S E L E C T H A R V E S T S A n n u A L R E p o R T 2 0 1 6 ANNUAL REPORT 2016 Select Harvests Annual Report 2016 Growing Together Company Profile Select Harvests is one of Australia’s largest almond growers and a leading manufacturer, processor and marketer of nut products, health snacks and muesli. We supply the Australian retail and industrial markets plus export almonds globally. We are Australia’s second largest almond producer and marketer with core capabilities across: Horticulture, Orchard Management, Nut Processing, Sales and Marketing. These capabilities enable us to add value throughout the value chain. These orchards, plus other independent orchards, supply our state-of-the-art primary processing facility at Carina West near Robinvale, Victoria and our value-added processing facility at Thomastown in the Northern Suburbs of Melbourne. Our primary processing facility has the capacity to process 25,000 metric tonnes of almonds in the peak season and is capable of meeting the ever increasing demand for both in-shell and kernel product. Our processing plant in Thomastown processes over 10,000 metric tonnes of product per annum. Our Operations Export Our geographically diverse almond orchards are at or near maturity. Located in Victoria, South Australia and New South Wales our portfolio includes more than 7,602 Ha (18,776 acres) of company owned and leased almond orchards and land suitable for planting. Select Harvests is one of Australia’s largest almond exporters and continues to build strong relationships in the fast growing markets of India and China, as well as maintaining established routes to markets in Asia, Europe and the Middle East. Our Brands The Select Harvests Food Division provides a capability and route to market domestically and around the world for processed almonds and other natural products. It supplies both branded and private label products to the key retailers, distributors and industrial users. Our market leading brands are: Lucky, NuVitality, Sunsol, Allinga Farms and Soland in retail; Renshaw and Allinga Farms in wholesale and industrial markets. In addition to almonds, we market a broad range of snacking and cooking nuts, health mixes and muesli. Our Mission To deliver sustainable shareholder value by being a global leader in integrated growing, processing & marketing of almonds. Geographic Diversity SOUTHERN REGION PARINGA LOXTON Adelaide LAKE CULLULLERAINE HILLSTON NORTHERN REGION Sydney EUSTON GRIFFITH ROBINVALE Swan Hill Nhill CENTRAL REGION Processing Centres Albury Select Harvests Orchards THOMASTOWN Melbourne 16,521 TOTAL PLANTED ACRES (6,687 HA) 4,620 7,086 4,815 PLANTED ACRES IN SOUTHERN REGION (1,870 HA) PLANTED ACRES IN CENTRAL REGION (2,868 HA) PLANTED ACRES IN NORTHERN REGION (1,949 HA) 01 www.selectharvests.com.au Contents 01 Company Profile 01 Geographic Diversity 03 Performance Summary 04 Chairman and Managing Director’s Report 08 Strategy Explanation & Progress 10 Almond Division 11 Food Division 12 People & Diversity 12 Communities 13 OH&S 13 Sustainability & Environment 14 Executive Team 15 Board of Directors 16 Historical Summary 17 Financial Report 77 Corporate Information 02 Select Harvests Annual Report 2016 Performance Summary Key Financial Data $000’s Revenues EBIT Almond Division Food Division Corporate Total EBIT Interest expense Profit Before Tax Tax expense NPAT (before non-recurring items) Non-recurring items NPAT Reported EPS (before non-recurring items) EPS Reported Total Dividend (Interim & Final) Net Debt Gearing (Net Debt/Equity) Operating Cashflow FY15 223,474 87,503 6,817 (4,685) 89,635 (5,331) 84,304 (24,855) 59,419 (2,653) 56,766 86.8 cents 82.9 cents 50.0 cents 115,609 40.2% 30,399 FY16 285,917 36,093 10,342 (5,132) 41,303 (5,495) 35,808 (7,949) 27,859 5,937 33,796 38.5 cents 46.7 cents 46.0 cents 67,265 23.1% 92,866 Underlying NPAT (A$ million) FY15 59.4 FY13 22.9 FY14 21.6 FY16 27.9 FY12 9.5 FY16 NPAT was the second largest NPAT in the last 5 years FY16 produced one oF the largest crops in the companY’s historY 03 Harvest Volume (MT) FY13 12,000 FY15 14,500 FY16 14,200 FY14 10,500 FY12 5,830 www.selectharvests.com.au Chairman and Managing Director’s Report Welcome to Select Harvests’ 2015/16 Annual Report. It has been a challenging and volatile year for the almond industry generally. While some way from the record result of 2014/15, the 2015/16 result was still one of the best in the history of the company. Importantly, with outstanding cash generation and the balance sheet in great shape, the company was able to continue to invest in initiatives to deliver additional growth, productivity gains, capacity increases, cost reductions and improved efficiency underpinned by sustainable business practices. Highlights