC T 2019 A NNUA L R EP OR T 93 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 debtor’s 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 commodity price risk from a number of commodities, including resin. The Group manages these risks through customer pricing, including contractual rise and fall adjustments. 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. 94 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 2019 A NNUA L R EP OR T 95 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. Movement in net defined benefit liability/(asset) The following table shows a reconciliation of the movement in the net defined benefit liability/(asset) and its components for each entity: $’000 Present value of the defined benefit obligation Discount rate Salary increase rate At 1 July 2018 Current service cost Net interest cost Actuarial (gains) / losses: Changes in financial assumptions Changes in experience assumptions Changes in demographic assumptions Benefits paid Employer contributions Foreign exchange translation movements Present value of defined benefit obligation at 30 June 2019 CSI India(1) 7.70% CSI Philippines 6.24% CSI Korea 3.10% 12.0% 6.0% 4.0% 703 199 19 164 17 10 96 26 6 2 4 - (2) (40) 5 97 47 (8) - - - 20 250 (58) (61) 15 (81) - 11 747 Plastop Asia 5.93% 5.0% 73 23 6 42 1 21 - - 12 Total 1,036 265 41 33 (64) 36 (83) (40) 48 178 1,272 (1) Defined benefit obligations for CSI India comprises of Gratuity liability and Leave encashment liability. 96 Financial Report — Notes to the Financial Statements 5.1 Defined Benefit Plans (continued) $’000 Present value of the defined benefit obligation Discount rate Salary increase rate 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 30 June 2018 Measurement assumptions India CSI India 7.75% CSI Philippines 7.98% CSI Korea 3.51% 12.0% 6.50% 4.0% - 663 50 4 - 210 14 6 - 98 4 1 (2) - - (5) - 96 (82) 6 - - 10 164 - 1 (70) - 55 703 Plastop Asia 7.79% 5.0% 89 - 24 5 (42) (6) - - 3 73 Total 89 971 92 16 (126) 1 (70) (5) 68 1,036 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 Bankers Association of the Philippines (BAP) benchmark reference curve for the government securities market by stripping the coupons from government bonds to create virtual zero coupon bonds. The salary rate assumption is based on the actual salary increment during the financial year. Korea The discount rate assumption is based on yields available on high quality AA- corporate bonds. 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 is based on approximated zero-coupon yield of government bonds with remaining period to maturity approximating the estimated average duration of benefit payment, as published by the Philippine Dealing Exchange. The salary rate assumption is based on the prevailing inflation rate and company policy. Reconciliation of DBO and Fair Value of Plan Assets The following table shows a reconciliation of the DBO and the fair value of plan assets that comprises the net defined benefit liability/(asset) for each entity: $’000 Defined Benefit Obligation Fair value of plan assets Present value of net defined benefit CSI India(1) CSI Philippines(2) 250 - 130 (33) 2019 CSI Korea(3) 1,358 (611) Plastop Asia(2) 178 - Total 1,916 (644) obligation at end of the year 97 250 747 178 1,272 (1) The plan assets for CSI India relating to the gratuity liability comprises of investments in 100% insurance policies (2) The plan assets for CSI Philippines and Plastop Asia are held in the companies own bank accounts (3) The plan assets for CSI Korea comprises of investments in 100% fixed interest securities PAC T 2019 A NNUA L R EP OR T 97 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 5.1 Defined Benefit Plans (continued) Reconciliation of DBO and Fair Value of Plan Assets (continued) $’000 Defined Benefit Obligation Fair Value of plan assets Present value of net defined benefit CSI India 116 (20) CSI Philippines 164 - 2018 CSI Korea 1,300 (597) Plastop Asia 73 - Total 1,653 (617) obligation at end of the year 96 164 703 73 1,036 Sensitivity analysis The present value of the DBO is based on the assumptions detailed on pages 96 and 97. 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 2019 (194) 228 220 (191) 2018 (145) 169 159 (141) 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 2019 387,922 20,604 21,677 (168) 430,035 2018 367,699 19,439 21,655 1,225 410,018 19,976 16,316 36,292 20,602 16,330 36,932 The Group’s non-current employee benefits provisions of $7.3 million relate to long service leave entitlements of $6.0 million (2018: $6.5 million), and a defined benefit net liability of $1.3 million (2018: $1.0 million) 98 Financial Report — Notes to the Financial Statements 5.2 Employee benefits expenses and provisions (continued) 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. 