Pact Group Holdings Ltd
Annual Report 2020

Plain-text annual report

2020 ANNUAL REPORT CONTENTS Overview Pact at a Glance Our Vision to Lead the Circular Economy Financial and Operational Highlights A View from the Chairman A Message from the CEO Sustainability Innovation and Awards Review of Operations and Financial Performance Strategy Overview Operational and Financial Summary Governance Corporate Governance Overview Financial Reports Directors' Report — Remuneration Report Auditor's Independence Declaration Financial Statements Directors' Declaration Independent Auditor's Report Shareholder Information FY21 Shareholder Calendar Corporate Directory 2 3 4 6 8 10 10 12 16 28 31 38 49 50 104 105 114 115 1 PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONPACT AT A GLANCE 6,000 employees 7,000 customers $1.8 billion revenue in FY20 OUR VISION TO LEAD THE CIRCULAR ECONOMY Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services • Market leader in rigid plastic • Largest provider of returnable • A leading supplier of contract packaging in Australia and New Zealand, with a growing platform in Asia produce crate pooling services in manufacturing services in Australia Australia and New Zealand for the home, hygiene, personal care • Largest supplier of garment hanger and health and wellness categories • Leading supplier of recycling and and accessory reuse services globally • A diversified portfolio and broad sustainability services in Australia and • Leading supplier of plastic materials manufacturing capability for liquid, New Zealand handling products and custom- powder, aerosol and therapeutic • Regional scale with extensive moulded infrastructure products nutraceutical products manufacturing footprint supported • Comprehensive service offerings and • Strong customer relationships, by innovation and a customer-centric asset tracking technology innovation and product development structure capability FY20 revenue $1,144 million FY20 revenue $316 million FY20 revenue $394 million operations in 15 countries UK China Korea Hong Kong United States Philippines India Sri Lanka Nepal Bangladesh Singapore Thailand Indonesia Australia New Zealand ASPIRATION VISION Pact will Lead the Circular Economy through reuse, recycling and packaging solutions TARGET Top quartile shareholder returns and 30% recycled content across portfolio by 2025 PRIORITIES STRENGTHEN OUR CORE EXPAND REUSE AND RECYCLING CAPABILITY Focus portfolio and strengthen balance sheet  Turnaround and defend core ANZ consumer packaging businesses Lead plastics recycling in ANZ Scale-up reuse solutions Differentiate industrial and infrastructure businesses LEVERAGE REGIONAL SCALE Grow Asian packaging platform ENABLERS Competitive manufacturing Safe, diverse and motivated workforce Segment Differentiated Circular Disciplined Data-driven skilled sales capability solutions through technical expertise and innovation economy capital decision- credentials management making and communication 2 3 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL AND OPERATIONAL HIGHLIGHTS Solid operating performance, despite COVID-19 challenges Net debt reduced and leverage improved • Group EBITDA and margins improved • Net debt reduced by $70 million • Solid organic growth in the Contract Manufacturing • Gearing improved at 2.6x, down 0.4x (excluding hygiene category and in crate pooling services AASB16) • Modest underlying growth in New Zealand and Asia • Strong operating cash flows • Tight cost control and disciplined cash management • ROIC improved at 12.6%, up 1.5% pts excluding AASB16) Dividends resumed • Final dividend of three cents per share, 65% franked 5 YEAR FINANCIAL HISTORY 1 8 3 1 5 7 4 1 4 7 6 1 4 3 8 1 9 0 8 1 FY16 FY17 FY18 FY19 FY20 0 2 2 3 3 2 7 3 2 1 3 2 4 3 2 2 0 3 FY16 FY17 FY18 FY19 FY20 Exc AASB16 FY20 Inc AASB16 3 6 1 9 6 1 5 6 1 8 4 1 1 5 1 6 6 1 FY16 FY17 FY18 FY19 FY20 Exc AASB16 FY20 Inc AASB16 4 9 0 0 1 5 9 7 7 1 8 3 7 FY16 FY17 FY18 FY19 FY20 Exc AASB16 FY20 Inc AASB16 1% Revenue $m 1% EBITDA1 $m (exc AASB16) 1% EBIT1 $m (exc AASB16) 5% NPAT1 $m (exc AASB16) 4 1 Before significant items. 5 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONA VIEW FROM THE CHAIRMAN Dear Shareholder On behalf of the Board of Directors of Pact Group, it is my pleasure to present to you our 2020 Annual Report. FY20 Overview As we all know, FY20 was a period of unprecedented challenges including the outbreak of the COVID-19 pandemic in the second half of the year and the impact of devastating bushfires during the Australian summer. Despite these adverse macro impacts, and some underlying volume challenges, the Group was able to deliver revenue of $1.8 billion, broadly in-line with the prior year, and EBITDA of $301.8 million, up 1% on the prior year (on a comparable basis). Group operating cash flows were also robust, our balance sheet strengthened, and Group net debt and financing metrics significantly improved. Despite the significant challenges that we faced in the period, the Group and our dedicated people have responded exceptionally well, driving improvements in the business, capturing new business opportunities and completing the strategic review that we announced earlier in the year. We have also made excellent progress in the first stages of the execution of that vision and strategy. Importantly, we have also been able to support the communities in which we operate during the COVID-19 pandemic through the supply of hand sanitiser and hygiene products to emergency services and the broader community, donations through local charities and on an ongoing basis through our continued commitment to sustainability and innovation. Our Vision & Strategy Pact’s vision is to Lead the Circular Economy through reuse, recycling and packaging solutions. We will target top quartile shareholder returns and 30% recycled content across our portfolio by 2025. To achieve this vision our key priorities are: • Strengthening our balance sheet and improving the competitiveness of our core packaging business. • Expanding our reuse and recycling capability, and leading plastics recycling in Australia and New Zealand. • Leveraging our regional scale and growing our Asian packaging platform. Pact has a special position in the circular economy which will enable and creating hundreds of new jobs. Our crate pooling and hanger us to lead change in the industry and deliver innovative, sustainable reuse platforms are best-in-class and will also provide the platform solutions to our customers and deliver a strong competitive for us to drive deeper penetration of reuse solutions and further advantage. reduce single use packaging. Our Commitment to Sustainability Board Changes Care for the environment and the communities in which we operate On 21 April 2020, we welcomed Mr Michael Wachtel to the Board as is central to our strategy. The new strategy established in FY20 is a a Non-Executive Director and member of our Audit, Business Risk natural extension of our Pact 2025 Promise. Launched in FY18, we are committed to becoming our customers’ partner of choice for sustainable packaging. Our targets are to reduce, reuse and recycle by: and Compliance Committee. Michael is a Board member of Future Fund, Seek Limited and St Vincent’s Medical Research Institute, and has previously held a number of leadership roles in professional • eliminating all non-recyclable packaging that we produce; • having solutions to reduce, reuse and recycle all single use secondary packaging; and • offering 30% recycled content across our packaging portfolio by 2025. In pursuing these targets, we are actively collaborating with our customers and other stakeholders in product innovation and investments in new manufacturing technology, to improve the use of recycled materials, and provide a range of sustainability services. Examples of our progress in FY20 include: Reduce — Polystyrene is the most significant non-recyclable resin consumed in our products. We decreased consumption of this resin by 181 tonnes in FY20 and are working with customers to transition more products to alternative substrates. PACT’S VISION IS TO LEAD THE CIRCULAR ECONOMY THROUGH REUSE, RECYCLING AND PACKAGING SOLUTIONS services organisations, including as Chair (Asia Pacific and Oceania) of EY. Michael brings a strong professional background and extensive global experience in governance, risk management, finance and complex international transactions to the role. I am delighted that we have been able to attract such a high calibre individual to complement our Board of Directors. Dividend We appreciate the importance of dividend income to our shareholders. The resilience of our portfolio and the strength of our balance sheet has enabled the Board to resume dividends. The Board has determined to pay a final dividend of three cents per share, franked to 65%, in respect of the year ended 30 June 2020. Our medium-term target with respect to dividends is a payout policy of more than 40% of Group net profit after tax, before significant items. Reuse — We have enabled the growth in use of returnable produce crates in Australia’s supermarket supply chain through the expansion of our crate pooling operation, reducing single-use corrugate secondary packaging by more than 2,000 tonnes since 2019. Recycle — We have increased the number of products we manufacture from recycled resin by 31% since 2019 and have won contracts in FY20 to supply three Australian supermarket chains with recycled PET meat trays. Critically, we are also establishing the recycling capability to provide recycled raw materials which promote the local circular economy. We are pursuing a number of recycling initiatives, including a joint venture with Cleanaway and Asahi, which will see us grow our recycling capacity from 30,000 tonnes to more than 50,000 tonnes by 2022, providing differentiation in the market, generating the supply to help enable us to meet our 30% recycled content target Thank You On behalf of the Board of Directors, and myself, I would like to say thank you to our shareholders and to all of our customers, suppliers and other stakeholders for your support during this remarkable year. I would also like to express my gratitude to the Group’s management team and, most importantly, all of our people for your outstanding contribution in delivering on our promises and driving results in such difficult circumstances in FY20. As a Group, we will continue to respond decisively to rapidly changing economic conditions, the needs of our customers and the ongoing, uncertain impact of COVID-19. I am excited by our vision and our strategy and am confident that through our continued relentless focus on innovation and sustainability we will deliver those targets. Raphael Geminder Non-Executive Chairman 6 7 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONA MESSAGE FROM THE CEO Dear Shareholder I am delighted to present to you my report for FY20, a year which saw us establish our new vision and strategy for the Group and deliver a solid financial and operating performance in a period of significant market uncertainty. Group Performance and Business Overview I was very pleased with our financial performance in FY20. We delivered improved earnings and margins, tightly managed pricing and controllable costs, and significantly strengthened our balance sheet. These results were delivered in a period where we faced the uncertainty of the COVID-19 pandemic, along with challenges from other macro events, and clearly demonstrated the resilience of our diversified portfolio and customer base. Our strong local manufacturing and service capabilities enabled us to confidently manage these challenges, to provide security of supply to our customers and quickly respond to their changing needs. The business responded rapidly to meet strong demand and supply shortages for hand sanitiser and other hygiene products, ensuring that the needs of front line workers and the general community were met. Demand in most consumer segments was resilient during the COVID-19 impacted period, but we did experience a slow-down in the industrial sector and our hanger reuse business was impacted by significant weakness in the clothing retail sector in Australia. Over the full year, underlying volumes in our Australian packaging business and the health and wellness sector remained challenging, but underlying volumes were ahead in our New Zealand and Asian businesses, the latter beginning to leverage the benefits of consolidating our regional closures platform. Pleasingly we also generated solid organic growth in our Materials Handling segment, through new contracts to expand crate pooling services in Australia and hanger reuse services in the USA, and in the hygiene category in our Contract Manufacturing segment. We were also able to significantly improve the strength of our balance sheet in FY20, generating strong cash flow, tightly managing capital expenditure and consequently reducing net debt by $70 million and improving our gearing ratio to 2.6x, well within our targeted levels. Safety and Our People I am incredibly saddened to report that a valued team member at our Albany site in New Zealand died in a tragic incident in May. We have supported detailed investigations into the incident and implemented procedures to prevent similar incidents at any of our facilities in the future. THE BUSINESS HAS PERFORMED WELL IN FY20, WE HAVE A CLEAR PLAN FOR THE FUTURE, AND WE ARE VERY CONFIDENT IN PACT’S CAPABILITY TO ACHIEVE ITS TARGETS AND VISION. Whilst our Lost Time Injury Frequency Rate for FY20 was 4.0, improved on 4.7 in the prior year, we remain committed to driving continued improvement in our safety culture and processes. I am extremely proud of how well our people responded to the challenges presented by the COVID-19 pandemic and the commitment they demonstrated in continuing the efficient operation of our facilities across Australia, New Zealand and Asia. The Group was able to swiftly react to the onset of the COVID-19 pandemic and developed a response plan focused on protecting the health and safety of our employees and the community, as well as supporting our customers. I would like to thank all our people around the Group for their outstanding resilience and dedication in FY20. Strategic Review As foreshadowed in our last Annual Report, the Group completed a strategic review in FY20 and established a Vision to Lead the Circular Economy through reuse, recycling and packaging solutions. Under this strategy, our decision-making will be guided by targets and a new capital allocation framework. I am delighted to report that we are already progressing well in the execution of our new strategy and are committed to maintaining this momentum. We have completed the critical first phase of the turnaround of our Australian packaging business and have clear plans for the next stage of the process. Phase two will include the development of targeted segment strategies to drive resource allocation, differentiate in the marketplace, improve margins and sharpen our focus on growth opportunities. This business is integral to delivering value in the circular economy. During the year we also formalised a joint venture with Cleanaway and Asahi to expand our recycling capability by developing a new recycling facility in Australia. This is expected to be operational by 2022. In addition, we have entered an agreement to acquire Flight Plastics, a leading recycler and provider of sustainable packaging solutions in New Zealand (subject to regulatory approval). We also progressed our strategy through the expansion of our crate pooling and hanger reuse operations as noted above. During FY20 we grew our pooling revenues by an impressive 27%. As previously announced, and also in-line with this strategy, the Group is pursuing its options with respect to the sale of the businesses in our Contract Manufacturing segment. This process will recommence in FY21 following a suspension in the second half of FY20 due to the COVID-19 pandemic. Outlook In respect of the outlook for the Group, we expect our diversified portfolio to be resilient with trading in the first quarter of FY21 in most sectors to be generally in line with recent trends. The duration and economic impact of COVID-19 is uncertain. An update on trading will be provided at the AGM on 18 November 2020. Notwithstanding the uncertainties associated with COVID-19, we have a clear vision for Pact and are committed to our new strategy. We have made good progress so far and believe that through the execution of this strategy we can deliver significant long-term value for all our stakeholders. We have clearly defined targets to deliver by 2025: • Top quartile shareholder returns. • Return on invested capital above 15% (13.5% on a post AABS16 basis). • Pact’s sustainability promise of 30% recycled content across its portfolio. • A strong balance sheet with gearing under 3x (excluding the impact of AASB16). • A focussed portfolio with investments and divestments clearly aligned to strategy. • The payment of dividends to shareholders in-line with our dividend policy. The business has performed well in FY20, we have a clear plan for the future, and we are very confident in Pact’s capability to achieve its targets and vision. Finally, I would like to take this opportunity to thank our shareholders for your continued support and confidence in the Company, and reiterate my thanks to our management team and the wonderful people across the business who have performed so well in such challenging circumstances this year. I look forward to updating you all on further progress in FY21. Sanjay Dayal Managing Director & Group CEO 8 9 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION SUSTAINABILITY Pact is committed to sustainability and this is embedded in the way Our annual Sustainability Review is prepared based on the Global we work. Our vision is to lead the circular economy through reuse, Reporting Initiative (GRI) Sustainability Reporting Guidelines (G4 recycling and packaging solutions. 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: version) and addresses the challenges and opportunities facing 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/ INNOVATION AND AWARDS Pact received numerous prestigious awards throughout FY20 for the innovative design of products and services. Corporate • Australian Financial Review (AFR) BOSS Most Innovative Companies List 2019, 2018, 2017, 2016, 2015, 2014, 2013. • Wealth & Finance International Global Excellence Awards. — 2019 Most Innovative Packaging Company of the Year Acquisition International Leading Advisor Awards. — 2020 Leading Creative Packaging Solutions Provider of the Year. WE’RE PROUD TO HAVE BEEN RECOGNISED FOR OUR WORK IN SUSTAINABLE PACKAGING INNOVATION IN SUPPORT OF OUR VISION TO LEAD THE CIRCULAR ECONOMY THROUGH REUSE, RECYCLING AND PACKAGING SOLUTIONS. Industry Packaging • 2020 Winner World Packaging Organisation (WPO) — Sustainability Special Award — Lewis Road’s 100% rPET Milk Bottle range. • 2020 Winner Australasian Packaging Innovation & Design Awards (PIDA) — Health, Beauty & Wellness Category — Glowlabs’ post- consumer sourced (PCR) 100% rPET bottle range. • 2020 Runner Up Australasian Packaging Innovation & Design Awards (PIDA) — Sustainable Design Category — Earthwise’s PCR 75% rHDPE household cleaning range. Contract Manufacturing • 2020 Canstar Awards — Atlas Crawling Insect Spray. • 2020 Canstar Awards — Atlas Insect Kill Fly Spray. • 2020 Canstar Awards — Atlas Multi Insect Spray. • 2020 Canstar Awards — Powerforce Toilet Block Gel Five Ball 35g. • 2020 Canstar Awards — Powerforce Active Gel Disks 75ml. • 2020 Canstar Awards — Powerforce Anti-Bac Disinfectant Spray 300g. • 2019 Choice Awards — ALDI Trimat Laundry Power. DESIGN INNOVATION OF THE YEAR HEALTH, BEAUTY & WELLNESS GOLD WINNER SUSTAINABLE PACKAGING DESIGN SPECIAL AWARD - RETAIL PACK SILVER WINNER REVIEW OF OPERATIONS AND FINANCIAL PERFORMANCE 10 O V E R V I E W P E R F O R M A N C E G O V E R N A N C E F I N A N C I A L R E P O R T S S H A R E H O L D E R I N F O R M AT I O N 11 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT STRATEGY OVERVIEW During the year Pact undertook a detailed business strategy review under the leadership of the Managing Director and Group CEO. The review has clarified what is critical to Pact’s continued success and will enable the Group to maximise long-term shareholder value. The Board of Directors has endorsed this new strategy, which is focussed around “Leading the Circular Economy” in plastic packaging. Our Vision Our Target PACT WILL LEAD THE CIRCULAR ECONOMY THROUGH REUSE, RECYCLING AND PACKAGING SOLUTIONS TOP QUARTILE SHAREHOLDER RETURNS AND 30% RECYCLED CONTENT ACROSS THE PORTFOLIO BY 2025 PACT'S SCALE AND CAPABILITY ACROSS THE CIRCULAR ECONOMY VALUE CHAIN We are a leading plastics recycler, well positioned to lead the change needed to “close the loop” on plastics Leading recycling platform in ANZ with growing capability in post- consumer plastics recycling End-of-life recycling of pooling assets We have solutions that meet the growing need for alternatives to single-use packaging Best in class produce crate pooling platform with a leading position in Australia and New Zealand Leading position globally in garment hanger reuse services Leading provider of drum and IBC reconditioning services in Australia and New Zealand We have industry leading capability to improve plastics sustainability through innovation and product design, and the scale and technical know-how to