Strategy The company has continued to make solid progress against its 8 strategic objectives, investing in growth and efficiency, which is delivering increased scale, diversity and profitability. Importantly, the future benefits of some of this investment is yet to reveal itself in the financial results. For example, in 2012 the 8,804 bearing acres (i.e. revenue generating) were equal to the planted acres and yet when we look at the orchard portfolio today, there are 16,521 planted acres and only 12,319 bearing acres – i.e. an area totalling an additional 34% of existing bearing acres is not yet generating revenue. These current non-bearing acres will deliver increasing yields over the next 7 years and cash flows over the next 30 years. Both the Almond and the Food Division require globally cost competitive, sustainable foundations in order to securely anchor the growth opportunities the company has in front of it. Energy costs are embedded in everything we do, so it is critically important that we can rely on a dependable supply of economic and sustainable power. Project H2E will produce low-cost electricity from almond by-product streams that will power the adjacent Carina West Hulling and Shelling processing centre and neighbouring farms. Project Parboil will deliver a state of the art almond-only value-added processing facility adjacent to the Hulling & Shelling operation with 3x the existing value-added capacity and using power generated from Project H2E. • Record operating cash flow A$92.9 million • Net Profit After Tax (“NPAT”) of A$27.9 million – 2nd best result in last 8 years • 2nd largest SHV almond crop – 14,200 tonnes • Avge SHV almond price A$8.08/kg • Record Food Division result – A$10.3 million Earnings Before Interest & Tax (“EBIT”) • Sale & leaseback – 3 properties for A$64.0 million • Sale of WA land – A$9.5 million • Invested in Strategic Projects – H2E and Parboil • Increased area planted to almonds to 16,521 acres • Improved financial strength – Net Debt to Equity 23% • Maintained strong dividend payment – full year 46 cents per share (“cps”) Financial Performance In challenging market conditions, the company produced a Reported NPAT of A$33.8 million in FY16. Excluding the impact of after-tax gains on asset sales, Underlying NPAT was A$27.9 million. Reported Earnings per Share (“EPS”) was 46.7 cps while Underlying EPS was 38.5 cps. The company generated record operating cash flow of A$92.9 million, further boosted by proceeds from the sale of the WA property plus the sale and leaseback of the 3 almond properties. The company paid a final fully franked dividend of 25 cps on 30 September 2016 (Record Date 5 September 2016) taking the full year dividend to 46 cps (last year 50 cps). At 30 June 2016, Net Debt (including lease liabilities) was A$67.3 million and Net Debt to Equity was 23%. 04 Orchard Funding and Growth During the year, the business sold and leased back 3 properties from First State Super (“FSS”) for net proceeds of A$64.0 million. The company has secured an additional 2 properties for FSS and will plant out 1,000 acres of greenfield almonds (property cost and capex paid by FSS and leased out by Select Harvests) across 2017 and 2018. The planning and development of 2,084 acres of new almond orchards in VIC and NSW took place. At the time of writing this report, the company has 16,521 acres of planted almond orchards that will generate approximately of 16,000 tonnes of almonds in 2018, rising to 18,000 tonnes in 2020 and to 23,000 tonnes in 2024. Select Harvests continues to actively seek to acquire orchards (preferably mature). Almond Division The Almond Division delivered an EBIT of A$36.1 million in FY2016 – significantly down on the record FY2015 profit of A$87.5 million. Price and volume variation explain the vast majority of the year on year profit decline. Almond volume was 14,200 tonnes (FY15 14,500 tonnes) while price was A$8.08/kg (FY15 A$11.45/kg). The harvest was completed more quickly than last year given favourable harvest weather, the slightly smaller crop size and additional harvest equipment. Tree health and vitality has been given significant focus in recent years and the high performance orchard program is gaining traction – old trees that in theory should be past their prime are delivering outstanding yields. We expect further improvements as the program is enhanced. Select Harvests Annual Report 2016 Food Division The Food Division produced an FY2016 EBIT of A$10.3 million, well up on FY2015 EBIT of A$6.8 million. This Division is performing ahead of plan and is investing now for future export led growth in Consumer Brands and Industrial & Trading. The strongly improved result was driven by increased sales of Consumer Branded