5.3 Share based payments Long-term Incentive Plan (LTIP) Under the 2019 LTIP scheme 69,784 performance rights were granted to Sanjay Dayal (CEO), with a fair value of $0.25 for each right at the valuation date of 27 March 2019. Senior executives were granted 354,742 performance rights during the year, with a fair value of $0.76 for each right at the valuation date of 14 November 2018. The rights were independently valued to establish the fair value in accordance with AASB 2: Share Based Payments. The key assumptions in the independent valuation in relation to the 2019 LTIP were as follows: Share price at valuation date Annualised volatility Annual dividend yield Risk free rate Expected life of performance right Model used CEO $2.68 30.0% 5.0% 1.4% 36 months Monte Carlo Simulation Model Senior Executives $3.25 30.0% 5.5% 2.1% 36 months Monte Carlo Simulation Model Initial share grant At the Annual General Meeting on 16 November 2016, a resolution was approved for a grant of 209,205 performance rights in relation to the initial share grant to the former CEO, Mr Malcolm Bundey. The shares were held in escrow until 1 December 2018, and were issued to Mr Bundey on 3 December 2018. PAC T 2019 A NNUA L R EP OR T 99 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 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 2019 2,616 90 (475) 2,231 2018 2,417 72 1,010 3,499 The following table provides the total amount of transactions with related parties for the year ended 30 June 2019: $’000 Related parties — Directors' interests(1) 2019 2018 Sales 13,789 11,469 Purchases 11,043 12,312 Other expenses 6,667 5,958 Net amounts receivable 609 2,573 (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 49.8% (2018: 40%), 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. The total value of sales under this arrangement is approximately $4.2 million (2018: $4.3 million). The supply arrangement is at arm’s length terms. Mr Jonathan Ling was appointed as an Independent Non Executive Director and Chairman of Pro-Pac on 8 April 2019. Property leases with related parties The Group leased 13 properties (10 in Australia and three 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 period ended 30 June 2019 was $6.4 million (June 2018: $6.1 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered into, and are therefore at arm’s length. Terms and conditions of transactions with related parties As detailed above, all transactions with related parties are made at arm’s length. 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. 100 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 $427,000 (2018: $430,000). • 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. 6.2 Accounting policies The table below includes standards that were adopted during the period: New Standards, Interpretations or Amendments AASB 15: Revenue from Contracts with Customers Pact financial year that it is adopted Adopted on 1 July 2018 AASB 15: Revenue from Contracts with Customers replaces AASB 118: Revenue and AASB 111: Construction Contracts. The Group adopted AASB 15 based on a modified retrospective basis Impact on Pact financial results AASB 9: Financial Instruments effective from 1 July 2018. The Group has assessed where branded goods are manufactured for customers with no alternate use, revenue is recognised using an overtime revenue model. As such, an adjustment of $1,155,000 to opening retained earnings has been recognised on adoption of AASB 15. Adopted on 1 July 2018 AASB 9: Financial Instruments replaces AASB 139: Financial Instruments: Recognition and Measurement and introduces a new approach for classification and measurement of financial instruments, impairment of financial assets and hedge accounting. The impact to the Group results on the adoption of AASB 9 is immaterial. PAC T 2019 A NNUA L R EP OR T 101 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.2 Accounting policies (continued) There are also 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 2019. The following table includes those standards that have been identified as those which may impact the Group in the period of initial application: New Standards, Interpretations or Amendments AASB 16: Leases(1) Pact financial year that it is adopted Commencing 1 July 2019 The Group plans to adopt AASB 16 on a modified retrospective Impact on Pact financial results basis to contracts that were previously identified as leases applying AASB 117 and AASB Interpretation 4. Where applicable, the Group will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms end within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. On adoption of AASB 16, the Group EBITDA is expected to increase, however there will also be an increase in depreciation and interest expense as a result. (1) Including the associated amendments issued by the AASB that would need to be adopted upon adopting this standard. Comparatives Comparative figures can be adjusted to conform to changes in presentation for the current financial period 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 period disclosure. No material reclassifications have been made to prior period disclosures. AASB 15: Revenue from Contracts with