provide a meaningful offtake “sink” for recycled materials Largest manufacturer of rigid plastic packaging in Australia and New Zealand Regional leader in caps and closures Leading supplier of plastic materials handling and infrastructure products Technical and innovation capability to use recycled materials in product design and provide sustainable product choices Priorities The Group will seek to deliver long-term value focussing on three core areas, with six key priorities: • Strengthen the core Strengthen the core Expand reuse and recycling capability To align our portfolio with strategy, strengthen the balance and turnaround and defend our core packaging business in Australia and New Zealand, the Group: To leverage our unique position in the plastics value chain, to expand our recycling capability and reuse platforms and to meet the growing demand for sustainable supply chain solutions, the Group: - Align the portfolio with strategy and strengthen the balance • has commenced a sales process in respect of its Contract • will collaborate with industry and Government to build local sheet. Manufacturing businesses; recycling capability; Progress in FY2020 During FY2020 the new business strategy has been established with the following strategic initiatives progressed • Phase one of the restructure of the ANZ packaging business is complete, with a customer-centric structure implemented and new senior leadership appointed. - Turnaround and defend our core packaging business in • has reaffirmed a target leverage ratio of less than 3x (excluding • will expand its returnable crate pooling operations through • Capital prioritisation framework embedded and FY21 priorities the impact of AASB 16); increased conversion of single-use packaging; and agreed. • will assess all new growth capital against a minimum target hurdle • will expand its garment hanger reuse operations to support - Lead plastics recycling in Australia and New Zealand. of 15% ROIC and quality of returns; - Scale up reuse solutions. - Differentiate industrial and infrastructure businesses. • Leverage regional scale - Grow our Asian packaging platform. • has set a target for ROIC to exceed 15% by 2025; • will improve the competitiveness of its packaging platform in Australia and New Zealand through focussed capital and operational initiatives; and • will leverage its technical and innovation capability and access to recycled raw materials to differentiate in the market. offshore growth. Leverage regional scale To grow our Asian packaging platform, the Group will optimise its value chain through the consolidation of our regional closures platform. The Group: • has consolidated its regional closures network, which includes assets in Australia, New Zealand and Asia; • has invested in capacity expansion in Asia; • will leverage the platform to deliver the lowest cost of manufacture; and • is supporting growth in our special closures capability within Australia and New Zealand. • Recycling capability to be expanded through strategic investments — Agreement to acquire Flight Plastics Ltd in New Zealand, which provides post-consumer recycling capability in New Zealand (subject to approval by regulatory authorities). — Formalised joint venture arrangements with Cleanaway and Asahi to expand post-consumer recycling capability in Australia, with the project moving into the construction phase. • Active collaboration with Government to accelerate investment in local recycling capability. • Successful start-up of reuse services to support a new contract in the USA. • Consolidation of the closures business into Asia has commenced. • Sale process in respect of Contract Manufacturing business to recommence. Australia and New Zealand. • Expand reuse and recycling capability 12 13 PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONPACT 2020 ANNUAL REPORT ManufactureReuseRecycleCase Study Establishing a competitive advantage through supply of sustainable packaging Consumers are increasingly demanding sustainable • An arrangement with Cleanaway and Asahi to jointly packaging and the use of recycled content which develop recycling capability in Australia. Trading supports the local circular economy. Capability to meet as Circular Plastics Australia, the joint venture will this need will be a competitive advantage. construct a new recycling facility with capacity to Pact is making great progress expanding its recycling capability to support the needs of its customers. Access to recycled raw materials will enable Pact to differentiate in the market. To meet Pact’s target of 30% recycled content across its portfolio by 2025 the Group will require in excess of 60,000 tonnes of recycled raw materials. Several initiatives already underway will provide a significant step in achieving this target, increasing recycling capacity to around 50,000 tonnes by 2022. These recycle the equivalent of one billion 600ml PET plastic bottles each year. Expected to be operational by 2022, the facility will lift Australia’s PET recycling capacity by 50%. The recycled materials will be used to produce new food and beverage packaging. • An agreement to acquire Flight Plastics (subject to approval by regulatory authorities) a leading provider of packaging for the ANZ fresh food segment and New Zealand’s only packaging manufacturer with integrated recycling capability. initiatives include: • The acquisition of Australian Recycled Plastics (51% share). SIGNIFICANT PROGRESS HAS BEEN MADE IN INCREASING PACT'S RECYCLING CAPABILITY TO PROVIDE CUSTOMERS WITH FOOD GRADE RECYCLED CONTENT THAT WILL ESTABLISH AN IMPORTANT COMPETITIVE ADVANTAGE In FY20, Pact secured the contracts to supply three Australian supermarket chains with recycled polyethylene terephthalate (rPET) Moisturelock meat trays. THE THREE CONTRACTS COMBINED ARE FOR APPROXIMATELY 35 MILLION TRAYS PER ANNUM. EACH TRAY CONTAINS AN AVERAGE OF 10–30% POST-CONSUMER RECYCLED CONTENT. This equates to approximately 150 tonnes of plastic that has been reused and diverted from landfill. In March 2021, Pact will have the capability to increase the percentage of post-consumer recycled content in each tray; the target being to approximately 50%–100%. 14 15 PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONPACT 2020 ANNUAL REPORT OPERATIONAL AND FINANCIAL SUMMARY The Group has reported revenue of $1,809.2 million for the year ended 30 June 2020, down 1% compared to the prior corresponding period (pcp). The statutory net profit after tax (NPAT) for the year was $88.8 million, compared to a statutory net loss after tax of $289.6 million in the pcp. NPAT before significant items3 for the year was $73.2 million. Excluding the impact of AASB 16 Leases (adopted from 1 July 2019), NPAT before significant items3 was $80.8 million (pcp: $77.3 million). Note: Statutory financial results for the year reflect the adoption of AASB 16 Leases. Comparatives have not been restated. Results excluding the impact of AASB 16 are included in this report for comparative purposes. COVID-19 The Group’s COVID-19 response plan is focused on protecting the health and safety of employees, supporting customers and the Materials Handling and Pooling • Crate pooling volumes were improved, with strong demand for fresh produce. community and safeguarding the balance sheet. • Several bin and infrastructure projects were delayed. Protecting our people • Strict health and safety protocols implemented to protect employees, customers, and the community. • Demand from the clothing retail sector was weak, with hanger reuse services well down. • Net adverse impact to segment earnings of around $7 million. — Gearing4 at 2.6x (excluding AASB 16) substantially improved Supporting our customers and the community Contract Manufacturing Services Overview • Revenue down 1.4% to $1,809.2 million (pcp: $1,834.1 million). • EBITDA1 of $301.8 million (pcp: $230.7 million); excluding AASB 16 EBITDA up 1.3% to $233.7 million. • EBIT2 of $166.3 million (pcp: $148.4 million); excluding AASB 16 EBIT up 1.5% to $150.6 million. and well within targeted range. • Execution of strategy to Lead the Circular Economy progressing well. — Phase one of the turnaround of the ANZ packaging business complete and new senior leadership appointed. — Recycling capability to be expanded through strategic investments. • NPAT3 of $73.2 million (pcp: $77.3 million); excluding AASB 16 — Agreement to acquire Flight Plastics Ltd in New Zealand, NPAT up 4.5% to $80.8 million. • Solid operating performance despite COVID-19 challenges — Group EBITDA and margins improved. — Solid organic growth in the Contract Manufacturing businesses (primarily in the hygiene category), and in Materials Handling crate pooling services, along with modest underlying growth in New Zealand and Asia. investing in post-consumer recycling capability in New Zealand (remains subject to regulatory approval). — Formalised joint venture arrangements with Cleanaway and Asahi to develop post-consumer recycling capability in Australia (expected to be operational by 2022). — Reuse platform expanded to support crate pooling services into the ALDI fresh produce supply chain and the start-up of — Lower underlying packaging volumes in Australia partly due hanger reuse services to support a major contract in the USA. to COVID-19 impacts to volume in the industrial and clothing retail sectors. — Consolidation of the closures business into Asia has commenced. — Lower resin costs and recovery of pricing lags, tight control of — Sale process in respect of Contract Manufacturing business to discretionary spend. recommence following suspension due to COVID-19. • Net debt reduced and leverage improved. • Dividends resumed. • Comprehensive business continuity plans supporting demand and supply planning. • Close regulatory engagement to reduce the impact of government enforced lockdowns. • Investment in resources and capacity to meet changing customer needs. Safeguarding the balance sheet • Reduction in discretionary spend. • Deferment of non-essential capital. • Robust controls to manage working capital. • Strong liquidity and debt capacity to support new business opportunities. The hygiene category outperformed. The business responded rapidly to meet demand for hand sanitisers and other hygiene products by expanding manufacturing capacity and establishing a reliable localised raw material supply chain. Volumes in the period were up significantly. Whilst demand in this category moderated by the end of the period, demand is expected to remain above historical levels going forward. COVID-19 Financial Assistance and Other Support Initiatives During the year, the Group received financial assistance from government and other key stakeholders in various jurisdictions to support business operations adversely impacted by the COVID-19 pandemic. This assistance included wages subsidies, property rent relief, waiver of payroll tax obligations and other miscellaneous subsidies with a total benefit to the Group of $2.8 million, of which The Group’s strong local manufacturing and service capability $0.7 million was in Australia. This benefit has been recognised in has enabled it to provide security of supply to its customers and other income within the Consolidated Statement of Comprehensive respond rapidly to their changing needs. During the COVID-19 Income for the period. In addition, the Group received early affected period in FY20, the resilience of the Group’s diversified settlement of an income tax refund of $6.2 million, as a timing portfolio was clearly demonstrated. benefit through COVID-19 assistance. — Reduction in net debt6 of $70.0 million (excluding AASB 16 — Final ordinary dividend of three cents per share (65% franked Packaging and Sustainability impact) through disciplined balance sheet and working capital to be paid in October 2020). management. Key Financial Highlights – $millions Revenue Segment EBITDA1 Packaging & Sustainability Materials Handling & Pooling Contract Manufacturing Services EBITDA1 EBIT2 NPAT3 Statutory Net (Loss)/Profit After Tax Total Dividends — cents per share Statutory 2020 1,809.2 Exc AASB 16 2020 1,809.2 2019 1,834.1 Change % Exc AASB 16 (1.4%) 181.3 73.0 47.5 301.8 166.3 73.2 88.8 3.0 137.8 56.0 40.0 233.7 150.6 80.8 91.8 3.0 154.6 51.1 25.1 230.7 148.4 77.3 (289.6) (10.9%) 9.6% 59.5% 1.3% 1.5% 4.5% 131.7% - 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 26 for definitions. • Volumes in most consumer packaging sectors in Australia, New Zealand and Asia were resilient. Higher supermarket demand early in the period arising through panic-buying moderated by the end of the period. Some categories outperformed, such as hygiene and homecare, whilst others underperformed, including kiwi fruit trays in New Zealand, where packing restrictions meant that fruit was delivered loose to supermarkets. Beverages were also lower, impacted by country lockdowns, particularly in Asia. • Volumes into the industrial packaging sector were down. • Net adverse impact to segment earnings of around $5 million. 16 17 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Group Results $’000 Revenue Other income (excluding interest revenue) Expenses EBITDA1 EBITDA margin Depreciation and amortisation EBIT2 EBIT margin Significant items (before tax) EBIT after significant items Net finance costs expense Income tax expense Tax on significant items and other significant tax items Net profit / (loss) after tax Revenue Exc AASB 16 2020 1,809,158 17,276 (1,592,728) 233,706 12.9% (83,122) 150,584 8.3% 1,993 152,577 (36,390) (33,405) 9,065 91,847 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) Exc AASB 16 Change % (1.4%) 1.3% 1.5% 155.5% 131.7% Statutory 2020 1,809,158 17,276 (1,524,627) 301,807 16.7% (135,544) 166,263 9.2% 6,537 172,800 (62,754) (30,264) 9,065 88,847 EBITDA Group revenue for the year of $1,809.2 million was 1.4% lower than EBITDA of $301.8 million was $71.1 million higher than the pcp the pcp of $1,834.1 million. The full year included an incremental including a positive impact of $68.1 million from the adoption of four months of results from TIC Retail Accessories (“TIC”). Excluding AASB 16 (which has the effect of reducing operating costs and this impact of TIC ($34.2 million), revenue was 3.2% lower than increasing depreciation and interest costs relating to right of use the pcp. Lower overall net Group volumes and lower pricing assets). Excluding the impact of AASB 16, EBITDA was $233.7 million, (reflecting the partial pass through of lower raw material input an increase of $3.0 million or 1.3% on the pcp. Earnings were costs) were partly offset by favourable foreign exchange translation favourably impacted by the incremental contribution of the TIC benefits. Strong volume growth was delivered in the Contract acquisition along with the partial recovery of prior period pricing lags Manufacturing segment, driven by significantly increased demand following lower resin input costs in the period. In addition, operating in the hygiene category, partly offset by lower health and wellness costs and overheads were tightly managed and the Group also volumes. Revenue in the Materials Handling and Pooling segment benefitted from generally favourable foreign exchange movements was ahead through the expansion of crate pooling operations in (as the New Zealand dollar and Asian currencies strengthened Australia to support ALDI, and the incremental impact of the TIC against the Australian dollar compared to the pcp). These benefits acquisition, which more than offset the impact of COVID-19 on were, however, largely offset by the adverse impact of overall lower industrial demand and reuse services. Packaging and Sustainability net Group volumes, as noted above, along with some increased costs volumes were down due to the impact of COVID-19, mostly affecting to serve during the COVID-19 impacted period. industrial volumes, and lower underlying volumes in the Australian packaging business. Underlying volumes were modestly improved in New Zealand and Asia. Excluding AASB 16, the EBITDA margin for the year was 12.9%, up from 12.6% in the pcp. EBIT Net finance expense EBIT of $166.3 million for the year was $17.9 million higher than Net financing costs for the year were $62.8 million, an increase of the pcp including a positive impact of $15.7 million relating to AASB $23.8 million compared to the pcp, including $26.4 million related to 16. Excluding this impact, EBIT was $2.2 million (1.5%) up on the the adoption of AASB 16. Underlying net financing costs were $2.6 pcp due primarily to the earnings impacts noted above. Underlying million lower than the pcp due to lower net debt levels during the depreciation and amortisation (excluding an additional $52.4 million year and benefits from lower market interest rates. relating to right of use assets under AASB 16) was $0.8 million higher, primarily due to the full year impact of the TIC acquisition. Excluding AASB 16, the EBIT margin for the year was 8.3%, up from 8.1% in the pcp. Income tax expense and significant tax items The income tax expense for the year (before significant items) was $30.3 million, representing an average tax rate of 29.2% of net profit before tax and significant items, in-line with the prior year and Further detail on revenue and earnings in each of the Group’s consistent with the statutory tax rates payable by the Group across operating segments is contained in the Review of Operations below. its main operating geographies. Tax expense includes a benefit Significant items of $3.1 million relating to the impact of AASB16. Tax on significant items and other significant tax items were a benefit of $9.1 million Pre-tax significant items for the year delivered net income of $6.5 (with no impact from AASB16). million. This includes $4.5 million of benefits relating to a net gain on lease modification (following the adoption of AASB 16), and $30.0 Net (loss)/profit after tax million from the reversal of a contingent consideration obligation The statutory net profit after tax for the year was $88.8 million (relating to the acquisition of TIC). These items were partly offset by compared to a statutory net loss after tax for the prior half year of transaction costs of $4.0 million, expenses relating to the finalisation $289.6 million. Excluding significant items, NPAT was $73.2 million of acquisition consideration of $7.2 million, a write off expense of compared to $77.3 million in the pcp. NPAT excluding the impact of $11.8 million (relating to customer contract intangible assets in AASB 16 was $80.8 million, an increase of $3.5 million or 4.5% on the contract manufacturing business), and $5.0 million of costs the pcp of $77.3 million. associated with business restructuring. Pre-tax significant items for the prior year were an expense of $423.3 million. This represented an impairment expense of $368.8 million ($136.3 million fixed assets; $232.4 million intangible assets), inventory write-downs of $13.0 million, costs associated with business restructuring of $37.8 million and transaction costs of $3.7 million. 