products, strong sales to industrial food manufacturers, margin management and passing on commodity price increases. Branded Consumer sales are up 10% while Lucky continues to climb to higher market shares – July 2016 MAT 42.3% vs 40.1% July 2015 MAT. New products now make up 13% of sales. Industrial sales are up 17%, driven by aligning with key regional industrial customers while our trading has been astute in a volatile market. Safety Our first and foremost objective is the safety of our people and through the Zero Harm Safety Strategy we strive to improve our safety performance. The strategy aims to reduce Long Term Injury Frequency Rates (“LTIFR”) and Medically Treated Injury Frequency Rates (“MTIFR”) by 25% and increase the Hazard Identification Frequency Rate (“HIFR”) by 75%. Our focus is to prevent injuries before they occur. 05 www.selectharvests.com.au Chairman and Managing Director’s Report Continued Market Outlook Thankyou Volatile market conditions in 2016 made it a difficult market to navigate. A slightly larger global crop, combined with demand reduction on the back of very high almond prices collided with the Middle East credit squeeze which forced traders to aggressively sell product to provide liquidity in their businesses. This created a perfect almond storm and a severe price decline. As credit returned and price acted to stimulate demand, almond shipments out of California have increased considerably – up 3% in the last 12 months and 21% in the last 3 months in total. Export growth is even more pronounced with exports up 9% in the last 12 months, 33% in the last 3 months and 54% in the last month. We expect strong demand to continue and for it to have a positive impact on prices. We are confident that Select Harvests is a strong and growing business, well positioned to supply an inherently healthy product with a growing range of uses and products that the world quite clearly is demanding more of. As the theme of this Annual Report makes clear, Select Harvests is Growing Together. We would like to thank all of the Select Harvests stakeholders who are working hard to grow our business and improve our performance, in particular our hardworking and enthusiastic employees. In addition, we’d like to thank our supportive shareholder base. We hope you agree our business is positioned for long and successful growth and we look forward to delivering that together. Michael Iwaniw, Chairman Paul Thompson, Managing Director SHV THeoreTIcal HarVeST VoluMe 2016 – 2025 +61% +63% 22,879 23,120 +54% 21,913 +47% 20,906 +37% 19,446 +27% 18,084 +12% 15,935 +16% 16,417 +7% 15,200 14,200 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Basis: Current Planted Area and Planned Planted Area at SHV Yields Yield from existing portfolio Yield from committed new plantings Select Harvests future almond production will increase from 14,200 tonnes in 2016 to approx. 16,000 tonnes in 2018, 18,000 tonnes in 2020 rising to 23,000 tonnes in 2024 making Select Harvests one of the largest almond producers in the world. 26000 24000 22000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 06 Select Harvests Annual Report 2016 PlanTed/BearIng alMond orcHardS (acreS) 16,521 13,311 13,824 11,943 12,319 8,804 8,804 10,222 9,295 9,443 FY12 FY12 FY13 FY13 FY14 FY14 FY15 FY15 FY16 FY16 In addition to the existing 12,319 bearing acres, there are another 4,202 acres that are planted but non-bearing – these non-bearing acres begin to produce almonds and then increasingly move to full maturity over the next 7 years, significantly increasing Select Harvests productive base. Planted Acres Bearing Acres 07 www.selectharvests.com.au Select Harvests Annual Report 2016 Project H2E - Hull to Energy Carina West Processing Plant - Wemen CLEAN EXHAUST > CO2 SAVINGS POWER TO HV NETWORK Strategy Explanation & Progress OUTSIDE FUEL STORAGE BIOMASS MIX SUPER HEATED STEAM PASTEURISATION SCREENING SORTING STEAM TURBINE SHELL & HULL REMOVAL IRRIGATION DAM POWER TO HV SWITCH HV SWITCH POWER TO PROCESS POWER TO IRRIGATION PUMPS PRODUCTION WASTE AS FUEL ASH FOR FERTILISATION MIXED PRODUCTION WASTE TO OUTSIDE STORAGE FUEL ProjecT H2e SCHEMATIC OF ELECTRICITY CO-GENERATION PLANT Strategic Objective & Activities COnTrOl CriTiCAl MASS OF AlMOnDS Secure the critical mass of nuts needed to maximize profitability and leverage the global almond opportunity. FY14 / completed FY14 Initiatives • Acquired 275 HA (680 acres) planted orchard • Acquired 405 HA (1,000 acres) unplanted iMPrOvE yiElD & CrOP vAluE Improve yield and overall crop value by perfecting on-farm and farm to factory practices. • Total review of Horticultural assets • Further A$500K frost fans • Additional harvest equipment BE BEST in ClASS SuPPly CHAin Continuously