Customers The Group has adopted AASB 15 using a modified retrospective approach. The Group did not apply any of the practical expedients available on transition. A cumulative catch-up adjustment relating to the transition to AASB 15 of $1.1 million was recognised as an adjustment to opening retained earnings on 1 July 2018. The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled to in exchange for those goods and services. A key judgement applied by management is whether the goods or products manufactured have an alternate use to Pact, including whether these goods or products can be repurposed and sold without significant economic loss to the Group. Pact recognises revenue on the following basis: (a) Delivery of goods or products Where the goods or products are not branded and can be sold to more than one specific customer, the performance obligation is the delivery of finished goods or product to the customer. The performance obligation is satisfied when control of the goods or products has transferred to the customer. (b) Manufacture of goods or products Where the goods or products are manufactured for a specific customer which have no alternate use and at all times throughout the contract Pact has the enforceable right to payment for performance completed to date, a performance obligation is the service of manufacturing the specific goods or products. This performance obligation is satisfied as the goods and products are manufactured. An output method has been adopted to recognise revenue for performance obligations satisfied over time. This method reflects Pact’s short manufacturing period. In addition, Pact has obligations to store and deliver manufactured goods or products. These obligations are satisfied as the goods or products are stored (on an over time basis) and when and as delivery occurs. 102 Financial Report — Notes to the Financial Statements 6.2 Accounting policies (continued) Contract assets are recognised for the manufacture and storage of goods or products as the performance obligations are satisfied. Upon completion of delivery of the goods or products and acceptance by the customer, the amounts recognised as contract assets are reclassified to trade receivables. The Group allocates the transaction price to each performance obligation on a stand-alone selling price basis. The stand-alone selling price of the products is based on list prices or a cost plus margin approach, which is determined by the Group’s expertise in the market and also taking into consideration the length and size of contracts. Some contracts for sale of goods have variable consideration including items such as volume rebates. Variable consideration is estimated at contract inception using the expected value method based on forecast volumes and is subject to the constraint on estimates. This estimate is reassessed at each reporting date. AASB 9: Financial Instruments The new accounting standard AASB 9: Financial Instruments became effective for the Group on 1 July 2018. The Group adopted AASB 9 retrospectively except for hedge accounting which has been applied prospectively. Classification and Measurement (a) Financial assets AASB 9 classifies financial assets based on an entity’s business model for managing the financial assets (whether they are held to collect or held to sell) and the contractual terms of the cash flows (whether the contractual cash flows to be received relate only to principal and interest or contain other features). The changes in classification of the Group’s financial assets under AASB 9 have not materially impacted their carrying values. Under AASB 139, all trade and other receivables were subsequently measured at amortised cost. Derivatives were recognised at fair value through profit and loss, except for designated and effective hedging instruments. Under AASB 9, unsecuritised trade receivables and other receivables are subsequently measured at amortised cost. Trade receivables to be sold into the securitisation program is subsequently measured at fair value through profit or loss. Derivative assets are subsequently measured at fair value. (b) Financial liabilities The requirements for the Group’s financial liabilities under AASB 9 remain largely the same as AASB 139. Financial liabilities are classified at amortised cost or at fair value through profit and loss. Under AASB 9, the Group’s trade and other payables and interest-bearing loans and borrowings are subsequently measured at amortised cost. Derivative liabilities are subsequently measured at fair value. (c) Impairment AASB 9 replaces the ‘incurred loss’ impairment model of AASB 139 with a new ‘expected credit loss’ (ECL) impairment model. The objective of the ECL model is to recognise debtor provisions on a forward-looking basis, rather than when there is historical evidence of an impairment occurring. The Group assessed that the impact of adopting the ECL approach to impairment was not material. The Group assess the ECLs on trade and other receivables (other than those subsequently measured at fair value), contract assets and loan receivable from joint ventures. The Group has applied the simplified approach to calculating ECLs which requires the lifetime ECLs to be recognised from initial recognition. Lifetime ECLs represent ECLs that arise from all possible default events over the expected life of the financial asset and are a probability weighted estimate of a range of possible outcomes. To calculate ECLs the Group utilises a provision matrix which incorporates historical debt write off information as well as considering forward indicators. Individual debts that are known to be uncollectible are written off when identified. (d) Hedge accounting The Group applied hedge accounting prospectively. At the date of the initial application, all the Group’s existing hedging relationships were eligible to be treated as continuing hedging relationships. Consistent with prior periods, the Group has continued to designate the change in fair value of the derivatives in the Group’s cash flow hedge relationships to other comprehensive income and, as such, the adoption of the hedge accounting requirements of AASB 9 had no significant impact on the Group’s financial statements. PAC T 2019 A NNUA L R EP OR T 103 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.3 Other (losses) / gains 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) Inventory write downs and related disposal costs Business restructuring programs • restructuring costs • asset write downs Business restructuring programs total Total significant items before tax Other gains/(losses) Unrealised losses on revaluation of foreign exchange forward contracts (Loss) / Gain on sale of property, plant and equipment Realised net foreign exchange (losses) / gains Total other (losses) / gains Total losses before tax 6.4 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 2019 2018 (3,666) - (13,031) (37,842) - (37,842) (54,539) (306) (269) (775) (1,350) (55,889) (4,411) (8,781) - (8,524) (1,589) (10,113) (23,305) (81) 866 116 901 (22,404) 2019 389,861 2018 367,809 1,675,353 1,653,344 1,675,353 1,653,344 1,570,477 1,510,477 2,325 64 140,478 1,675,353 1,653,344 173,845 173,845 2,157 64 102,655 413 413 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 Building 3, 658 Church Street, Cremorne, 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. 104 Financial Report — Notes to the Financial Statements 6.5 Deed of Cross Guarantee $’000 Closed group consolidated income statement (Loss) / Profit before income tax Income tax benefit /(expense) Net (loss) / profit for the year Retained earnings at beginning of the year Net (loss) / profit for the year Dividends provided for or paid (Accumulated losses) / Retained earnings at end of the year $’000 Closed group consolidated balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Loans to related parties Current tax assets 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 Cash and cash equivalents 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 Other non-current financial liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves (Accumulated losses) / Retained earnings Total equity 2019 2018 (363,219) 36,665 (326,554) 61,653 (326,554) (15,670) (280,571) 57,964 (20,252) 37,712 60,797 37,712 (36,856) 61,653 2019 2018 - 77,422 137,779 84,492 17,488 349 16,912 334,442 25,829 88,894 147,691 80,539 - 2,684 15,592 361,229 695 366,386 507,924 20,809 235,456 39,482 1,319 511,852 507,924 17,581 340,143 31,831 1,170,752 1,410,650 1,505,194 1,771,879 2,937 231,596 80,937 - 32,141 6,666 354,277 66,312 45,469 530,209 24,173 65 666,228 1,020,505 484,689 - 287,955 80,311 9,655 32,871 695 411,487 17,593 34,174 473,374 54,368 - 579,509 990,996 780,883 1,750,476 1,690,476 (971,246) (985,216) 61,653 (280,571) 780,883 484,689 PAC T 2019 A NNUA L R EP OR T 105 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.5 Deed of Cross Guarantee (continued) 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 Note 4.3 Managing our liquidity risks). 6.6 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: $ Ernst & Young Audit and audit related services Audit services Audit related services Total audit and audit related services Other Services Tax compliance Tax advisory Total other services Total auditor’s remuneration of Ernst & Young 6.7 Segment assets and segment liabilities Segment assets $’000 Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Total Segment Assets Reconciliation to total assets(1): Current tax assets Deferred tax assets Total Assets Segment liabilities $’000 Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Total Segment Liabilities Reconciliation to total assets(1): Interest-bearing liabilities Deferred tax liabilities Total Liabilities (1) These reconciling items are managed centrally and not allocated to reportable segments. 