18 19 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONBalance Sheet $’000 Cash Other current assets Property plant and equipment Intangible assets Other assets Total assets Interest bearing liabilities Other liabilities, payables and provisions Total Liabilities Net Assets Statutory Net Debt6 Net Debt6 excluding AASB 16 2020 76,004 400,495 996,002 456,068 67,066 2019 49,950 384.349 638,542 477,054 47,295 1,995,635 1,597,190 733,490 1,144,389 541,105 478,597 1,622,986 1,274,595 322,595 683,540 683,540 372,649 1,068,385 613,526 Change % 52.2% 4.2% 56.0% (4.4%) 41.8% 24.9% 56.0% (11.6%) 27.3% 15.5% 56.3% (10.2%) Statutory net debt at 30 June 2020 was $1,068.4 million, an increase The Group has several revolving debt facilities, two term facilities, of $384.8 million from 30 June 2019, inclusive of the recognition a subordinated term debt facility and a working capital facility with of $454.9 million in interest-bearing lease liabilities following the total commitments of $1,057.6 million, of which $340.7 million is adoption of AASB 16. Excluding this impact, net debt was $613.5 undrawn at 30 June 2020. The facilities are spread across multiple million, $70.0 million lower than 30 June 2019. The improvement maturities, with the working capital facility revolving with an annual has been driven by strong operating cash flows, lower outflows from review. The debt facilities include: a $380.7 million loan facility investing activities and no dividend payments in the period. maturing in January 2022; a $184.6 million loan facility maturing in The increase in property plant and equipment of $357.5 million primarily reflects the recognition of $364.1 million in net book value of right of use assets at 30 June 2020 following the adoption of AASB16. The decrease in intangible assets of $21.0 million includes $11.8 million relating to a write off of customer contracts in the Contract Manufacturing business, with the balance of the reduction attributable to amortisation and foreign exchange translation movements. January 2023; a $299.1 million loan facility maturing in March 2023; a $120.0 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 $23.0 million at 30 June 2020. Average tenor is 2.6 years. Financing metrics Gearing4 Interest cover5 Statutory 2020 3.5x 4.8x Exc AASB 16 2020 2.6x 6.4x 2019 3.0x 5.9x Exc AASB 16 Change 0.4 0.5 The increase in other assets of $19.8 million mainly reflects At 30 June 2020 gearing was 3.5x, an increase from 3.0x in the pcp, increased deferred tax assets, along with increased investments in impacted by the recognition of interest-bearing lease liabilities as associates and joint ventures. The decrease in other liabilities, payables and provisions of $62.5 million mainly relates to $53.8 million in lower trade and other payables along with $33.1 million in lower provisions (including $32.8 million of fixed rent and restructuring provisions derecognised on the adoption of AASB 16), partly offset by $18.3 million in higher tax liabilities. part of net debt following the adoption of AASB 16. Excluding the impact of AASB 16, gearing is 2.6x, a substantial improvement of 0.4x on the prior year as a result of the strong cash flow performance and disciplined balance sheet management. Interest cover at 4.8x has been impacted by increased finance costs under AASB 16. Interest cover excluding the AASB16 impact is 6.4x, also a significant improvement on the pcp. Both metrics are well within targeted levels. Cash Flow Key items — $’000 Net cash flows provided by operating activities Payments for property, plant and equipment Payments for investments in associates and joint ventures Purchase of businesses and subsidiaries, net of cash acquired Repayment of lease liability principal (net of incentive received) Payment of dividend 2020 192,131 (76,475) (3,558) - (44,480) - 2019 108,683 (69,455) - (78,725) - (38,236) Change % 74.3% (10.1%) n/a (100.0%) n/a (100.0%) Statutory operating cash flow including proceeds from securitisation was $192.1 million for the year, $83.4 million up on the pcp. The outflow from securitisation of trade debtors was $6.8 million for the year compared to an inflow of $13.6 million in the pcp. Excluding securitisation cash flows, statutory operating cash flow Outlook We expect our diversified portfolio to be resilient, with trading in the first quarter of FY2021 in most sectors to be generally in line with recent trends. was $103.9 million higher than the pcp. Operating cash flows have The duration and economic impact of COVID-19 is uncertain. An benefitted from the adoption of AASB 16, with principal lease liability update on trading will be provided at the AGM on 18 November 2020. repayments ($44.5 million) now classified as a financing activity. Excluding this impact, statutory operating cash flow was $59.4 million up on the pcp. Net receipts and payments were $46.4 million higher (net of the impact of AASB 16 lease liability repayments), tax cash flow was $34.1 million improved (following the receipt of a prior year related tax refund in the period), and net finance cost and interest cash flows were $21.1 million higher (with improved underlying finance cost cash flows more than offset by $26.4 million of interest payments for lease liabilities in FY2020 under AASB 16). Payments for property, plant and equipment were $76.5 million for the year compared to $69.5 million in the pcp, an increase of $7.0 million. The Group continued to invest in growth projects, including Other events of significance Divestment of Contract Manufacturing segment The Group is pursuing its options to sell the businesses in the Contract Manufacturing segment. The process will recommence following a suspension during the year due to COVID-19. Joint Venture with Cleanaway and Asahi Holdings Pact, Cleanaway and Asahi Holdings (Australia) have formalised a joint arrangement to develop recycling capability in Australia, expected to be operational by 2022. expenditure on the contract win for TIC reuse services in the USA, Acquisition of Flight Plastics NZ Ltd investment in crate assets and facilities related to the provision of crate pooling services to ALDI, a major upgrade to a steel plant in New Zealand, automation in the Australian packaging business, a variety of capacity initiatives in the Asian platform and several recycling related projects. All these initiatives are strongly aligned with the new business strategy to “Lead the Circular Economy”. Payments for investments in associates and joint ventures of $3.6 million relate to the purchase of a 50.8% share in Australian Recycled Plastics Pty Ltd (ARP), a kerbside collected plastics recycling business located in New South Wales. Payments for purchase of businesses and subsidiaries, net of cash acquired, in the pcp of $78.7 million represented $46.3 million for the TIC acquisition (cash consideration paid of $28.3 million and deferred consideration paid of $20.8 million, less $2.8 million cash acquired) and $32.4 million paid in relation to the Asian acquisition and the acquisition of Pascoe’s completed in prior years. The Group has entered into an agreement to acquire New Zealand’s only PET recycler, Flight Plastics NZ, a leading recycler and provider of plastic trays and containers for grocery products in New Zealand, for a purchase consideration of NZD $26 million. The transaction remains conditional on approval by regulatory authorities. Review of operations The Group’s operating segments are: — Packaging and Sustainability — Materials Handling and Pooling — Contract Manufacturing Services Inter-segment revenue eliminations of $44.5 million (pcp: $43.0 million) are not included in the segment financial information below. 20 21 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION  PACKAGING AND SUSTAINABILITY MATERIALS HANDLING AND POOLING The Packaging and Sustainability segment encompasses the Group’s packaging and sustainability businesses. The business 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 and Sustainability contributed 63% of the Group’s revenue in FY2020. 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 and includes TIC, a closed loop plastic garment hanger and accessories re-use business (acquired 31 October 2018) operating across several countries in Asia as well as in Australia. Materials Handling and Pooling contributed 17% of the Group’s revenue in FY2020. $’000 Revenue EBITDA1 EBITDA Margin % EBIT2 EBIT Margin % Statutory 2020 1,143,852 181,272 15.8% 90,806 7.9% Exc AASB 16 2020 1,143,852 137,751 12.0% 79,913 7.0% 2019 1,208,468 154,577 12.8% 97,409 8.1% Exc AASB 16 Change % (5.3%) (10.9%) (0.8%) (18.0%) (1.1%) $’000 Revenue EBITDA1 EBITDA Margin % EBIT2 EBIT Margin % Statutory 2020 315,599 73,012 23.1% 44,200 14.0% Exc AASB 16 2020 315,599 55,974 17.7% 40,528 12.8% 2019 296,386 51,054 17.2% 35,710 12.0% Exc AASB 16 Change % 6.5% 9.6% 0.5% 13.5% 0.8% Revenue for the Packaging and Sustainability segment of $1,143.9 adoption of AASB 16. Excluding this impact, EBITDA was $16.8 Revenue for the Materials Handling and Pooling segment of $315.6 adoption of AASB 16. Excluding this impact, EBITDA was $5.0 million million was $64.6 million (5.3%) lower than the pcp. Revenue was million (10.9%) lower. Earnings benefitted from modest underlying million for the year was $19.2 million (6.5%) higher than the pcp. The up on the pcp. The four-month incremental impact from the TIC positively impacted by volume growth in New Zealand (in the dairy growth in the New Zealand and Asian businesses, despite COVID-19 increase was driven by a full year contribution from the TIC garment acquisition in the period was $6.5 million, with underlying segment sector) along with benefits from favourable foreign exchange related lockdowns in those regions, and from the net cost benefits accessory reuse business (acquisition completed 31 October 2018, earnings therefore $1.5 million lower. The favourable impact of translation as the New Zealand, Chinese and Philippines currencies of lower resin and other material input prices, allowing the partial incremental impact $34.2 million). Excluding the acquisition impact, net cost benefits from lower resin input prices, efficiency and cost appreciated against the Australian dollar compared to the pcp. recovery of prior period pricing across the segment. The segment segment revenue was $15.0 million lower than the pcp. Pooling reductions and higher pooling volumes were more than offset by In the Asian closures business, performance was also pleasingly also benefitted from disciplined cost management, overhead revenues grew organically with the expansion of crate pooling start-up costs relating to the new ALDI pooling contract in the first resilient despite the challenges of pandemic related lockdowns reductions, footprint consolidation in Asia and favourable foreign services into the ALDI fresh produce supply chain. Operations began half along with unfavourable product mix and lower volumes in the and instability in the region. These benefits were more than exchange translation. These benefits were however more than on schedule in the first half of the year and have performed slightly industrial and TIC reuse businesses. offset however by continued underlying volume challenges in the offset by the volume challenges noted above, the impact of Australian business and the impact of COVID-19, mostly on the unfavourable macro-economic conditions and some increased industrial sector. Following a solid first half, sales in the sustainability costs to serve during the COVID-19 impacted period. businesses were lower in the second half, with a recovery in agriculture related volumes more than offset by lower sales of Excluding AASB 16, EBITDA margins were 0.8% lower at 12.0%. recycled resin and infrastructure projects. Sales for the overall EBIT for the segment of $90.8 million was $6.6 million lower than segment were also impacted by lower pricing, reflecting the partial the pcp. Excluding AASB 16, EBIT was $17.5 million lower. Reduced pass through of lower raw material input costs, particularly in the depreciation in the Australian business following asset impairments Australian and Asian businesses, and by lower recycled resin prices. was offset by increased depreciation from capital investment in the EBITDA for the year of $181.3 million was $26.7 million higher Asian closure businesses. than the pcp including a positive impact of $43.5 million from the Excluding AASB 16, EBIT margins were 1.1% lower at 7.0% ahead of expectation. Pooling services also benefitted from higher volumes in Australia as a result of increased COVID-19 related supermarket demand in the second half. Organic growth in pooling was more than offset by lower industrial volumes (as fewer bin and infrastructure projects were available, impacted by COVID-19, and the Excluding AASB 16, EBITDA margins were 0.5% higher at 17.7% due to the relative impact of increased volumes in the higher margin pooling business and benefits from lower input prices which more than offset weaker margins in the TIC reuse business. rollout of the NBN slowed as it nears completion) and lower volumes EBIT for the half year of $44.2 million was $8.5 million up on the in the TIC reuse business. This business was adversely affected in the pcp. Excluding AASB 16, EBIT was $4.8 million (13.5%) higher. second half by weak clothing retail sales in Australia and the impact of The incremental period of TIC contributed $6.2 million, with COVID-19 related lockdowns across Australia and Asia. These impacts the underlying business depreciation in-line with the pcp, and more than offset organic growth related to the start-up of reuse services to support a new contract in the USA in the second half. EBITDA for the segment of $73.0 million was $22.0 million higher than the pcp including a positive impact of $17.0 million from the consequently EBIT $1.4 million lower. Excluding AASB 16, EBIT margins were 0.8% higher at 12.8%. 22 23 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONCONTRACT MANUFACTURING SERVICES The Contract Manufacturing Services segment is a leading supplier of contract manufacturing 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 22% of the Group’s revenue in FY2020. The Group has announced its intention to divest the business and the sale process will recommence. $’000 Revenue EBITDA1 EBITDA Margin % EBIT2 EBIT Margin % Statutory 2020 394,188 47,523 12.1% 31,258 7.9% Exc AASB 16 2020 394,188 39,981 10.1% 30,143 7.6% 2019 372,263 25,063 6.7% 15,285 4.1% Exc AASB 16 Change % 5.9% 59.5% 3.4% 97.2% 3.5% Revenue for the Contract Manufacturing Services segment of Excluding AASB 16, EBITDA margins were 3.4% higher at 10.1% due $394.2 million for the year was $21.9 million (5.9%) up on the pcp. to increased volumes of higher margin products, with raw material The business delivered solid organic growth in the hygiene category, costs largely in line with the prior year. meeting strong demand for hand sanitisers and other cleaning products, as a result of the COVID-19 pandemic. The business also benefitted from the diversification of its customer portfolio. Demand in the health and wellness category was weak due to EBIT for the segment of $31.3 million was $16.0 million higher than the pcp. Excluding AASB 16, EBIT was $14.9 million up, with underlying depreciation and amortisation in-line with the pcp. customer destocking, with volumes well down on the pcp despite Excluding AASB 16, EBIT margins for the segment were 3.5% higher some COVID-19 related demand late in the period. at 7.6%. EBITDA for the year of $47.5 million was $22.5 million higher than the pcp inclusive of a positive impact of $7.5 million from the adoption of AASB 16. Excluding this impact, EBITDA was $15.0 million (59.5%) up on the pcp. The increase was driven primarily by the higher net volumes and disciplined pricing, partly offset by some inefficiency and higher costs to serve as a result of the swift ramp up in production required to supply the elevated demand for hygiene products in the second half. BUSINESS RISKS There are various internal and external risks that may have a Cyber risks material impact on the Group’s future financial performance and economic sustainability. The Group makes every effort to identify material risks and to manage these effectively. Material financial risks, not in order of significance, are listed below. Details of the Group’s environmental and social sustainability risks are reported in the Group’s Sustainability Report. 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 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. There is an increasing risk of and sophistication to cyber-attacks and crime, which may lead to systems and data breaches, interruption to operations and an adverse effect on the Group’s future financial performance. Consumer demand Changes in demand for Pact’s products or adverse activities in key industry sectors which Pact and its customers service may be influenced by various factors. These industry sectors include consumer goods (eg. food, dairy, beverages, personal care and 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; reputation of products, substrates (eg. plastics, recycled and recyclable materials); or technology in the wider industry sector. Demand for Pact's products may materially be affected by any of these factors which could have an adverse effect on the Group's future financial performance. Strategic acquisitions Pact’s growth over time has been aided by the acquisition of various 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, is required. 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 Group's competitive position as a result of actions from competitors and project milestones are achieved. may result in a decline in sales revenue and margins, and an adverse effect on the Group's future financial performance. 24 25 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONForeign exchange rates Interruption to operations Pact’s financial reports are prepared in Australian dollars. However, Pact operates across a diverse geographical footprint and situations a substantial proportion of Pact’s sales revenue, expenditures may arise in which sites are not able to operate. Factors include and cash flows are generated in, and assets and liabilities are emergency situations such as natural disasters, failure of information denominated in, New Zealand dollars. In relation to business technology systems or security, or industrial disputes. Any of these operations, Pact is also exposed to a range of other currencies factors may lead to disruptions in production or increase in costs and including; the US dollar; Chinese yuan; the Philippines peso; the may have an adverse effect on the Group’s financial performance. Indonesian rupiah; the Thai baht; the South Korean won; the Indian rupee; the Nepalese rupee; the Hong Kong dollar; the UK pound; Compliance risks and the Bangladesh Taka. Any depreciation of the Australian dollar Pact is required to comply with a range of laws and regulations, and adverse movement in exchange rates would have an adverse and those of particular significance to Pact are in the areas of effect on the Group's future financial performance. employment, including; modern slavery; work health and safety; Supply chain property; environmental; competition; anti-bribery and corruption; customs and international trade; taxation; and corporations. The ability for the supply chain to meet the Group’s requirements Changes in Government policy may also have an adverse effect on including the sourcing of raw materials, is reliant on key the Group’s financial performance. relationships with suppliers. The price and availability of raw materials, input costs, including energy, and future consolidation in industry sectors could result in a decrease in the number of suppliers or alternative supply sources available to Pact. Additionally, Pact may not always be able to pass on changes in input prices to its customers. Any of these factors may have an adverse effect on the Group's future financial performance. 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. (1) EBITDA refers to EBITDA before significant items and is a non-IFRS financial measure which is calculated as earnings before significant items, finance costs (net of interest revenue), tax, depreciation and amortisation. (2) EBIT refers to EBIT before significant items and is a non-IFRS financial measure which is calculated as earnings before significant items, finance costs (net of interest revenue) and tax. (3) NPAT refers to NPAT before significant items and is a non-IFRS financial measure which is calculated as net profit after tax before significant items. (4) Gearing is a non-IFRS financial measure which is calculated as net debt divided by rolling 12 months EBITDA. Net debt is calculated as interest bearing liabilities less cash and cash equivalents (5) Interest cover is a non-IFRS financial measure which is calculated as rolling 12 months EBITDA divided by rolling 12 months net finance costs and losses on de-recognition of financial assets. (6) Net debt is a non-IFRS financial measure and is calculated as interest bearing liabilities less cash and cash equivalents GOVERNANCE 26 O V E R V I E W P E R F O R M A N C E G O V E R N A N C E F I N A N C I A L R E P O R T S S H A R E H O L D E R I N F O R M AT I O N 27 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT CORPORATE GOVERNANCE The Board recognises the importance of good corporate governance The annual Corporate Governance Statement outlines the key and its role in ensuring the accountability of the Board and aspects of the Group’s corporate governance framework and Management to shareholders. The Board’s role is to ensure that the practices. The Board considers that the Company’s corporate Group is properly managed to protect and enhance shareholder governance framework and practices have complied with the interests and that the Group, including the Company, Directors, ASX recommendations for the financial year, except as otherwise officers, and employees, operate in an appropriate environment detailed in the Corporate Governance Statement. The 2020 of control and corporate governance. The corporate governance framework adopted comprises of principles and policies that are Corporate Governance Statement is available on the website: www.pactgroup.com.au/investors/corporate-governance/corporate- consistent with the ASX Corporate Governance Council’s Corporate statement. Governance Principles and Recommendations (fourth edition). FINANCIAL REPORTS 28 O V E R V I E W P E R F O R M A N C E G O V E R N A N C E F I N A N C I A L R E P O R T S S H A R E H O L D E R I N F O R M AT I O N 29 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT FINANCIAL REPORT CONSOLIDATED FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2020 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 2020. This Consolidated Financial Report was issued in accordance with a resolution of the Directors on 19 August 2020. 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 Revenue from contracts with customers 1.3 Taxation 1.4 Dividends Section 2: Our Operational Footprint 2.1 Businesses acquired 2.2 Controlled entities 2.3 Associates and joint ventures Section 3: Our Operating Assets 3.1 Working capital 3.2 Non-current assets 3.3 Capital expenditure 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 1.3 Taxation • 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 • Note 6.2 Incremental borrowing rate To assist in identifying key accounting estimates and judgements, they have been highlighted as follows: 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 New standards, interpretations and amendments 6.3 Other (losses)/gains 6.4 Pact Group Holdings Ltd — Parent entity financial statements summary 6.5 Deed of Cross Guarantee 6.6 Auditor's remuneration Segment assets and segment liabilities 6.7 6.8 Geographic revenue 31 49 50 51 52 53 54 56 58 61 62 62 64 67 69 74 75 76 79 80 87 90 90 91 92 92 98 99 100 101 102 102 6.9 COVID-19 financial assistance and other support initiatives 103 6.10 Subsequent events Directors’ Declaration Independent Auditor’s Report 103 104 105 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 2020. 