improve our supply chain, achieving high quality, low cost and optimum capital utilisation. • Evaluate operational improvements & refine proposals • New Optical Sorter at Thomastown invEST in inDuSTriAl & TrADinG DiviSiOn Allocate resources to leverage our trading skills and grow sales in the industrial channel. • Grew Industrial Division 24% through local and SE Asia customer base • Innovations assisted growth STrEnGTHEn PACKAGED FOOD BuSinESS Commit funds and develop structure to generate domestic and export growth for the packaged food business delivering sustainable returns above the cost of capital. • Product Development – Innovation/ Renovation/Reformulation/Repackaging • Brand relaunch – Sunsol & Lucky Smart Snax Fix Our SySTEMS & PrOCESS Develop the business systems and processes required to be a global industry leader. nOn-OrGAniC GrOWTH Acquire businesses in related categories leveraging existing capabilities that are EPS accretive and deliver sustainable returns above our cost of capital. EnGAGE WiTH Our PEOPlE & Our STAKEHOlDErS Engage with investors and our industry while developing the team required to be a global industry leader. • OHS improvement – LTI’s dropped 73% • New risk management framework • New OHS policies/procedures • N/A – Objective only introduced in FY16 • Hort 3 training for Farm Management • Refreshed company website • Introduction of employee newsletters/intranet 08 08 Project Parboil Almond Value Add - Carina West Development Details: - Integrated Processing Equipment Blanching, Slivering, Slicing, Dicing, Dry Roasting, Pasting, Grinding, Pasteurising, Electronic Sorting and Industrial & Retail Packing - Climate Controlled Factory - Cool Store Warehousing - NATA Accreditated Laboratory - Container Loading Facility - Line speed approximately 2T/Hour - Completion Date: December 2016 PASTE ROOM WASHROOM SPIRAL ELEVATORS GRADING SCREENS INSPECTION BELT GENIUS SORTER SECONDARY DRYER / ROASTER PRIMARY DRYER Q.A. AND LABORATORY NIMBUS SORTER SLIVERING, SLICING, DICING PASTEURISER $ 1/4 BLANCHER HEAT GENERATOR SCALDER ProjecT ParBoIl INTERNAL SCHEMATIC OF ALMOND VALUE-ADDED PROCESSING FACILITY FY15 / completed FY16 / completed FY17 / ongoing FY19 FY15 Initiatives FY16 Initiatives FY16+ • Acquired 1,004 HA (2,481 acres) planted orchard • Acquired 1,808 HA (4,465 acres) unplanted • Acquired 6,215 ML high security water • Replanted 207 HA (512 acres) in Q3CY2014 • Acquired mature orchards • Develop 2,024+ HA (5,000+ acres) of greenfield almonds • Planted 384HA (948 acres) in Q3CY2015 • Acquire mature orchards • Replace old orchards • Invest in greenfield orchards • Additional harvest equipment • Biostimulants trial • Trial catch & shake harvest technology • Increase Hort program to target 3.2T/HA (1.3T/acre) yield • On farm drying • Irrigation management • Better on-farm execution • Use of new technologies as they become available • High voltage network (Project H2E) Cogen Plant • Carina West Dryer • Reduce cost (Project Parboil) • Refrigerated storage • Biomass (Project H2E) • Project H2E • Project Parboil • Expanding business with food processors in local and SE Asian markets • Increase value adding capacity (Project Parboil) • Project Parboil • Take advantage of FTA’s • Multiple relaunches & new products • Range rationalisation • New distributors – Thailand & Malaysia • IT upgrade • Relaunch key brands • Accelerate NPD rate of branded business • Distribution in SE Asia • Single Company ERP • Reduce LTI’s by 25% Y on Y • China launch • New product development • Reinvigorate Soland, Lucky & NuVitality Brands • Investment in Single Company ERP • Redevelop business processes to capitalise on ERP • N/A – Objective only introduced in FY16 • Understand and review potential investments in related space • Understand and review potential investments in related space • Further development of Performance • Improve skill levels on farm Review process • Diversity Committee & processing QA • Employee diversity • Embrace diversity • Improve culture 09 09 www.selectharvests.com.au Almond Division unDErlyinG EBiT ($M) Fy15 87.5 Fy16 36.1 59% The Almond Division delivered a historically strong result with EBIT of A$36.1 million, notwithstanding that it was 59% down on the outstanding FY15 record result. The decline was overwhelmingly driven by a reduction in almond price to A$8.08/kg, well down on FY15 price of A$11.45/kg. FY16 volume was 14,200 tonnes, down marginally on FY15 crop of 14,500 tonnes. FY16 AUD/ USD FX rate 0.72 (FY15 0.77) Favourable weather around harvest and continued investment in additional harvest equipment resulted in harvest being completed in record time. Processing of the crop was finished by mid-August but the dryness of this years’ crop resulted in lower