106 2019 2018 1,931,000 1,614,000 302,000 2,182,000 1,916,000 251,000 113,000 45,000 158,000 140,000 216,000 356,000 2,340,000 2,272,000 2019 1,297,798 154,432 123,768 1,575,998 3,360 42,100 1,621,458 2019 373,755 78,311 76,361 528,427 733,490 36,946 1,298,863 Financial Report — Notes to the Financial Statements 6.7 Segment assets and segment liabilities (continued) The table below shows segment assets and liabilities for the comparative period, prior to the change in operating segments: Segment assets $’000 Pact Australia Pact International Total segment assets Segment liabilities $’000 Pact Australia Pact International Total segment liabilities 2018 1,175,138 675,449 1,850,587 2018 924,907 342,480 1,267,387 6.8 Revenue from services rendered Revenue from asset hire services of $72.7 million was recognised for the year ended 30 June 2019 (2018 $70.3 million), which is included in the Group revenue number of $1,834.1 million for the year ended 30 June 2019 (2018 $1,674.2 million). 6.9 Geographic revenue The table below shows revenue recognised in each geographic region that Pact operates in. $’000 Australia New Zealand Asia Total 6.10 Subsequent events 2019 2018 1,291,238 1,279,857 285,296 109,035 1,834,076 1,674,188 289,258 253,580 In the opinion of the Directors, there have been no material matters or circumstances which have arisen between 30 June 2019 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 2019 A NNUA L R EP OR T 107 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 2019 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 Group Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2019. This Declaration is made in accordance with a resolution of the Directors. Raphael Geminder Chairman Dated 14 August 2019 Sanjay Dayal Managing Director and Group Chief Executive Officer 108 PAC T 2019 A NNUA L R EP OR T 109 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION110 PAC T 2019 A NNUA L R EP OR T 111 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION112 PAC T 2019 A NNUA L R EP OR T 113 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION114 Shareholder Information PAC T 2019 A NNUA L R EP OR T 115 PAC T 2019 A NNUA L R EP OR T 115 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 31 August 2019. Ordinary shares Pact has on issue 343,993,595 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 2019: Name Kin Group Pty Ltd Investors Mutual Ltd On market buy-back Date of interest 17/12/13 29/02/16 Number of ordinary shares 141,932,367 40,753,173 % of issued capital 41.26% 11.85% 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 2,611,499 16,944,102 13,109,632 26,554,732 284,773,630 343,993,595 4,871 6,484 1,737 1,167 63 14,322 There were 749 holders of less than a marketable parcel of ordinary shares (minimum of $500 which is equivalent to 97,579 ordinary shares based on a market price of $2.43 at the close of trading on 31 August 2019). 116 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) Ltd JP Morgan Nominees Australia Ltd Citicorp Nominees Pty Ltd Manipur Nominees Pty Ltd Stanningfield Pty Ltd Argo Investments Limited Citicorp Nominees Pty Ltd Salvage Pty Limited National Nominees Limited Sandurst Trustees Limited S&J Capital Pty Limited Mr Russell Stanley Barber Custodial Services Limtied BNP Paribas Nominees Pty Ltd Total: Top 20 holders of fully paid ordinary shares (Total) Total Remaining Holders Balance Unquoted equity securities There are no unquoted equity securities on issue. Restricted equity securities Ordinary Shares Number of shares % of total shares 40.20 19.16 6.68 3.81 1.64 1.64 1.50 1.10 1.06 0.55 0.47 0.44 0.43 0.40 0.33 0.30 0.26 0.18 0.17 0.15 80.48 19.52 138,296,438 65,905,446 22,963,197 13,118,300 5,650,250 5,650,250 5,172,314 3,771,338 3,635,929 1,885,651 1,600,000 1,514,339 1,476,520 1,376,725 1,143,877 1,040,000 911,569 629,334 587,446 500,346 276,829,269 67,164,326 There are no restricted equity securities in the Company. However, there are 8,475,375 ordinary shares which are subject to voluntary escrow. These shares will cease to be subject to voluntary escrow as follows: 941,708 on 31 October 2019; 1,883,417 on 31 January 2020; 1,883,417 on 30 April 2020; 1,883,417 on 31 July 2020 and 1,883,417 on 31 October 2020. 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 2019 A NNUA L R EP OR T 117 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFY20 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 and events may be subject to change. Dates 19 February 2020 27 February 2020 28 February 2020 3 April 2020 19 August 2020 27 August 2020 28 August 2020 2 October 2020 18 November 2020 118 Corporate Directory Registered and Principal Administrative office in Australia Pact Group Holdings Limited Building 3, 658 Church Street Richmond, Victoria 3121, Australia Telephone: + 61 3 8825 4100 ABN: 55 145 989 644 Website Address www.pactgroup.com. 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 39. 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 2019 A NNUA L R EP OR T 119 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONwww.pactgroup.com.au 120 

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