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 Master 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 (from 1 July 2019 to 14 August 2019) Chair of the Nomination and Remuneration Committee (from 15 August 2019 to 30 June 2020) 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). 30 31 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDIRECTORS’ REPORT Directors (continued) 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 Liberty Infrabuild. Jonathan Ling Independent Non-Executive Director Member of the Board since 28 April 2014 Chair of the Nomination and Remuneration Committee (from 1 July 2019 to 14 August 2019) Chair of the Audit, Business Risk and Compliance Committee (from 15 August 2019 to 30 June 2020) 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 Master of Business Administration from the Royal Melbourne Institute of Technology. Other current directorships Independent Non-Executive Director and Chairman of Pro Pac Packaging Ltd, and Non-executive Director and Chairman of Planet Innovation Ltd. DIRECTORS’ REPORT Directors (continued) 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 2008–2016. 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. Michael Wachtel Independent Non-Executive Director Member of the Board since 21 April 2020 Member of the Audit, Business Risk and Compliance Committee from 21 April 2020 Michael brings a strong professional background and extensive global experience in governance, risk management, finance and complex international transactions to the role. Through his Future Fund Board role he has a deep involvement in global markets and monetary policy trends. Michael has previously held a number of leadership roles in professional services organisations, including as Chair (Asia Pacific and Oceania) of EY. Michael has a Bachelor of Laws and Commerce from the University of Cape Town and a Master of Laws from the London School of Economics. Michael completed the Harvard Business School Executive Program in 2011 and is a Fellow of the Australian Institute of Company Directors. Other current directorships Michael is currently a Board member of Future Fund, Seek Limited and St Vincent’s Medical Research Institute. 32 33 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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 10-year period, including Group Strategy and Corporate Development Officer, Group General Counsel and Company Secretary and Group Commercial Director. Prior to that Jonathon worked in 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: Raphael Geminder Lyndsey Cattermole Jonathan Ling Ray Horsburgh Carmen Chua Michael Wachtel Sanjay Dayal Relevant Interest in Ordinary Shares 152,252,175 529,879 48,786 80,971 150,000 - 40,000 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 Jonathan Ling Ray Horsburgh Carmen Chua Michael Wachtel(1) Sanjay Dayal Former Directors Peter Margin(2) Directors’ Meetings Audit, Business Risk and Compliance Committee Nomination and Remuneration Committee Meetings held 9 9 9 9 9 1 9 Meetings attended 9 9 9 8 8 1 9 Meetings held NM 5 3 5 NM - NM Meetings attended NM 5 3 4 NM - NM Meetings held 4 4 4 NM NM NM NM Meetings attended 4 4 4 NM NM NM NM 1 0 2 2 1 1 NM — Not a member of the relevant committee (1) Michael Wachtel was appointed as a Non-Executive Director on 21 April 2020. (2) Peter Margin resigned as a Non-Executive Director and as the chair of the Audit, Business Risk and Compliance Committee on 14 August 2019. 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 presented on pages 11 to 26 of this Report. Dividends The Directors have determined to pay a final dividend of three cents after the end of the financial year (2019: nil). The table below shows dividends paid (or payable) during the year ended 30 June 2020 and the comparative year. Dividends Current year to 30 June 2020 Final dividend (per ordinary share) Interim dividend (per ordinary share) Prior year to 30 June 2019 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 3.00 cents - 1.95 cents - 1.05 cents - 7 October 2020 - - - - - - - - - 34 35 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDIRECTORS’ REPORT Other events of significance Please refer to the Review of Operations and Financial Performance in the ASX announcement on 19 August 2020. Significant events after balance date Divestment of Contract Manufacturing segment The Group is pursuing its options to sell the businesses in the Contract Manufacturing segment. The process will recommence following a suspension during the year due to COVID-19. Joint Venture with Cleanaway and Asahi Holdings Pact, Cleanaway and Asahi Holdings (Australia) have formalised a joint arrangement to develop recycling capability in Australia, expected to be operational by 2022. Acquisition of Flight Plastics Ltd The Group has entered into an agreement to acquire New Zealand’s only PET recycler, Flight Plastics NZ, a leading recycler and provider of plastic trays and containers for grocery products in New Zealand, for a purchase consideration of NZD $26million. The transaction remains conditional on approval by regulatory authorities. In the opinion of the Directors, other than the matters aforementioned, there have been no other material matters or circumstances which have arisen between 30 June 2020 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. 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 DIRECTORS’ REPORT 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 policy that provides cover for the current and former Directors, alternate Directors, Secretaries, executive officers and officers of the Group. The Directors have not included details of the nature of the liabilities covered in this contract or the amount of the premium paid, as disclosure is prohibited under the terms of the contract. Indemnification of auditors Pursuant to the terms of the Company’s standard engagement letter with Ernst & Young (EY), it indemnifies EY against all claims by third parties and resulting liabilities, losses, damages, costs and expenses (including reasonable legal costs) arising out of, or relating to, the services provided by EY or a breach of the engagement letter. The indemnity does not apply in respect of any matters finally determined to have resulted from EY’s negligent, wrongful or wilful acts or omissions nor to the extent prohibited by applicable law including the Act. Proceedings on behalf of the company No person has applied to the court under section 237 of the Act for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with the leave of the court under section 237 of the Act. Non-audit services During the year, the Company's auditor EY, performed other assignments in addition to its 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 2020 252,000 2019 158,000 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. 36 37 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDIRECTORS’ REPORT Remuneration Report (audited) This Remuneration Report for the year ended 30 June 2020 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 2020 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 Jonathan Ling Ray Horsburgh Carmen Chua Michael Wachtel Other KMP Sanjay Dayal Richard Betts Former KMP Peter Margin Position Term as KMP in 2020 Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Full Year Full Year Full Year Full Year Full Year Appointed 21 April 2020 Managing Director and Group CEO Chief Financial Officer Full Year Full Year Former Non-Executive Director Resigned 14 August 2019 There have been no other changes to KMP after the reporting date and before the date the financial report was authorised for issue. DIRECTORS’ REPORT 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. 38 39 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION DIRECTORS’ REPORT 3. Executive remuneration arrangements Remuneration principles and strategy Pact’s executive remuneration strategy is designed to drive Group Strategy, organisational culture and long-term shareholder value creation. It is underpinned by Pact’s governing reward principles that articulate the intent and purpose of our executive reward framework. The below diagram illustrates the remuneration framework for the CEO and CFO for the current year. Pact Executive Remuneration Approach Designed to drive Group Strategy, organisational culture and long-term shareholder value creation Governing Principles Underpinning Our Reward Framework Aligns with shareholder value creation Attracts, retains and motivates capable talent Reflects group strategy and organisational culture Drives high performance culture that recognises outperformance Simple and transparent Reward Framework Components Fixed annual remuneration + Short-term incentive (at risk) + Long-term incentive (at risk) = Total remuneration Attract, retain and engage high-calibre executive talent Reinforce short and long-term objectives to deliver sustainable growth Alignment with organisation, customer, employee and shareholder outcomes Target ASX200 Market Median (Excluding Financial Services and Mining) Purpose Competitively set to attract and retain capable talent reflecting the role scope and accountabilities Performance link Sustained performance and leadership in executive role Payment vehicle and quantum Base salary, superannuation, and may include other benefits and allowances Target ASX200 Market Median (excluding Financial services and mining) Reward for the creation of sustainable long-term shareholder value Focuses on leading positive organisational culture and engagement with customers, community and people Three-year relative total shareholder return (relative TSR) performance against selected ASX 200 companies Annual performance rights grant Target opportunity • CEO 100% FAR • CFO 30% of FAR • Subject to Board discretion and clawback provision Reward for annual performance to deliver superior business, customer and shareholder value Provides specific focus on annual strategic priorities Annual performance targets (from FY21) • Group financial and safety • Key performance indicators (KPI) • Functional KPI Annual cash incentive Target opportunity • CEO 100% FAR • CFO 50% of Base salary • Maximum opportunity equivalent to 125% of target • Subject to Board discretion and clawback provision DIRECTORS’ REPORT 3. Executive remuneration arrangements (continued) 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 2020 year was as follows(1): Executive KMP remuneration component at target Fixed Remuneration Short-term incentives Long-term incentives (LTIP) Total Sanjay Dayal % 46% 45% 9% 100% Richard Betts % 62% 30% 8% 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). Detail of incentive plans FY20 Short-term incentive plan Term Purpose Summary of FY20 arrangement STI is an annual cash payment plan linked to short-term organisational and employee performance outcomes. Participation Opportunity It is designed to provide specific focus on annual strategic priorities to deliver superior business, customer and shareholder value. Executive KMP Executives CEO CFO Target 100% of FAR 50% of Base Salary Maximum 125% of FAR 62.5% of Base Salary Gateways Group Financial Gateway: 95% of Group Target EBITDA In the event Group Financial Gateway is not achieved, no STI award will be payable. Individual Gateway: Adherence to Group Code of Conduct, Compliance and Pact values Employees who do not meet the Individual Gateway condition, will forfeit any STI award payable. Performance Measures & Weighting STI is linked to a combination of Group EBITDA (excluding the impact of AASB 16, refer to the table on page 43), and Functional KPI measures. Each measure will result in a payout outcome in accordance with the payout model. Executives CEO CFO Group EBITDA 100% 50% Functional KPI ^ - 50% ^ CFO Functional KPI include performance against cash conversion and capital management targets. The Board considers these measures to be appropriate as they are strongly aligned with the interests of shareholders. Group EBITDA is a key indicator of the underlying growth of the business, enabling the payment of dividends to shareholders. The achievement of these STIs in full is subject to the delivery of agreed safety objectives. The table on page 43 provides additional information on these performance measures, including an overview of performance versus target in the current year. Payout calculation Performance vs Percentage Payout Each performance measure will be assessed against a set target to determine the percentage payout outcome (see below payout schedule). For instance, achieving the target will result in 100% payout of Target STI opportunity. Percentage payout against Target schedule • Below Threshold = Nil • Threshold = 50% of Target • Target = 100% of Target • Stretch = 125% of Target Straight-line sliding scale calculation applicable. 40 41 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION DIRECTORS’ REPORT 3. Executive remuneration arrangements (continued) FY21 Short-Term Incentive Plan Changes The Board has approved the following changes to the Short-Term Incentive Plan: • Change of core financial performance measure from EBITDA to EBIT to further strengthen the alignment of executive reward with organisational performance. The change is also influenced by the Company’s increased focus on capital returns. • Addition of Group Safety Measure aligned to Pact’s Towards Zero Harm commitment. • Addition of Strategic Initiative Measure aligned to Group Strategy applicable to participants. FY20 Long-term incentive plan Term Purpose Participation Opportunity LTI is an annual performance rights grant linked to achievement of long-term sustainable shareholder value creation. It is designed to drive the delivery of long-term Group Strategy aligned with value creation to our customers, community, people, and shareholders. Executive KMP Executives CEO CFO Target as % of FAR 100% 30% The minimum potential outcome is zero. Performance rights (note: no dividend or dividend equivalent payments are provided on rights). Instrument Performance Period The performance period commences on the first day of that fiscal year and is measured over three years. Allocation approach Maximum face value allocation approach based on five-day Volume Weighted Average Price (VWAP) following the public announcement of the full Financial Year results (ie. typically AGM date). FAR $ x LTI % opportunity ÷ Share price $ = Number of rights granted Gateways Individual Gateway: Adherence to Group Code of Conduct, Compliance and Pact values. condition, the participant will forfeit any STI award payable. Performance hurdle Vesting of rights is subject to relative Total Shareholder Return (rel. TSR) ^ hurdle over a three-year performance period. Employees who do not meet the Individual Gateway Peer Group: S&P/ASX 200 comparator group, excluding companies in the Financials, Metals and Mining sectors. LTI Vesting Schedule TSR relative to peer group At or above 75th percentile Between 50th and 75th percentile At 50th percentile Below 50th percentile Vesting % 100% Pro rata vesting between 50% and 100% 50% Nil ^TSR measures a company’s share price movement, dividends paid and any return on capital over a specific period. Relative TSR compares the ranking of Pact Group TSR over the performance period with the TSR of other companies in a peer group. 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. 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. 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. 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). The Board has absolute discretion to determine that some or all of the LTI award lapse based on circumstances where (but not limited to): • The vesting of rights do not justify or support the performance of the business unit or function relevant to the executive or the overall performance of the Group • The vesting of rights will impact on the financial soundness of the Group. Cessation of Employment Rights attaching to performance rights Clawback Change of Control Provisions Board discretion DIRECTORS’ REPORT 4. Executive remuneration outcomes for FY2020 Business performance in FY2020 The Group’s FY2020 financial performance reflects a solid operating performance given the challenging operating environment, particularly during the COVID-19 pandemic which impacted the second half of the year. 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 / (loss) after tax ($000) Net profit after tax (NPAT)1 ($000) NPAT growth %1 EBITDA1 ($000) EBITDA (pre-AASB 16)2 ($000) EBITDA growth % Dividends per ordinary share (cps) Closing share price (30 June) Three month average share price (1 April to 30 June) Earnings per share1(cps) Earnings per share1 growth % Cumulative TSR %3 2016 85,051 94,310 10.7% 220,157 220,157 5.5% 21.0 6.03 5.46 32 10.3% 36.7% 2017 90,341 100,003 6.0% 233,116 233,116 5.9% 23.0 5.99 6.44 33 3.1% 64.8% 2018 74,488 94,661 (5.3%) 237,251 237,251 1.8% 23.0 5.27 5.57 30 (9.1%) 49.9% 2019 (289,587) 77,307 (18.3%) 230,694 230,694 (2.8%) - 2.79 2.51 23 (23.3%) (18.9%) 2020 88,847 73,245 (5.3%) 301,807 233,707 1.3%(2) 3.0 2.19 2.01 21 (8.7%) (30.6%) (1) Before significant items (refer to note 1.1 in the Consolidated Financial Report). (2) EBITDA before significant items and excluding the impacts of AASB16 is $233.7 million, representing a 1.3% increase on the prior year. (3) Cumulative TSR has been calculated using the same start date for each period (1 July 2015). The 3 month average share price has been used in all periods (the 3 month average share price for the starting period was $4.28). STI Outcomes — Executive KMP The table below outlines the components of the STI, and how performance has been measured in fiscal year 2020. Performance measure EBITDA(1) CEO weighting 100% CFO weighting 50% Cash - 50% conversion and capital management Overview of performance v target EBITDA increase of 1.3% compared to last year, against a back drop of COVID-19 the delivered EBITDA exceeded target. Achievement was reduced to reflect a deduction for a failure to deliver agreed safety objectives following the fatality in New Zealand. Cash conversion is defined as operating cash flow divided by EBITDA, with operating cash defined as EBITDA less the change in working capital, less changes in other assets and liabilities. Capital management is assessed as delivery of various working capital targets. During the year target performance was partially achieved. (1) The measure is EBITDA excluding the impacts of AASB 16 as reported in the table above. LTIP Outcomes — CEO and CFO The tables below outline 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 2020 LTIP 13 November 2019 2019 LTIP 27 March 2019 Performance rights granted 538,189 69,784(1) Fair value of rights at Grant date $721,173 $17,446 Value of rights included in compensation for the year $240,391 $7,721 Performance period 1 July 2019 to 30 June 2022 1 July 2018 to 30 June 2021 (1) The performance rights granted to Mr Dayal for the 2019 LTIP were on a pro rata basis aligning with his commencement date of 3 April 2019. Richard Betts – CFO Year Grant date 2020 LTIP 13 November 2019 2019 LTIP 14 November 2018 2018 LTIP 15 November 2017 Performance rights granted 87,952 43,301 33,182 Fair value of rights at Grant date $117,856 $32,909 $87,932 Value of rights included in compensation for the year $39,285 $10,970 $29,311 Performance period 1 July 2019 to 30 June 2022 1 July 2018 to 30 June 2021 1 July 2017 to 30 June 2020 The performance measure for the LTIP is achievement of relative TSR targets. The vesting conditions have been outlined on page 42. 42 43 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION DIRECTORS’ REPORT DIRECTORS’ REPORT 4. Executive remuneration outcomes for FY2020 (continued) 5. Executive KMP contracts The table below outlines current year movements in relation to performance rights granted to the CEO and CFO. Remuneration arrangements for Executive KMP are formalised in employment agreements. KMP Sanjay Dayal Richard Betts Balance at 1 July 2019 69,784 76,483 Number granted 538,189 87,952 Number lapsed - (33,182) Balance at 30 June 2020 607,973 131,253 Vested at 30 June 2020 - - Unvested at 30 June 2020 607,973 131,253 Executive KMP remuneration for the year ended 30 June 2020 Executive Year Short term benefits Salary and fees STI and bonuses Mr Sanjay Dayal (CEO) Mr Richard Betts (CFO) $ $ 2020 1,200,000 1,111,198 2019 - 205,487 2020 59,000 2019 269,886 584,101 556,728 Non- monetary benefits (1) $ - - - 50,558 $ 22,441 22,677 (6,963) 2,802 Former Executive KMP Mr Malcom Bundey 2020 - 2019 - (Former CEO) 2020 1,784,101 1,316,685 Total Executive 59,000 KMP remuneration 2019 1,785,462 - 958,848 - 31,059 - 81,617 - 48,793 15,478 74,272 Post- employment benefits Other benefits (2) Super- annuation Long- term benefits Long Service Leave(3) $ - - 65,836 - Share based payments (equity settled) Performance related % Total LTIP (4) Initial Grant $ 248,112 2,025 79,566 40,281 $ $ - 2,606,751 319,588 - 953,027 - 734,369 - % 52% 1% 30% 14% - - 65,836 - - - (656,030)(5) 138,889 - 540,309 327,678 - 3,559,778 (613,724) 138,889 1,594,266 - (121%)(5) 46% (35%) $ 25,000 25,000 25,000 25,000 - 18,750 50,000 68,750 (1) Non-monetary benefits includes FBT payments made by the Company on behalf of Mr Betts and Mr Bundey in the prior year. (2) Other benefits is the movement in the annual leave provision for Mr Dayal and Mr Betts, and Mr Bundey in the prior year. (3) Long term benefits is the movement in the long service leave provision in relation to long service leave entitlements after 5 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) Following Mr Bundey’s cessation of employment in the prior year, 421,801 unvested LTIP rights were forfeited. Negative percentage is due to the reversal of share based payment expense in the prior year. 