processing productivity, as the almonds were more prone to damage and needed to move through the processing plant more slowly. Other achievements for the year in review: • 14,200 tonne almond crop – 2nd largest on record • Sale and leaseback of 3 properties to First State Super (“FSS”) for A$64.0 million • Sale of WA property for A$9.5 million • Progressed the plant out of 2,084 acres in Vic & NSW • Acquired 2 new properties (1,000 acres) and will plant out to almonds in CY17 and CY18 The high nutrition program that has been introduced in recent times is having a positive impact on tree health and yield. The company is well on the way to increasing the average yield in the orchard to 1.3 tonnes/acre and is now focussing on delivering productivity increases in excess of this level. The company’s water strategy has provided water security and mitigated the impact of the recent El Nino on the average price that the company has paid for its water. Importantly, this strategy has allowed capital that would otherwise have been tied up in water, to be applied to higher return applications such as almonds and the value added processing facilities. The almond market has had a volatile 12 months, impacted by incremental supply and demand fluctuations, along with a significant credit event in the Middle-East that severely impacted credit availability to almond traders. The August Position Report from the Almond Board of California has demonstrated increasingly strong year on year monthly shipments of US Almonds, both to the US export market and more recently to the US domestic market. This gives confidence in the almond market outlook. Despite the challenging conditions in the global almond market, the company continued to roll out its strategic plan to increase its critical mass of almonds. With the Select Harvests almond orchard now comprising 16,521 planted acres across the 3 major Australian Almond growing regions, Select Harvests is now one of the largest producers of almonds in the world. Production volumes are expected to be in excess of 15,000 tonnes in 2017, rising to 18,000 tonnes in 2020 and 23,000 tonnes in 2024. The company continues to investigate opportunities to acquire mature orchards at the right price. With the 2017 crop having received sufficient chill hours, a good pollination and the benefit of the new horticultural program, the bud potential is strong. The Almond division delivered A hisToricAlly sTrong resulT wiTh eBiT of A$36.1m 10 Select Harvests Annual Report 2016 The Food Division delivered a great result in FY16 with EBIT of A$10.3 million, up 52% on the FY15 result of A$6.8 million and ahead of target. This was driven by increased sales of branded products, strong sales to industrial food manufacturers, margin management and passing on commodity price increases. Industrial sales are up 17%, partly through aligning with key regional industrial customers. Strong performance in commodity trading was partially offset by reduced margins in the Private Label business. Consumer Brand sales were up 10%, with Lucky again performing strongly and achieving July 2016 MAT 42.3% (July 2015 MAT 40.1%). New products now make up 13% of sales and new product development is a focus for the Company. The recent launch of “Lucky Entertainers” and “Lucky Topperz”, along with the relaunch of NuVit brand as NuVitality and the re-set of the Sunsol range has driven this outcome. The Food Business has further defined its export strategy and is keenly focussed on establishing, developing and growing distribution partners for its brands in China. The Food Business is investing in future export led growth in Consumer Brands and Industrial & Trading. The investment being made in Project H2E will ensure a sustainable, reliable and economic power supply to the business, while Project Parboil will deliver significant quality assurance improvements, productivity enhancements and cost savings through a world class, value-added, fully integrated almond processing capability that will enhance our ability to supply high quality almond products to our customers. Select Harvests Food Division is well placed to supply the growing demands of global Food Manufacturers and Consumers who see the benefits of consuming plant based proteins like almonds. Food Division unDErlyinG EBiT ($M) Fy15 6.8 Fy16 10.3 52% indusTriAl sAles up 17% consumer BrAnd sAles up 10% 11 www.selectharvests.com.au People & Diversity Select Harvests recognises the advantages of having a diverse workforce including (but not limited to) gender, age, ethnicity, religious and cultural beliefs and sexual orientation. Select Harvests employs a very diverse workforce of approximately 297 permanent employees and a seasonal workforce of 109, employed