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 2020. 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 Fixed Remuneration(1) $ 1,225,000 609,101 STI and bonuses(2) $ 1,111,198 205,487 Other benefits(3) $ 22,441 (6,963) Performance rights vested in 2020 $ n/a (4) - (5) Total $ 2,358,639 807,625 (1) Fixed remuneration includes salary and fees, and superannuation contributions, calculated on the same basis as the remuneration table above. (2) STI and bonuses attributable to the year ended 30 June 2020 are calculated on the same basis as the remuneration table above. (3) Other benefits relates to the movement in the annual leave provision for Mr Dayal and Mr Betts 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) The 2018 LTIP tranche has not vested as the TSR hurdle measured at 30 June 2020 has not been reached, therefore no benefits were received during the current financial year. 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 125% 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 page 42. • 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 $609,101 per annum. • The CFO has a maximum STI of 62.5% 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 page 42. • In the event a redundancy occurs, the CFO is entitled to receive a redundancy payment of three weeks for every year of service which is capped at 52 weeks. The Company is not required to make any payment of a benefit which is not permitted by Part 2D.2, Division 2 or Chapter 2E of the Act in the absence of shareholder approval or the ASX Listing Rules. The Company must use its reasonable endeavours to try and obtain shareholder approval, if required. 6. Non-Executive Directors’ remuneration arrangements Remuneration policy The Committee seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Non-executive Directors (NEDs) of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies (S&P/ASX 200 comparator group, excluding companies in the Financials, Metals and Mining sectors). The Company’s Constitution and the ASX Listing Rules specify that the NED fee pool shall be determined from time to time by a general meeting. Consistent with prior years, the total amount paid to NEDs must not exceed a fixed sum of $1,000,000 per financial year in aggregate. Raphael Geminder does not receive a fee for his position as Chairman and a NED of the Company. 44 45 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION DIRECTORS’ REPORT DIRECTORS’ REPORT 6. Non-Executive Directors’ remuneration arrangements (continued) 7. Equity holdings of KMP 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. 2020 2019 $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 2020 is detailed in the following table. Non-Executive KMP remuneration for the year ended 30 June 2020 Non-Executive Year Short-term benefits Post-employment benefits Ms Lyndsey Cattermole Mr Raphael Geminder Mr Jonathan Ling Mr Peter Margin Mr Ray Horsburgh Ms Carmen Chua Mr Michael Wachtel Total Non-Executive KMP remuneration Fees $ 117,009 117,009 - - 143,500 143,500 18,225 151,187 109,989 109,989 112,750 93,958 21,048 - 522,521 615,643 Superannuation $ 11,116 11,116 - - - - - - 10,449 10,449 - - 2,000 - 23,565 21,565 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Total $ 128,125 128,125 - - 143,500 143,500 18,225 151,187 120,438 120,438 112,750 93,958 23,048 - 546,086 637,208 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 2020: KMP Raphael Geminder Lyndsey Cattermole Jonathan Ling Ray Horsburgh Carmen Chua Michael Wachtel Sanjay Dayal Richard Betts Former KMP Peter Margin Balance 1 July 2019 133,951,614 391,329 31,179 44,971 30,000 - 40,000 9,284 Movements 18,300,561 138,550 17,607 36,000 120,000 - - - Balance 30 June 2020 152,252,175 529,879 48,786 80,971 150,000 - 40,000 9,284 35,257 - 35,257(1) (1) The final shareholding of Mr Peter Margin is at the 14 August 2019, the date he resigned as a Non-Executive Director. 8. Related party transactions with KMP The following table provides the total amount of transactions with related parties for the year ended 30 June 2020: $’000’s Related parties — Directors' interests(1) 2020 2019 Sales 13,362 13,789 Purchases Other expenses 6,317 6,667 7,354 11,043 Net amounts receivable 558 609 (1) Related parties — Directors' 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), ceased its business operations in November 2019. P’Auer had a supply agreement to provide label products to Pact. Pact had a Transitional Services and Support agreement with P’Auer to provide support services. These agreements were at arm’s length. In addition, P’Auer provided Pact with periodic warehousing services. Pro-Pac Packaging Limited (Pro-Pac) Pro-Pac, an entity for which Mr Raphael Geminder owns 49.7% (2019: 49.7%), is an exclusive supplier of certain raw materials such as flexible film packaging, flexible plastic bags and tapes to Pact. Pact has a supply agreement with Pro-pac that expires 31 December 2021. The total value of sales under this arrangement is approximately $4.2 million (2019: $4.2 million). The supply arrangement is at arm’s length. Mr Jonathan Ling is also an Independent Non-Executive Director and Chairman of Pro Pac. Terms and conditions of transactions with related parties The Group leased 11 properties (nine in Australia and two 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 2020 was $6.2 million (June 2019: $6.4 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered into. 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. 46 47 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDIRECTORS’ REPORT Auditor's Independence Declaration A copy of the auditor's independence declaration as required under section 307C of the Act is set out at page 49. Rounding Is presented in Australian dollars with all values rounded to the nearest $1,000, unless otherwise stated, in accordance with the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 1 April 2016. Signed in accordance with a resolution of the Board of Directors: Raphael Geminder Sanjay Dayal Chairman 19 August 2020 Managing Director and Group Chief Executive Officer 48 49 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2020 FINANCIAL REPORT — CONSOLIDATED STATEMENT OF FINANCIAL POSITION For the year ended 30 June 2020 $’000 Revenue Raw materials and consumables used Employee benefits expense Occupancy, repair and maintenance, administration and selling expenses Interest and other income Other gains / (losses) Depreciation and amortisation expense Impairment and write-off expense Finance costs and loss on de-recognition of financial assets Share of profit in associates Profit / (loss) before income tax expense Income tax (expense) / benefit Net Profit / (loss) for the year Net Profit / (loss) attributable to equity holders of the parent entity Notes 1.1, 1.2 5.2 6.3 3.2 3.2 4.1 2.3 1.3 2020(1) 2019 1,809,158 1,834,076 (843,167) (786,175) (430,035) (441,666) (341,539) (292,919) 11,068 14,828 (55,889) 14,463 (82,290) (135,544) (368,765) (11,793) (39,675) (63,437) 2,336 3,131 (313,880) 110,046 24,293 (21,199) (289,587) 88,847 (289,587) 88,847 Other comprehensive income Items that will be not be reclassified subsequently to profit or loss Loss on remeasurement of defined benefit liability Items that will be reclassified subsequently to profit or loss Loss on cash flow hedges taken to equity Foreign currency translation (losses) / gains Income tax on items in other comprehensive income Other comprehensive (loss) / income for the year, net of tax Total comprehensive income / (loss) for the year Attributable to: Equity holders of the parent entity Total comprehensive income / (loss) income for the Group (144) (10) (3,285) (2,753) 1,088 (5,094) 83,753 (6,453) 10,932 1,762 6,231 (283,356) 83,753 83,753 (283,356) (283,356) cents Basic earnings per share Diluted earnings per share 1.1 1.1 25.8 25.7 (85.3) (85.3) (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. The Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. $’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 Other non-current financial assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liability Employee benefits provisions Other provisions Lease liabilities Other current financial liabilities Total current liabilities Non-current liabilities Trade and other payables Employee benefits provisions Other provisions Interest-bearing loans - bank borrowings Lease liabilities 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 2020(1) 2019 4.1 3.1 3.1 1.3 3.2 2.3 3.2 1.3 3.1 1.3 5.2 3.4 4.1,6.2 5.2 3.4 4.1 4.1,6.2 1.3 76,004 149,679 223,698 12,349 - 784 13,985 476,499 7 2,925 996,002 30,876 456,068 111 33,147 1,519,136 1,995,635 378,124 21,175 38,638 - 69,203 4,313 511,453 - 8,127 9,967 689,530 385,656 8,457 9,796 1,111,533 1,622,986 372,649 49,950 145,282 211,846 8,895 3,360 349 14,617 434,299 718 4,392 638,542 24,353 477,054 - 17,832 1,162,891 1,597,190 365,615 - 36,292 13,914 - 2,369 418,190 66,313 7,270 32,358 733,490 - 4,296 12,678 856,405 1,274,595 322,595 4.2 4.2 1,750,476 (901,251) (476,576) 372,649 1,750,476 (896,911) (530,970) 322,595 (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. The Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 50 51 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2020 FINANCIAL REPORT — CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2020 Attributable to equity holders of the Parent entity Contributed equity Common control reserve Cash flow hedge reserve Foreign currency translation reserve Share based payments reserve Retained earnings Total equity 1,750,476 (928,385) - - 1,750,476 (928,385) - - - - - - - - (4,580) - (4,580) - (2,197) (2,197) - 33,897 - 33,897 - (2,753) (2,753) - - 2,157 (530,970) (34,309) 2,157 (565,279) 88,847 (144) 88,703 - - - - 610 322,595 (34,309) 288,286 88,847 (5,094) 83,753 610 $’000 Year ended 30 June 2020 As at 1 July 2019 Adjustment on adoption of AASB 16 As at 1 July 2019 (adjusted)(1) Profit for the year Other comprehensive loss Total comprehensive (loss) / income Share based payments expense Transactions with owners in their capacity as owners Balance as at 30 June 2020 - - 1,750,476 (928,385) - (6,777) - 31,144 610 - 2,767 (476,576) 610 372,649 Year ended 30 June 2019 As at 1 July 2018 Adjustment on adoption of AASB 15 As at 1 July 2018 (adjusted) Loss for the year Other comprehensive income/(loss) Total comprehensive (loss) / income Issuance of share capital Total equity transactions Dividends paid Share based payments expense Transactions with owners in their - 1,690,476 (928,385) - 1,690,476 (928,385) - - - - - - - - - - 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 (38,236) (168) 2,157 (530,970) (38,404) 322,595 (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. $’000 Cash flows from operating activities Receipts from customers Receipts from securitisation program Payments to suppliers and employees Income tax paid Interest received (Payments to) / proceeds from securitisation of trade debtors Borrowing, trade debtor securitisation and other finance costs paid(2) Net cash flows provided by operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for investments in associates and joint ventures 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 Repayment of lease liability principal (net of incentive received) Payment of dividend Net cash flows (used in) / provided by financing activities Net increase / (decrease) 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 2020(1) 2019 4.1 2.3 2.1 980,845 1,057,888 (1,775,178) (4,315) 1,534 (6,840) (61,803) 192,131 1,160,215 944,281 (1,931,802) (38,438) 168 13,611 (39,352) 108,683 (76,475) (3,558) - 669 599 (78,765) 315,139 (357,599) (44,480) - (86,940) 26,426 49,950 (372) 76,004 (69,455) - (78,725) 88 867 (147,225) 433,786 (376,630) - (38,236) 18,920 (19,622) 67,980 1,592 49,950 (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. (2) In the current period net cash flows from operating activities includes an outflow of $26.4 million in relation to interest expense on lease liabilities recognised in accordance with AASB 16. The Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 52 53 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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 2020. 1.1 Group results $’000 Year ended 30 June 2020 Revenue EBITDA(1)(2) EBIT(1)(3) $’000 Year ended 30 June 2019 Revenue EBITDA(2) EBIT(3) Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Eliminations Total 1,143,852 181,272 90,806 315,599 73,012 44,200 394,188 47,523 31,257 (44,481) 1,809,158 301,807 166,263 - - 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 - - (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. (2) EBITDA — Earnings before finance costs and loss on de-recognition of financial assets, net of interest income, tax, depreciation and amortisation and significant items. (3) 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 Managing Director and CEO monitors 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. Reportable segments Packaging and Sustainability Products/services Manufacture and supply of rigid plastic Countries of Operation 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 FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.1 Group results (continued) Net profit / (loss) after tax The reconciliation of EBIT before significant items shown above and the net profit / (loss) after tax disclosed in the Consolidated Statement of Comprehensive Income is as follows: $’000 EBITDA Depreciation and Amortisation EBIT Significant items Transaction costs(2) Inventory write downs and related disposal costs Net gain on lease modification(3) Reversal of contingent consideration obligation(4) Finalisation of acquisition consideration(5) Impairment and write-off expenses • Tangible asset write downs • Intangible assets Business Restructuring Programs • • asset write downs restructuring costs(6) Total significant items EBIT after significant items Net finance costs(7) Net profit / (loss) before tax Income tax (expense) / benefit Net profit / (loss) after tax Notes 2020(1) 301,807 2019 230,694 (135,544) 166,263 (82,290) 148,404 3.2 (4,034) - 4,544 30,000 (7,172) (3,666) (13,031) - - - - (11,793) (136,330) (232,435) (4,790) (218) (5,008) 6,537 172,800 (62,754) 110,046 (21,199) 88,847 (37,842) - (37,842) (423,304) (274,900) (38,980) (313,880) 24,293 (289,587) (1) Reflects the adoption of AASB 16: Leases from 1 July 2019. Comparatives have not been restated. (2) Transaction costs includes professional fees, stamp duty and all other costs associated with business acquisitions and divestments. (3) In relation to the lease contract previously subject to the onerous lease provision recognised as at 30 June 2019, a net gain on lease modification was recognised as a difference between the gain on lease modification for $9.9 million and derecognition of ROU assets for $5.4 million in accordance with AASB 16: Leases. (4) Reversal of contingent consideration obligation recognised on acquisition of TIC. The specific financial hurdles required for payment were not achieved. In accordance with AASB 3: Business Combinations, changes to the fair value of amounts payable for acquisitions is recorded in the consolidated statement of comprehensive income. (5) Adjustments recognised following completion of accounting for acquisitions made in the year ended 30 June 2019. (6) Business restructuring relates to the optimisation of business facilities across the Group. (7) Net finance costs includes interest income of $683,000 (2019: $695,000). 54 55 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.1 Group results (continued) Basic and diluted earnings per share Earnings per share (EPS) (cents) — basic Earnings per share (EPS) (cents) — diluted Calculated using: • Net profit attributable to ordinary equity holders ($’000) • Weighted average of ordinary shares (shares) — basic • Weighted average of ordinary shares (shares) — diluted 2020 25.8 25.7 2019 (85.3) (85.3) 88,847 (289,587) 343,993,595 339,600,703 345,329,618 340,687,214 Earnings per share is calculated by dividing the net profit / (loss) 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 Revenue from contracts with customers Disaggregation of revenue from contracts with customers $’000 Year ended 30 June 2020 Australia New Zealand Asia Revenue from contracts with customers Revenue from asset hire services(3) Inter-segment revenue Revenue Packaging and Sustainability(1) Materials Handling and Pooling Contract Manufacturing Services(2) Eliminations Total 617,973 292,954 191,851 1,102,778 - 41,074 1,143,852 162,882 138 57,026 220,046 92,203 3,350 315,599 394,131 - - 394,131 - 57 394,188 - 1,174,986 293,092 - - 248,877 - 1,716,955 92,203 - (44,481) - (44,481) 1,809,158 (1) 0.2% of total revenue for Packaging and Sustainability is recognised over time. (2) 2.5% of total revenue for Contract Manufacturing Services is recognised over time. (3) Revenue from asset hire services is accounted for under AASB 16: Leases. $’000 Year ended 30 June 2019 Australia New Zealand Asia Revenue from contracts with customers Revenue from asset hire services(3) Inter-segment revenue Revenue Packaging and Sustainability(1) Materials Handling and Pooling Contract Manufacturing Services(2) Eliminations Total 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) 0.4% of total revenue for Packaging and Sustainability is recognised over time. (2) 5.7% of total revenue for Contract Manufacturing Services is recognised over time. (3) Revenue from asset hire services is accounted for under AASB 117: Leases. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.2 Revenue from contracts with customers (continued) How Pact accounts for revenue The core principle of AASB 15 Revenue from Contracts with Customers 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. 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. 56 57 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.3 Taxation Reconciliation of tax expense $’000 Accounting profit / (loss) before tax Income tax calculated at 30% (2019: 30%) Adjustments in respect of income tax of previous years Impairment of goodwill Lease surrender Tax on unremitted foreign income Overseas tax rate differential Finalisation of acquisition consideration Sundry items Income tax expense / (benefit) reported in the Consolidated Statement of Comprehensive Income Comprising of: • Current year income tax expense • Deferred income tax benefit • Adjustments in respect of previous years income tax (1) The comparatives have not been restated for AASB 16. 2020 110,046 33,014 (2,009) - (1,363) 2,258 (2,977) (7,172) (552) 2019(1) (313,880) (94,164) (344) 69,340 - 1,879 (2,115) - 1,111 21,199 (24,293) 28,933 (5,725) (2,009) 17,065 (41,014) (344) Included in the above is a tax benefit on significant items and other significant tax items of $9.1 million for the year ended 30 June 2020 (2019: $56.4 million). FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.3 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 Adjustment from adoption of AASB 16 Net payments Acquisitions / (disposals) Foreign exchange translation movement Closing balance Comprises of: Deferred tax assets • Employee entitlements provision • Provisions • Unutilised tax losses • Lease incentives and rent free • Lease liability • Other Offset with deferred tax liability Net deferred tax asset Deferred tax liabilities • Property, plant and equipment • • Other Intangibles Offset with deferred tax asset Net deferred tax liability 2020 Current Income tax Asset/(Liability) 3,360 (28,934) (10,285) 2020 Deferred Income tax 5,154 5,725 12,294 1,088 9,234 4,315 - 46 - - - - 178 (21,176) 23,351 2019 Current Income tax Asset/(Liability) (19,075) (15,899) (154) - - 38,438 188 (138) 3,360 16,824 3,838 1,037 - 132,872 8,303 162,874 (129,727) 33,147 (135,890) (3,983) 350 (139,523) 129,727 (9,796) 2019 Deferred Income tax (35,860) 39,848 102 1,762 - - (390) (308) 5,154 12,522 13,688 4,864 4,616 - 6,410 42,100 (24,268) 17,832 (23,730) (8,659) (4,557) (36,946) 24,268 (12,678) 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. AASB Interpretation 23 Uncertainty over Income Tax Treatment addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of the recognition and measurement criteria in AASB 112: Income Taxes. 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. Refer Note 6.2 for further details. 58 59 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.4 Dividends $’000 Dividends paid during the financial year Proposed dividend(1) 2020 - 10,320 2019 38,236 - (1) The Directors have determined to pay a final dividend of 3.0 cents per ordinary share after the end of the financial year (2019: Nil). Franking credit balance(2) Franking account balance as at the end of the financial year at 30% (2019: 30%) Franking credits / (debits) that will arise from the payment / (refund) of income tax payable as at the end of the financial year Total franking credit available for the subsequent financial year 4,690 21,519 10,000 14,690 (16,829) 4,690 (2) Franking credits have not been utilised as no dividends were paid during the financial year (2019: $10.7 million). FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 1.3 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-evaluates its assessment of its tax positions, in particular where they relate to specific interpretations of applicable tax regulation. Deferred tax assets and liabilities are recognised on all assets and liabilities that have different carrying values for tax and accounting, including those arising from a single transaction, 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 are 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 its 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. 60 61 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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 2020 acquisitions: There have been no acquisitions for the year ended 30 June 2020. Completion of prior year acquisition accounting On 31 October 2019 the Group finalised the acquisition accounting of TIC Retail Accessories (‘TIC’). A decrease of $0.5 million to goodwill has been recognised in the period in relation to the TIC acquisition, which occurred in the prior year. 2.2 Controlled entities Australian incorporated entities that are party to the Deed of Cross Guarantee at 30 June 2020(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 Pact Group Industries (Asia) Pty Ltd Viscount Plastics (China) Pty Ltd Ruffgar Holdings Pty Ltd Davmar Investments Pty Ltd * There is currently an option granted to a third party to purchase 50% shares in this entity. This option has not been exercised. 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(2) Plaspak Management Pty Ltd(2) Plaspak (PET) Pty Ltd(2) Plaspak Minto Pty Ltd(3) Sustainapac Pty Ltd Bangladesh TIC Trading (Bangladesh) Ltd(11) TIC Manufacturing (Bangladesh) Ltd(11) TIC Industries (Bangladesh) Pty Ltd(11) 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(4) TIC RA NZ Ltd(5) China Guangzhou Viscount Plastics Co Ltd(6) Langfang Viscount Plastics Co Ltd(6) Changzhou Viscount Plastics Co Ltd(6) Pact Group Closure Systems (Guangzhou) Co. Ltd(7) Pact Group Closure Systems (Tianjin) Co. Ltd(7) Pact Group Packaging Systems (Guangzhou) Co. Ltd(9) Dongguan Top Rise Trading Co. Ltd(10) Regent Plastic Products Ltd(8) Ningbo Xunxing Trade Co. Ltd(11) Hong Kong Pact Group Holdings (Hong Kong) Limited(12) Roots Investment Holding Private Limited(7) TIC Group (HK) Ltd(13) TIC Group (Asia) Ltd(13) Talent Group Development Ltd(13) Fast Star International Holdings Ltd(13) TIC Group Ltd(13) India Pact Closure Systems (India) Private Limited(12) AMRS Business Services Private Limited(13) Indonesia PT Plastop Asia Indonesia(14) PT Plastop Asia Indonesia Manufacturing(14) Korea Pact Group Closure Systems Korea Ltd(7) Nepal Pact Group Closure Systems Nepal Private Limited(12) Philippines Plastop Asia Inc(15) Pact Closure Systems (Philippines), Inc(12) Singapore Asia Peak Pte Ltd(12) United States of America Pact Group (USA) Inc(16) PGH Services LLC(13) United Kingdom TIC Group (Europe) Ltd(16) (1) All entities are wholly owned (2) Owned by Skyson Pty Ltd (3) Owned by Snopak Manufacturing Pty Ltd (4) Owned by Sulo MGB Australia Pty Ltd (5) Owned by Pact Group Holdings (NZ) Ltd (6) Owned by Viscount Plastics (China) Pty Ltd (7) Owned by Pact Group Holdings (Hong Kong) Limited (8) Owned by Talent Group Development Ltd (9) Owned by Roots Investment Holding Private Limited (10) Owned by TIC Group (Asia) Ltd (11) Owned by Fast Star International Ltd (12) Owned by Pact Group Industries (Asia) Pty Ltd (13) Owned by Davmar Investments Pty Ltd (14) Owned by Asia Peak Pte Ltd (15) Owned by Ruffgar Holdings Pty Ltd (16) 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. 62 63 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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: Principal place of operation About Entity $’000 Pact’s ownership interest Carrying Value 2020 2019 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 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 Weener Plastop Indonesia Inc(1) Australian Recycled Plastics Pty Ltd(2) Indonesia and home care markets. A joint venture which processes kerbside collected recyclable plastic materials to produce PET flake and 40% 220 205 50% 976 732 50% 2,133 1,256 50% 20,632 19,323 50% 3,012 2,837 Australia HDPE flake simultaneously. 50.8% 3,903 - FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 2.3 Associates and joint ventures (continued) In accordance with AASB 12: Disclosure of Interests in Other Entities, given the material carrying value of the Group’s invest- ment in Gempack, the table below shows the summarised financial information and the carrying amount of the Group’s investment: $’000 Summarised statement of financial position Cash and cash equivalents Other current assets Non current assets Other current liabilities Net assets Carrying amount of the Group’s investment Summarised statement of comprehensive income Interest expense Depreciation and amortisation Income tax expense Summary of associates and joint venture financial information at 30 June(1) $’000 Summarised statement of financial position Current assets Non-current assets Current liabilities Non-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 (1) Includes the Group’s investment in Gempack 2020 11,072 13,973 25,281 (9,061) 41,265 20,632 1,100 2,358 455 2020 2019 42,930 36,261 24,984 34,978 (16,401) (11,918) (1,337) 61,453 30,876 51,890 (45,664) 6,226 3,131 - 48,044 24,353 39,470 (34,812) 4,658 2,336 Dividends received from associates and joint ventures during the year was $0.7 million (2019: $0.9 million). The joint ventures and associates had no contingent liabilities or material capital commitments at 30 June 2020 (2019: Nil). (1) Ownership interest at 30 June 2020 and 30 June 2019. (2) On 14 November 2019 the Group purchased 50.8% of the net assets of ARP, a plastics recycling business located in NewSouth Wales. Management has assessed that the interest held in ARP satisfies the criteria of a joint venture as per AASB 11: Joint Arrangements, and therefore have equity accounted for this investment in accordance with AASB 128: Investment in associates and joint ventures. 64 65 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS How Pact accounts for investment in associates and joint ventures and jointly controlled entities Section 3 — Our operating assets An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Group uses the equity method to account for its investments in associates and joint ventures, where it considers it has significant influence, but but it does not have control. Generally significant influence is deemed if Pact has over 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; and • 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. 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 1.3 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) 2020 113,354 (450) 36,775 149,679 2019 103,812 (993) 42,463 145,282 2 9 0 0 0 1 , 0 1 2 4 6 , 0 4 9 0 3 , 5 8 5 6 , Not due < 30 8 3 9 2 , 0 7 7 3 , 31–60 9 8 2 3 , 9 9 8 3 , > 61 Days 2020 2019 (2) At 30 June 2020 $26.7 million (2019: $26.3 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. 66 67 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 3.1 Working capital (continued) Trade and other receivables (continued) At 30 June 2020, the Group had expected credit losses of $0.4 million (2019: $1.0 million). 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; • Debtors securitisation program which allows Pact to sell receivables, at a discount to a third party on a non-recourse basis. The securitisation program has a committed facility limit of $120.0 million (2019: $130.0 million); and • Receivables finance program which allows Pact to sell selected receivables at a discount to a third party on a non- recourse basis. This program has an uncommitted facility limit of $35.0 million (2019 : $35.0 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 2020. In assessing expected credit losses, the Group has considered the current and potential impact of COVID-19 and related economic conditions. Management considers the credit risks associated with the pandemic to be sufficiently mitigated due to the diversity and credit standing of the Group’s customers. Accordingly, the Group has not experienced a significant increase in expected credit losses. 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 lease receivables, 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; and • at balance date, a liability is recognised if received collections have not been paid to other participants of the programs. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 3.1 Working capital (continued) Inventories Inventories at 30 June comprise of: $’000 Raw materials and stores Work in progress Finished goods Total inventories 2020 109,989 22,943 90,766 223,698 2019 98,216 21,448 92,182 211,846 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. 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 2020 261,405 116,719 378,124 2019 304,602 61,013 365,615 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 2020 851,812 362,007 2019 669,175 310,225 238,251 1,452,070 136,196 1,115,596 68 69 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 3.2 Non-current assets (continued) Property, plant and equipment(1) The key movements in property, plant and equipment over the year were: $’000 Estimated useful life Year ended 30 June 2020 Property(2) Plant and equipment Assets for hire(4) Right of use asset Capital work in progress Total Freehold: 40–50 years Leasehold improvements: 10 – 15 years 3–20 years 10 years 3 – 20 years n/a At 1 July 2019 net of accumulated depreciation Adoption of AASB 16 Additions and transfers Acquisition of subsidiaries and businesses Receipt of lease incentive Disposals Derecognition of ROU assets Foreign exchange translation movement Depreciation charge for the year At 30 June 2020 net of accumulated depreciation Represented by: At cost Accumulated depreciation 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(3) Foreign exchange translation movement Depreciation charge for the year At 30 June 2019 net of accumulated depreciation Represented by: At cost Accumulated depreciation and impairment 53,375 - 8,515 - - - - (433) (4,385) 57,072 471,609 - 84,974 524 - (1,552) - (2,798) (71,122) 481,635 24,578 - 12,605 - - - - - (3,631) 33,552 - 377,077 47,183 - (2,909) - (5,379) 592 (52,422) 364,142 88,980 - (29,263) - - - - (116) - 59,601 638,542 377,077 124,014 524 (2,909) (1,552) (5,379) (2,755) (131,560) 996,002 85,821 (28,749) 1,202,980 (721,345) 42,031 (8,479) 416,564 (52,422) 59,601 1,806,997 (810,995) - 43,852 11,936 1,119 - - 1,245 (4,777) 53,375 580,991 63,796 24,194 (357) (136,330) 7,272 (67,957) 471,609 30,910 (808) - - - - (5,524) 24,578 79,625 (26,250) 1,197,819 (726,210) 29,426 (4,848) - - - - - - - - - - 99,660 (11,706) - - - 1,026 - 88,980 755,413 63,218 25,313 (357) (136,330) 9,543 (78,258) 638,542 88,980 1,395,850 (757,308) - (1) Reflects the adoption of AASB 16: Leases from 1 July 2019. Comparatives have not been restated. (2) Property consists of the following: leasehold improvements of $34.7 million (2019: $28.8 million) and accumulated depreciation of $13.8 million (2019: $11.6 million), and freehold property of $51.1 million (2019: $50.8 million) and accumulated depreciation of $14.9 million (2019: $14.6 million). (3) The impairment loss of $136.3 million represented the write-down of certain property, plant and equipment 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. (4) In accordance with AASB 16: Leases, assets for hire has been disclosed separately to comply with the requirements of AASB 116: Property, Plant and Equipment. 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, excluding the ROU assets, has been based on historical experience. 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. The estimation of the useful lives of ROU assets has been based on the non-cancellable period of the lease plus renewal options when the exercise of the option is considered to be reasonably certain. 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 determined to assess if any impairment is required. 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. 70 71 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 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 2020 Notes Customer contracts(1) Other intangibles(1) Goodwill Total At 1 July 2019 net of accumulated amortisation and impairment Additions Transfer to Property, Plant and Equipment Intangible asset arising on acquisition Write-off expense(2) Foreign exchange translation movements Amortisation At 30 June 2020 net of accumulated amortisation 2.1 and impairment Represented by: At cost Accumulated amortisation and impairment 20,260 - - - (11,793) - (2,810) 9,586 4 (520) - - (23) (1,174) 447,208 - - (595) - (4,075) - 477,054 4 (520) (595) (11,793) (4,098) (3,984) 5,657 7,873 442,538 456,068 28,106 (22,449) 14,410 (6,537) 673,670 (231,132) 716,186 (260,118) (1) Customer contracts are recognised at cost and amortised on a straight-line basis over a period of 10 years (useful life). Other intangibles includes a balance of $1.8 million which has an indefinite life and is not amortised, all other intangibles are recognised at cost and amortised over their useful lives. (2) During the year, a customer contract acquired in a previous business combination was written down due to reduced future economic benefits expected. $’000 Year ended 30 June 2019 Customer contracts Other intangibles Goodwill Total At 1 July 2018 net of accumulated amortisation and impairment Additions Intangible asset arising on acquisition(1) 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 23,070 - - - - (2,810) 20,260 28,106 (7,846) 9,843 2,332 - (1,303) (64) (1,222) 9,586 551,280 - 119,983 (231,132) 7,077 - 447,208 584,193 2,332 119,983 (232,435) 7,013 (4,032) 477,054 14,949 (5,363) 678,340 (231,132) 721,395 (244,341) (1) In the prior year, 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). 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) $’000 Goodwill and intangible assets with indefinite lives are allocated to the following group of CGUs and segments(1): Packaging and Sustainability Contract Manufacturing Services Materials Handling and Pooling (1) This is the lowest level where goodwill is monitored. Annual impairment testing 2020 2019 254,623 21,030 168,647 444,300 258,628 21,031 169,311 448,970 The discount rates and terminal growth rates applied to cash flow projections are detailed below. The calculation of value in use for the segments below are sensitive to the following assumptions: • Gross margins and raw material price movement — Gross margins reflect current gross margins adjusted for any expected (and likely) efficiency improvements or price changes. • Cash Flows — Cash flows are forecast for a period of five years. Cash flows beyond the one year period are extrapolated using growth rates which are a combination of expected volume growth and price growth. Rates are based on published industry research and economic forecasts relating to GDP growth rates, adjusted for management’s view on customer performance. • Discount rates — The discount rates are based on an external assessment of the Group’s pre-tax weighted average cost of capital in conjunction with risk factors specific to the CGUs within the operating segment. 2020 Discount rate (pre-tax)(1) Terminal growth rate(1) 2019 Discount rate (pre-tax)(1) Terminal growth rate(1) Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services 9.4% - 17.0% 11.8% - 14.3% 1.0% - 1.2% 1.0% - 5.9% 9.8% - 20.5% 11.8% - 14.3% 1.0% - 1.2% 1.0% - 7.2% 13.6% 1.0% 14.3% 1.0% (1) The % range of the discount rate and terminal growth rate is representative of the different countries within each CGU. The below table shows the carrying amount and headroom analysis across the segments: Carrying amount ($’000) Headroom (times) Breakeven analysis(1) Terminal growth rate; and Discount rate Packaging and Sustainability 820,382 1.14 Materials Handling and Pooling 326,448 1.21 Contract Manufacturing Services 124,279 1.49  0.5%  1.0%  1.0%  3.0%  1.0%  1.0% (1) This is the level at which the recoverable amount would be equal to the carrying amount. 72 73 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) 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 CGUs), to which the goodwill relates. When the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a CGU (or group of CGUs) and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the CGUs retained. Key estimates and judgements — impairment of goodwill and other intangibles The recoverable amount of each of the CGUs has been determined based on value in use calculations using cash flow projections contained within next year’s financial budget approved by management and other forward projections up to a period of five years. Management has used its current expectations and what is considered reasonably achievable when assigning values to key assumptions in their value in use calculations. In the current period, Management’s estimates and judgement also specifically considered the potential risks arising from the COVID-19 pandemic. Management considers the risks associated with the pandemic to be sufficiently mitigated due to the diversity of the Group’s customers and products such that any prolonged impact from a pandemic will not result in a material change to any of the assumptions adopted for impairment testing purposes. 3.3 Capital expenditure commitments and contingencies Capital expenditure commitments Capital expenditure commitments contracted for at reporting date, but not provided for are: $’000 Payable within one year Payable after one year but not more than five years Total Contingencies 2020 24,139 6,419 30,558 2019 7,395 449 7,844 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. 3.4 Other provisions Total other provisions at 30 June comprise of: $’000's Current Business restructuring Total current provisions Non-current Fixed rent(1) Make good on leased premises(1) Total non-current provisions 2020 2019 - - - 9,967 9,967 13,914 13,914 22,765 9,593 32,358 (1) On adoption of AASB 16: Leases, the Group applied the modified retrospective approach to transition, under which the cumulative effect of initial application was recognised in retained earnings at 1 July 2019. Refer Note 6.2 for further details. Movement in provisions $’000 Year ended 30 June 2020 At 1 July 2019 Adoption of AASB 16 Provided for during the year Utilised Foreign exchange translation movement At 30 June 2020 Business restructuring(1) Fixed rent provision Make good on leased premises 13,914 (10,357) 4,790 (8,354) 7 - 22,765 (22,765) - - - - 9,593 - 1,277 (859) (44) 9,967 Total 46,272 (33,122) 6,067 (9,213) (37) 9,967 (1) Business restructuring - The business restructuring programs relate to the optimisation of business facilities across the Group. 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. 74 75 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION 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 interest-bearing loans and borrowings as at 30 June 2020: Current $’000 Lease liabilities Total current interest-bearing loans and borrowings Non-current $’000 Syndicated Facility Agreements(2) Subordinated Debt Facility(2) (3) Capitalised borrowing costs Total bank borrowings (including capitalised borrowing costs) Lease liabilities Total non-current interest-bearing loans and borrowings $’000 Total interest-bearing loans - bank borrowings Cash and cash equivalents Net debt before lease liabilities Lease liabilities Net debt Notes 6.2 Notes 6.2 Notes 6.2 2020(1) 69,203 69,203 2019 - - 2020(1) 643,700 50,991 (5,161) 689,530 385,656 1,075,186 2020(1) 689,530 (76,004) 613,526 454,859 1,068,385 2019 689,232 50,287 (6,029) 733,490 - 733,490 2019 733,490 (49,950) 683,540 - 683,540 (1) Reflects the adoption of AASB 16: Leases from 1 July 2019. Comparatives have not been restated. (2) The Group has several revolving debt facilities, two-term facilities, a subordinated term debt facility and a working capital facility with total commitments of $1,057.6 million, of which $340.7 million is undrawn at 30 June 2020. The facilities are spread across multiple maturities, with the working capital facility revolving with an annual review. The debt facilities include a $380.7 million loan facility maturing in January 2022, a $184.6 million loan facility maturing in January 2023, a $299.1 million loan facility maturing in March 2023, a $120.0 million term facility maturing in December 2024, and a subordinated term debt facility of USD 35.0 million, swapped into AUD ($50.3 million), maturing July 2025. The working capital facility is $23.0 million at 30 June 2020. (3) This facility is denominated in USD and was translated to AUD using the AUD/USD spot rate as at 30 June 2020. The foreign currency exchange differences is fully hedged with a cross currency swap. The fair value of this swap of $0.7 million is disclosed as a hedge asset. 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 2020 was assessed to be insignificant. The computation of the fair value of borrowings is derived using significant observable inputs (Fair Value Hierarchy Level 2). 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 Lease liabilities Total borrowings (b) Defaults and breaches 2020 $’000 2019 $’000 Carrying Value 643,700 50,991 454,859 1,149,550 Fair Value 643,700 50,991 454,859 1,149,550 Carrying Value 689,232 50,287 - 739,519 Fair Value 689,232 50,287 - 739,519 During the year, 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 on bank loans and borrowings Borrowing costs amortisation Amortisation of securitisation program costs Sundry items Total interest expense on borrowings Interest expense on unwinding of provisions Interest expense on lease liabilities Total finance costs Loss on de-recognition of financial assets Total finance costs and loss on de-recognition of financial assets 2020 28,852 3,416 654 819 33,741 536 26,364 60,641 2,796 63,437 2019 32,250 1,499 266 1,149 35,164 432 - 35,596 4,079 39,675 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 2020 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. 76 77 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 4.1 Net Debt (continued) Reconciliation of net profit / (loss) after tax to net cash flows from operations $’000 Net profit / (loss) for the year Non cash flows in operating profit / (loss): Depreciation and amortisation(2) Loss on sale of property, plant and equipment Share of net profit in associates Share based payments expense Impairment and write-off expense Other Changes in assets and liabilities: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventory Decrease / (increase) in current tax assets (Increase) / decrease in deferred tax assets (Decrease) / increase in trade and other payables Increase / (decrease) in employee entitlement provisions (Decrease) / increase in other provisions Increase / (decrease) in current tax liabilities Increase / (decrease) in deferred tax liabilities Net cash flow provided by operating activities 2020 88,847 2019 (289,587) 135,544 883 (3,131) 610 11,793 208 (3,104) (10,322) 3,360 19,353 (40,666) 2,998 (6,089) 18,939 (27,092) 192,131 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 (2) In the current period depreciation expense in non cash flows in operating profit / (loss) includes an amount of $52.4 million in relation to Right of use assets. Non-cash activities $’000 Acquisition of assets, liabilities and business via issue of shares Notes 2.1 2020 - 2019 60,000 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. 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 End of the year There were no shares issued during the period. 2020 Number of shares 2019 $’000s Number of shares $’000s 343,993,595 - 343,993,595 1,750,476 332,483,890 11,509,705 1,750,476 343,993,595 - 1,690,476 60,000 1,750,476 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 2020 31,144 (6,777) (928,385) 2,767 (901,251) 2019 33,897 (4,580) (928,385) 2,157 (896,911) (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. 78 79 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 4.3 Managing our financial risks 4.3 Managing our financial risks (continued) 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 2020 At 30 June 2020, the Group hedge cover is 36% interest rate debt, swaps to lock in the (2019: 51%) of its long-term variable debt excluding and therefore if interest rates amount of interest that working capital facilities. Pact will be required increase, the amount to pay. of interest Pact is required to pay would also increase. Sensitivity analysis performed by the Group showed that a +1 percentage point movement in AUD interest rates would • Considers alternative reduce net profit after tax by $2.5 million and increase equity financing and mix of fixed by $1.2 million (2019: $0.9 million reduction in net profit after and variable debt, as tax and increase equity by $0.3 million). appropriate. Sensitivity analysis performed by the Group showed that a +1 percentage point movement in NZD interest rates would reduce net profit after tax by $1.1 million and reduce equity by $0.2 million (2019: $0.9 million reduction in net profit after tax and increase equity by $0.3 million). (2019: $1.4 million reduction in net profit after tax and equity). 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 $0.5 million (2019: $0.4 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. 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 Impact at 30 June 2020 The Group has a significant exposure to the USD against the denominated in currency contracts to AUD and NZD from USD purchase commitments, while the currencies other eliminate or reduce currency Group’s exposure to sales denominated in currencies other than the functional exposures of individual than the functional currency of the operating entity is less currency of the transactions once the Group than 1%. operating entity, has entered into a firm there is a risk of commitment for a sale or an unfavourable purchase. financial impact to earnings if there is an adverse currency movement. As Pact has entities Pact utilises borrowing in At 30 June 2020, 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 and would have the following impact on equity for the largest hedging position AUDUSD ($2.0) million to $2.0 million. Sensitivity analysis performed by management showed that a that do not have the functional currency 10% +/- movement in its major translational currencies as at an Australian dollar of the overseas entity to 30 June 2020 would have the following impact on equity: (AUD) functional naturally hedge offshore currency, if currency entities where considered rates move adversely appropriate. The foreign compared to the currency debt provides a AUD, then the balance sheet hedge of AUDNZD ($9.0) million to $11.0 million AUDCNY ($12.0) million to $15.0 million AUDUSD ($1.5) million to $2.0 million AUDPHP ($2.5) million to $3.0 million amount of AUD- the asset, while the foreign Sensitivity analysis performed by management showed that a equivalent profit currency interest cost 10% +/- movement in its major translational currencies during would decrease, and provides a natural hedge of the year, would have the following impact on net profit after tax: the balance sheet the offshore profit. net investment value would decline. AUDNZD ($2.5) million to $3.0 million AUDUSD ($1.0) million to $1.0 million 80 81 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 4.3 Managing our financial risks (continued) The following table represents the changes in financial liabilities arising from financing activities: $’000 Lease liabilities Non-current interest-bearing loans and bank borrowings Total liabilities from financing activities 1 July 2019 Cash flows 70,845 42,460 (1,205,668) 113,305 (466,149) (739,519) Non-cash changes(1) (60,101) - (60,101) Foreign exchange 30 June 2020 movement (454,859) 546 2,369 (694,690) 2,915 (1,149,549) (1) Refer details at Note 6.2 (AASB 16: Leases). 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. The Group also manages commodity price risk using resin forward contracts in circumstances where contractual rise and fall adjustments are not in place to minimise the variability of cash flows arising from price movements. Utilising hedging contracts to manage risk As discussed above, the Group utilises interest rate swaps, foreign exchange forward contracts and resin forward contracts to hedge its risks associated with fluctuations in interest rates, foreign currency and resin prices. 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. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 4.3 Managing our financial risks (continued) 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 adequate Impact at 30 June 2020 The Directors have assessed that due to the Group’s cannot meet its amount of committed credit facilities. access to undrawn facilities and forecast positive cash obligations to 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. flows into the future they will be able to pay their debts as and when they fall due, and therefore it is appropriate the financial statements are prepared on a going concern basis. 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 2020 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) Resin forward contracts Interest rate swaps Interest bearing loans and bank borrowings(3)(4) Total outflows Net outflow 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 bank borrowings(3)(4) Total outflows Net outflow ≤ 6 months 6–12 months 1–5 years > 5 years Total 76,004 149,679 74,818 300,501 (378,124) (78,986) (12) (1,348) (8,508) (466,978) (166,477) 49,950 145,282 63,183 258,415 (417,285) (63,334) (1,814) (14,891) (497,324) (238,909) - - 2,760 2,760 - 7 348 355 - (2,809) - (1,477) (8,369) (12,655) (9,895) - (351) - (5,632) (726,261) (732,244) (731,889) - - 72 72 - 718 - 718 - - - - - - - - - - - - - - - 76,004 149,686 77,926 303,616 (378,124) (82,146) (12) (8,457) (743,138) (1,211,877) (908,261) 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) 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. These commitments include cash flows associated with the cross currency swap. (4) Refer Note 6.2 for details on lease maturity analysis. 82 83 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION 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 instruments; the hedged items or transactions; and the nature of the risks being hedged; and how the entity will assess the hedging instruments 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; and • 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 are 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); and • 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. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 4.3 Managing our financial risks (continued) Effect on financial position and performance — hedging instruments 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 2020 Foreign exchange forward contracts Resin forward contracts Cross currency swaps Interest Rate Swaps Year ended 30 June 2019 Foreign exchange forward contracts Interest rate swaps Hedged item Notional amount Carrying amount Asset/ (Liability) Change in fair value(5) Cash flow hedge reserve Committed purchases 79,746 Committed purchases FX component of debt Floating component of debt 234 50,991 246,716 Committed purchases 65,910 Floating component of debt 350,000 74(1) (4,301)(3) (12)(3) 814(2) (8,457)(4) 349(1) (556)(3) (1,774)(3) (4,296)(4) (4,020) (679) (12) 814 (2,387) - 77 (5,944) (2,655) (93) (5,453) (4,248) (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 non-current financial assets in the consolidated statement of financial position. The carrying amount recognised is the fair value of the cross currency swap, which is used to hedge the USD loan. The impact from movements in foreign currency rates was $0.7million. This amount fully offsets the translation of the USD loan. (3) The carrying amount is included in other current financial liabilities in the consolidated statement of financial position. (4) The carrying amount is included in other non-current financial liabilities in the consolidated statement of financial position. (5) The change in fair value represents the difference between the current and previous period carrying amount of hedge assets and hedge liabilities The Group notes no ineffectiveness for the hedges undertaken. 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 2020 Committed purchases Floating component of debt Cross currency swap Resin forward contracts Year ended 30 June 2019 Committed purchases Floating component of debt Total hedging gain/(loss) recognised in OCI Amount reclassified from OCI to profit or loss (679) (5,944) 77 - (93) (4,248) (3,265) - - (12) (73) - 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 - Interest rate swaps - Cross currency swap Reversal of prior year cash flow hedge reserve Tax effect Closing balance of cash flow hedge reserve 2020 (4,580) (679) (5,944) 77 4,580 (231) (6,777) 2019 111 (93) (4,248) - (111) (239) (4,580) 84 85 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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; and • 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. 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 five entities: • Pact Closure Systems (India) Private Ltd • Pact Closure Systems (Philippines) Inc • Pact Group Closure Systems Korea Ltd • Plastop Asia Inc • PT Plastop Indonesia Manufacturing 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 rate At 1 July 2019 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 Transfer from provisions Foreign exchange translation movements Present value of defined benefit obligation at 30 June 2020 Pact Closure Systems (India) Private Ltd(1) 7.90% 12.0% 97 32 7 Pact Closure Systems (Philippines) Inc 5.12% Pact Group Closure Systems Plastop Korea Ltd Asia Inc 4.29% 2.6% 6.0% 4.5% 4.0% 178 747 41 273 11 32 250 33 16 PT Plastop Indonesia Manufacturing 8.75% 5.0% - 54 11 (2) 11 - (2) 34 - (71) 106 43 (11) - - - - 27 358 101 23 (28) (182) - - 17 20 (5) - - - - 15 (15) 6 - - - 182 (1) 983 260 237 1,944 Total 1,272 433 77 147 24 (28) (184) 34 182 (13) 86 87 (1) Defined benefit obligations for CSI India comprises of Gratuity liability and Leave encashment liability. PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 5.1 Defined Benefit Plans (continued) $’000 Present value of the defined benefit obligation Discount rate Salary 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 Measurement assumptions Pact Closure Systems (India) Private Ltd Pact Closure Systems (India) Private Ltd(1) 7.70% 12.0% 96 26 6 Pact Closure Systems (Philippines) Inc 6.24% 6.0% 164 17 10 Pact Group Closure Systems Korea Ltd 3.10% 4.0% 703 199 19 2 4 - (2) (40) 5 97 47 (8) - - - 20 250 (58) (61) 15 (81) - 11 747 Plastop Asia Inc 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 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. Pact Closure Systems (Philippines) ,Inc 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. Pact Group Closure Systems Korea Ltd 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 Inc 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. PT Plastop Indonesia Manufacturing The discount rate assumption is based on market yields at the end of the reporting period based on high quality corporate bonds. The spot price used is released by Indonesia Bond Pricing Agency. The salary rate assumption is based on the prevailing inflation rate and company policy. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 5.1 Defined Benefit Plans (continued) Reconciliation of DBO and Fair Value of Plan Assets (continued) 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 At 30 June 2020 Defined Benefit Obligation Fair value of plan assets Present value of net defined benefit Pact Closure Systems (India) Private Ltd(1) 174 (68) Pact Closure Systems (Philippines) Inc 358 - Pact Group Closure Systems Korea Ltd(3) 1,590 (607) Plastop Asia Inc(2) 260 - Plastop Indonesia Manufacturing(2) 237 - Total 2,619 (675) obligation at end of the year 106 358 983 260 237 1,944 (1) The plan assets for Pact Closure Systems (India) Private Ltd relating to the gratuity liability comprises of investments in 100% insurance policies. (2) The plan assets for Pact Closure Systems (Philippines), Inc and Plastop Asia Inc and PT Plastop Indonesia Manufacturing are held in the companies own bank accounts. (3) The plan assets for Pact Group Closure Systems Korea Ltd comprises of investments in 100% fixed interest securities. $’000 At 30 June 2019 Defined Benefit Obligation Fair value of plan assets Present value of net defined benefit Pact Closure Systems (India) Private Ltd(1) 130 (33) Pact Closure Systems (Philippines) Inc(2) 250 - Pact Group Closure Systems Korea Ltd(3) 1,358 (611) Plastop Asia Inc(2) 178 - Plastop Indonesia Manufacturing(2) - - Total 1,916 (644) obligation at end of the year 97 250 747 178 - 1,272 Sensitivity analysis The present value of the DBO is based on the assumptions detailed on page 88. 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 2020 (260) 305 294 (256) 2019 (194) 228 220 (191) 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. 88 89 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 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 2020 396,029 19,614 25,413 610 441,666 2019 387,922 20,604 21,677 (168) 430,035 21,465 17,173 38,638 19,976 16,316 36,292 The Group’s non-current employee benefits provisions of $8.1 million relate to long service leave entitlements of $6.2 million (2019: $6.0 million), and a defined benefit net liability of $1.9 million (2019: $1.3 million). 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 twelve 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 2020 LTIP scheme 538,189 performance rights were granted to the CEO (approved by resolution at the Annual General Meeting on 13 November 2019), and 676,398 performance rights were granted to senior executives. These performance rights have performance hurdles and vesting conditions consistent with those outlined in the 2020 Remuneration Report. The rights were independently valued to establish the fair value in accordance with AASB 2: Share Based Payments. The fair value of each right at the valuation date of 13 November 2019 is $1.34. The share based payments expense recognised in the current period was $610,000 (2019: $168,000 net income). The prior period included a reversal of $655,000 in share based payments expense due to the lapsing of performance rights following the resignation of the former CEO. The key assumptions in the independent valuation in relation to the 2020 LTIP were as follows: Share price at valuation date Annualised volatility Annual dividend yield Risk free rate Expected life of performance right Model used $2.57 35.0% 3.4% 0.8% 36 months Monte Carlo Simulation Model 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 Long-term employee benefits Share-based payments expense Total compensation 2020 3,639 73 66 328 4,106 2019 2,616 90 - (475) 2,231 The following table provides the total amount of transactions with related parties for the year ended 30 June 2020: $’000 Related parties — Directors' interests(1) 2020 2019 Sales 13,362 13,789 Purchases 7,354 11,043 Other expenses 6,317 6,667 Net amounts receivable 558 609 (1) Related parties — Directors' 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), ceased its business operations in November 2019. P’Auer had a supply agreement to provide label products to Pact. Pact had a Transitional Services and Support agreement with P’Auer to provide support services. These agreements were at arm’s length. In addition, P’Auer provided Pact with periodic warehousing services. Pro-Pac Packaging Limited (Pro-Pac) Pro-Pac, an entity for which Mr Raphael Geminder owns 49.7% (2019: 49.7%), is an exclusive supplier of certain raw materials such as flexible film packaging, flexible plastic bags and tapes to Pact. Pact has a supply agreement with Pro-pac that expires 31 December 2021. The total value of sales under this arrangement is approximately $4.2 million (2019: $4.2 million). The supply arrangement is at arm’s length. Mr Jonathan Ling is also an Independent Non- Executive Director and Chairman of Pro Pac. Property leases with related parties The Group leased 11 properties (9 in Australia and 2 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 2020 was $6.2 million (June 2019: $6.4 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered. 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. 90 91 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION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 expenses of $415,000 (2019: $427,000); • 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; and • 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. 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. 6.2 New standards, interpretation and amendments AASB Interpretation 23 Uncertainty over Income Tax Treatment addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of the recognition and measurement criteria in AASB 112 Income Taxes. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately. • The assumptions an entity makes about the examination of tax treatments by taxation authorities. • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. • How an entity considers changes in facts and circumstances. FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) The Group has assessed whether the interpretation had an impact on its consolidated financial statements. Upon adoption of the interpretation, the Group considered whether it had any uncertain tax positions. The Group determined, based on its tax compliance and governance procedures, that it is probable that its tax treatments will be accepted by the taxation authorities. The Interpretation did not have an impact on the consolidated financial statements of the Group. AASB 16 supersedes AASB 117 Leases, Interpretation 4 Determining Whether an Arrangement Contains a Lease, Interpretation 115 Operating Leases-Incentives and Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model. Except for changes below, the Group has consistently applied the accounting policies in the Group’s consolidated financial statements as at and for the year ending 30 June 2020. AASB 16 Leases The Group applied AASB 16 Leases with a date of initial application of 1 July 2019. As a result, the Group has changed its accounting policy for lease contracts as detailed below. AASB 16 introduced a single, on-balance sheet accounting model for lessees. As a result, the Group, as a lessee, has recognised right of use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. The Group applied AASB 16 using the modified retrospective approach to transition, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented has not been restated — ie. it is presented, as previously reported, under AASB 117: Leases and related interpretations. Where relevant information is available, on a lease-by-lease basis, the Group applied AASB 16 to measure the right of use assets as if the Standard had been applied since the commencement date of that lease using the incremental borrowing rates at 1 July 2019. For other leases, the right of use asset was measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments as at 1 July 2019. The details of the changes in accounting policies are disclosed below. Definition of a lease Previously, the Group determined at contract inception whether an arrangement was or contained a lease under Interpretation 4 Determining whether an Arrangement contains a Lease. Under AASB 16, the Group assesses whether a contract is or contains a lease based on the new definition of a lease. Under AASB 16, a contract is, or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. On transition to AASB 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied AASB 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under AASB 117 and Interpretation 4 were not reassessed for whether there is a lease. Therefore, the definition of a lease under AASB 16 was applied to contracts entered into or changed on or after 1 July 2019. At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for leases of property in which it is a lessee, the Group has applied the practical expedient to not separate non- lease components and will instead account for the lease and non-lease components as a single lease component. 92 93 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) AASB 16 Leases (continued) As a lessee The Group leases many assets, including property, forklifts, motor vehicles, photocopiers and IT equipment. More than 95% of the total lease portfolio is represented by property leases. As a lessee, the Group previously classified leases as operating leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset. Upon adoption of AASB 16, the Group recognises right of use assets and lease liabilities for most leases — ie. these leases are on balance sheet. The Group applied the recognition exemptions for short-term leases and low value assets as detailed in the significant accounting policies below. The Group also early adopted the exemption to not assess the rent concessions occurring as a direct consequence of COVID-19 pandemic as a lease modification. The Group presents right of use assets that do not meet the definition of an investment property in ‘property, plant and equipment, the same line item as it presents underlying assets of the same nature that it owns. As a lessor Where the Group is a lessor, the accounting treatment on the adoption of AASB 16 is consistent with the accounting treatment under AASB 117: Leases. Significant accounting policies Right of use assets The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost and subsequently at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease liability. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, make good estimate and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right of use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right of use assets are subject to impairment. Lease liabilities The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group‘s incremental borrowing rate. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in the consolidated statement of comprehensive income if the carrying amount of the right of use asset has been reduced to zero. The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term and the amount of lease liabilities and right of use assets recognised. The Group evaluates all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (eg. a change in business strategy). FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) Short-term leases and leases of low value assets For lessees only, AASB 16 provides a practical expedient to disregard the recognition of ROU assets and lease liabilities for short-term leases with less than 12 months remaining lease term and leases of low-value assets. The Group has elected to apply the practical expedients on selected leases. The lease payments associated with these leases are recognised as an expense on a straight-line basis over the lease term in the consolidated statement of comprehensive income. The assessment of low-value is based on assets that are not integral to the Group’s business. The Group will apply the low-value exemption and alleviate the recognition requirements in AASB 16 for the aforementioned lease categories. The practical expedient for short term leases has been applied by class of underlying asset. Transition At transition date, lease liabilities were measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate as at 1 July 2019. Right of use assets were measured at either: • their carrying amount as if AASB 16 had been applied since the lease commencement date, but discounted using the incremental borrowing rate as at 1 July 2019; or • an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The latter method was applied for all leases where sufficient documentation was not available to permit the measurement using the former method. The Group used the following practical expedients when applying AASB 16 to leases previously classified as operating leases under AASB 117: • grandfathered the assessment of which transactions are leases; • applied a single discount rate to a portfolio of leases with reasonably similar characteristics; • adjusted the right of use assets by the amount of onerous contract provisions applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application, as an alternative to an impairment review; • applied the exemption not to recognise right of use assets and liabilities for leases with less than 12 months remaining lease term at 1 July 2019 and those lease contracts for which the underlying asset is of low-value; • excluded initial direct costs from measuring the right of use asset at the date of initial application; • applied the exemption not to separate the lease and non-lease components of the contract, and instead account for each lease and associated non-lease components as a single lease component; • used hindsight when determining the lease term if the contract contains options to extend or terminate the lease. 94 95 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) Impacts on financial statements FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) Impacts on financial statements (continued) The impacts on the Statement of Financial Position of the Group on transition to AASB 16 at 1 July 2019 were as The maturity analysis of contractual undiscounted cash flows for lease liabilities are: follows: $’000 Right of use assets Deferred tax assets (1) Total assets Lease liabilities Unearned incentives Fixed rent provisions Onerous lease provision Other Total liabilities Retained earnings 1 July 2019 377,077 8,587 385,664 (466,149) 15,450 22,765 10,357 (2,396) (419,973) 34,309 (1) The tax effect accounting on the adoption of AASB 16 for right of use assets and lease liabilities is consistent with the accounting policy. The carrying amounts of the Group’s right of use assets and lease liabilities and the movements during the period are as below: $’000 Adoption of AASB 16 Additions Receipt of lease incentive Depreciation expense Derecognition of ROU assets Lease modification Settlement obligation for remaining onerous leases Interest expense Payments Foreign exchange translation movement Balance as at 30 June 2020 Property 370,636 39,523 (2,909) (48,743) (5,379) - - - - 397 353,525 Plant and equipment 6,441 7,660 - (3,679) - - - - - 195 10,617 Total Right of use assets 377,077 47,183 (2,909) (52,422) (5,379) - - - - 592 364,142 Total Lease liabilities 466,149 46,404 - - - (9,923) (2,744) 26,364 (70,845) (546) 454,859 In addition to the expenses detailed above, the consolidated statement of comprehensive income also includes the following lease related expenses: $’000 Expenses relating to short-term leases Expenses relating to low-value leases Variable lease payments Property outgoings(1) 2020 2,907 176 633 12,014 (1) Includes council rates, taxes, insurance and other lease related payments. Outgoings are 19.7% of the Group’s property lease payments in the financial year. The lease liabilities included in the consolidated statement of financial position are: $’000 Current Non-current 96 2020 69,203 385,656 Less than one year One to five years More than five years Total undiscounted liabilities The amounts recognised in the statement of cash flows are: $’000 Repayment of lease liability principal (net of incentive received)(1) Interest payments(1) Expenses relating to short-term leases Expenses relating to low-value leases Variable lease payments Property outgoings Onerous lease payments 2020 70,826 228,965 347,813 647,604 2020 44,480 26,364 2,907 176 633 7,201 2,744 (1) Of the total lease payments, 13.9% relates to property leases that exclude renewal options in the assessment of the lease term. This includes warehouses, offices and shopfronts where the exercise of the option is not reasonably certain. The reconciliation of operating lease commitments at 30 June 2019 and the lease liabilities recognised at 1 July 2019 is detailed below. When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using relevant incremental borrowing rates at 1 July 2019. In performing this assessment, the Group used a weighted-average incremental borrowing rate of 5.8%. $’000 Operating lease commitments at 30 June 2019 as disclosed in the Group’s consolidated financial statements Add: Extension options reasonably certain to be exercised 1 July 2019 400,285 302,201 Less: Recognition exemption for: • Short-term leases expensed • Low-value leases expensed Total operating lease commitments before discounting Less: Discounted using the incremental borrowing rate at 1 July 2019 Lease liabilities recognised at 1 July 2019 Of which are: • Current lease liabilities • Non-current lease liabilities (14,394) (2,150) 685,942 (219,793) 466,149 54,877 411,272 Key Estimate and Judgement — Incremental borrowing rate Where the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right of use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Group estimates the IBR using observable inputs (such as market interest rates) when available. 97 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.2 New standards, interpretation and amendments (continued) Impacts on financial statements (continued) Key Estimate and Judgement – Determining the lease term of contracts with renewal and termination options The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. 6.3 Other gains / (losses) FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 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 2020 8,895 2019 389,861 1,680,353 1,675,353 1,680,353 1,675,353 1,570,477 1,570,477 2,157 64 102,655 1,680,353 1,675,353 413 413 2,767 64 107,045 1 1 The amounts disclosed in the table below are the amounts recognised in the Statement of Comprehensive Income: The above is a summary of the individual financial statements for Pact Group Holdings Ltd at 30 June. Pact Group $’000 Significant items (excluding impairment expenses) Transaction costs Inventory write downs and related disposal costs Net gain on lease modification Reversal of contingent consideration obligation Finalisation of acquisition consideration Business restructuring programs • restructuring costs • asset write downs Business restructuring programs total Total significant items (excluding impairment expenses) before tax Other (losses) / gains Unrealised losses on revaluation of foreign exchange forward contracts Loss on sale of property, plant and equipment Realised net foreign exchange gains / (losses) Total other losses Total gains / (losses) before tax 2020 2019 (4,034) - 4,544 30,000 (7,172) (3,666) (13,031) - - - (4,790) (218) (5,008) 18,330 (37,842) - (37,842) (54,539) (3,083) (883) 99 (3,867) 14,463 (306) (269) (775) (1,350) (55,889) 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. 98 99 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.5 Deed of Cross Guarantee $’000 Closed group consolidated income statement Profit / (loss) before income tax Income tax (expense) / benefit Net profit / (loss) for the year Retained earnings at beginning of the year Net profit / (loss) for the year Dividends provided for or paid Adjustment on adoption of AASB 16 Accumulated losses at end of the year Closed group consolidated balance sheet 2020(1) 2019 32,412 (3,503) 28,909 (280,571) 28,909 49,156 (27,696) (230,202) (363,219) 36,665 (326,554) 61,653 (326,554) (15,670) - (280,571) Current assets Cash and cash equivalents Trade and other receivables Inventories Contract Assets Loans to related parties Current tax assets Other financial assets Prepayments Total current assets Non-current assets Trade and other receivables Prepayments Property, plant and equipment Investments in subsidiaries Investments in associates Intangible assets and goodwill Deferred tax assets Other financial 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 Interest-bearing loans and borrowings Other current financial liabilities Total current liabilities Non-current liabilities Trade and other payables Provisions Interest bearing loans and bank borrowings Other non-current financial liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity (1) Reflects the adoption of AASB 16 Leases from 1 July 2019. Comparatives have not been restated. 31,895 57,967 136,703 11,737 130,078 - 738 8,502 377,620 - 77,422 129,442 8,337 84,492 17,488 349 16,912 334,442 - 2,640 632,853 509,486 26,887 231,513 32,491 111 695 - 366,386 507,924 20,809 235,456 15,309 - 1,435,981 1,146,579 1,813,601 1,481,021 - 240,830 142,574 10,535 34,037 48,887 3,608 480,471 - 13,537 773,274 7,275 794,086 1,274,557 539,044 2,937 231,596 80,937 - 32,141 - 6,666 354,277 66,312 45,469 530,209 65 642,055 996,332 484,689 1,750,476 1,750,476 (985,216) (981,230) (280,571) (230,202) 484,689 539,044 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 ‘Managing our liquidity risk’ at Note 4.3). 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: $ Fees to Ernst & Young (Australia) 2020 2019 Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities. Fees for assurance services that are required by legislation to be provided by the auditor. Fees for other assurance and agreed upon procedure services under other legislation or 1,467,675 1,443,221 - 15,000 contractual arrangements where there is discretion as to whether the service is provided by the auditor or another firm. Fees for other services: Tax compliance Tax advisory Total fees to Ernst & Young (Australia) 54,806 169,222 86,245 109,000 113,000 45,000 1,732,726 1,770,443 1,732,726 1,770,443 Fees to other overseas member firms of Ernst & Young (Australia) Fees for auditing the financial report of any controlled entities. Fees for other assurance and agreed upon procedure services under other legislation or 539,213 505,000 contractual arrangements where there is discretion as to whether the service is provided by the auditor or another firm. Fees for other services: Tax compliance Tax advisory Due diligence Total Fees to other overseas member firms of Ernst & Young (Australia) Total auditor’s remuneration 7,876 30,731 26,196 - - - 612,824 588,722 8,808 612,824 83,722 588,722 2,345,550 2,359,165 100 101 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 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 Inter-segment eliminations Total Assets Segment liabilities $’000 Packaging and Sustainability Materials Handling and Pooling Contract Manufacturing Services Total Segment Liabilities Reconciliation to total liabilities(1): Interest-bearing liabilities Income tax payable Deferred tax liabilities Inter-segment eliminations Total Liabilities 2020 1,256,413 457,840 248,189 2019 996,020 383,608 197,324 1,962,442 1,576,952 - 33,147 46 3,360 17,832 (954) 1,995,635 1,597,190 2020 629,491 150,668 122,280 902,439 2019 388,788 67,338 73,255 529,381 689,530 21,175 9,796 46 733,490 - 12,678 (954) 1,622,986 1,274,595 FINANCIAL REPORT — NOTES TO THE FINANCIAL STATEMENTS 6.9 COVID-19 financial assistance and other support initiatives During the year, the Group received financial assistance from Government and other key stakeholders in various jurisdictions to support business operations adversely impacted by the COVID-19 pandemic. This assistance included wages subsidies, property rent relief, waiver of payroll tax obligations and other miscellaneous subsidies with a total benefit to the Group of $2.8 million, of which $0.7 million was in Australia. This benefit has been recognised in other income within the Consolidated Statement of Comprehensive Income for the period. In addition, the Group received early settlement of an income tax refund of $6.2 million, as a timing benefit through COVID-19 assistance. 6.10 Subsequent events Divestment of Contract Manufacturing segment The Group is pursuing its options to sell the businesses in the Contract Manufacturing segment. The process will recommence following a suspension during the year due to COVID-19. Joint Venture with Cleanaway and Asahi Holdings Pact, Cleanaway and Asahi Holdings (Australia) have formalised a joint arrangement to develop recycling capability in Australia, expected to be operational by 2022. Acquisition of Flight Plastics Ltd The Group has entered into an agreement to acquire New Zealand’s only PET recycler, Flight Plastics NZ, a leading recycler and provider of plastic trays and containers for grocery products in New Zealand, for a purchase consideration of NZD $26million. The transaction remains conditional on approval by regulatory authorities. In the opinion of the Directors, other than the matters aforementioned, there have been no other material matters or circumstances which have arisen between 30 June 2020 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. (1) These reconciling items are managed centrally and not allocated to reportable segments. 6.8 Geographic revenue The table below shows revenue recognised in each geographic region that Pact operates in. $’000 Australia New Zealand Asia Total 2020 2019 1,270,816 1,291,238 289,258 253,580 1,809,158 1,834,076 287,329 251,013 102 103 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT 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 2020 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 2020. This Declaration is made in accordance with a resolution of the Directors. Raphael Geminder Chairman Dated 19 August 2020 Sanjay Dayal Managing Director and Group Chief Executive Officer 104 105 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION 106 107 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION108 109 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION38 47 SHAREHOLDER INFORMATION 110 PA C T 2 0 2 0 A N N UA L R E P O R T O V E R V I E W P E R F O R M A N C E G O V E R N A N C E F I N A N C I A L R E P O R T S S H A R E H O L D E R I N F O R M AT I O N 111 PACT 2020 ANNUAL REPORT SHAREHOLDER INFORMATION The shareholder information set out below is based on the information in the Pact Group Holdings Ltd Top 20 largest shareholders share register as at 30 June 2020. 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 30 June 2020: Name Investors Mutual Ltd Kin Group Pty Ltd On market buy-back Date of interest 5/6/2020 12/3/2020 Number of ordinary shares 29,852,425 152,252,175 % of issued capital 8.68% 44.26% 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 2,470,028 15,911,524 12,379,126 27,858,448 285,374,469 343,993,595 4,630 6,029 1,658 1,235 56 13,608 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). 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 Pty Ltd Citicorp Nominees Pty Ltd Manipur Nominees Pty Ltd Stanningfield Pty Ltd Argo Investments Limited Salvage Pty Ltd CS Third Nominees Pty Ltd Citicorp Nominees Pty Ltd National Nominees Limited BNP Paribas Nominees Pty Ltd Sandurst Trustees Limited Neweconomy Com AU Nominees Pty Limited <900 Account> S&J Capital Pty Limited Gaja Consolidated Pty Ltd Custodial Services Limtied Mr Russell Stanley Barber Warbont Nominees Pty Ltd Forum Investments 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 40.26 21.92 4.30 3.49 1.64 1.64 1.21 1.06 0.94 0.89 0.78 0.42 0.39 0.33 0.29 0.26 0.26 0.23 0.22 0.17 80.71 19.29 138,499,371 75,402,416 14,785,986 12,001,980 5,650,250 5,650,250 4,172,314 3,635,929 3,219,107 3,066,107 2,699,375 1,434,025 1,331,000 1,124,704 1,014,339 911,569 898,295 793,213 753,617 600,000 277,643,847 66,349,748 There are no restricted equity securities in the Company. However, there are 1,883,417 ordinary shares which are subject to voluntary escrow. These shares will cease to be subject to voluntary escrow 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. 112 113 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFY21 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 17 February 2021 25 February 2021 26 February 2021 7 April 2021 18 August 2021 26 August 2021 27 August 2021 7 October 2021 17 November 2021 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 31. 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 114 115 PACT 2020 ANNUAL REPORT PACT 2020 ANNUAL REPORT OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONwww.pactgroup.com.au 

Continue reading text version or see original annual report in PDF format above