in regional and urban Australia. The company has particularly strong experience in the employment of people from ethnically diverse backgrounds with 43% of the Select Harvests workforce stating they come from culturally diverse backgrounds. Females comprise 29% of senior management roles. This year a female with diverse FMCG experience was appointed to the Board and a female with diverse experience and cultural ethnicity was appointed to the Executive. The Company is committed to its target of 30% female representation on the Board and Senior Management team. The Company reinforced its commitment to building the diversity of its workforce through the activities of the Diversity Committee, comprising employees across all functions of the business. A copy of the Company’s Diversity Policy is available on the website (see Governance section). It lists our 2015/16 Diversity Objectives and demonstrates all objectives were met in 2015/16 with our gender participation in progress. Females comprise 29% oF senior management roles SuZanne BrIdgewood WAREHOUSE MANAGER CARINA WEST PROCESSING FACILITY Zeke Bowden-Hall APPRENTICE FOLLOWING HIS PARTICIPATION IN THE CLONTARF FOUNDATION PROGRAM. Communities Select Harvests operates in areas with many diverse cultural and ethnic backgrounds. We are proud to partner with a number of these community organisations to support the creation of a sustainable future workforce. • Foodbank Victoria • Cancer Council – Australia’s Biggest Morning Tea • Upgrade/Purchase infrastructure – schools, clubs, community centres in Leeton, Loxton and Robinvale We have contributed over A$100,000 to community projects that includes groups, clubs, charities and schools. • Student Tours of the farms, office and processing facilities • Partnership with the Clontarf • Strategic Partnership with Robinvale College – through the donation of a school bus and trailer to improve school attendance and provide safe transportation • Mallee Almond Festival sponsor Foundation (a charitable, not-for-profit organisation which exists to improve the education, discipline, life skills, self-esteem and employment prospects of young Aboriginal men and by doing so equips them to participate meaningfully in society) 12 Select Harvests Annual Report 2016 OH&S Our first and foremost objective is the safety of our people and through the Zero Harm Safety Strategy we strive to improve our safety performance. Our focus is to prevent injuries before they occur. The Zero Harm Safety Strategy targets 25% reductions in LTIFR (Lost Time Injury Frequency Rate) and MTIFR (Medically Treated Injury Frequency Rate) and a 75% increase in HIFR (Hazard Identification Frequency Rate). We are pleased to report that in FY16 we exceeded LTIFR by 29% and our HIFR by 436%. Unfortunately, our MTIFR increased significantly, due to minor injuries. The OH&S Committees meet on a monthly basis with the aim of improving the safety performance. We acknowledge that we can continue to improve our safety performance and that all incidents are preventable. Our 2016/17 Safety Strategy has been extended to include wellness. Bee PollInaTIng an alMond Flower Sustainability & Environment Sustainability at Select Harvests is about providing long term environmental benefits which generate value for shareholders, customers, consumers and the communities in which we operate. Select Harvests is a significant user of water. We recognise it as a scarce and finite resource that is an important input to our business. We conserve, recycle and save water wherever possible. This includes drainage to recycle orchard water, the use of low friction irrigation products and technology to avoid overuse. In recent years we have focussed on projects that improve the efficiency of water distribution to our orchards – replacing old and obsolete dripper tape, blocking irrigation to non-productive areas of our orchard and installing modern irrigation management infrastructure. Select Harvests is a significant user of energy, both on our farms and in our processing facilities. We have taken a variety of actions to reduce energy utilisation and its cost, including installing energy-saving low friction pumps. In 2016, we installed our first off-the-grid farm hub at Allinga Farm (see photo of the solar panel array). The biggest energy saving initiative is Project H2E, the biomass electricity co-generation plant which will become operational in FY17. Consuming almond by-product (hull, shell and orchard waste), Project H2E will generate enough electricity to power the Carina West Processing Facility as well as nearby pumps for the Carina Orchard. Project H2E will result in a carbon footprint reduction of 27% – equivalent to taking 8,210 cars off the road. Select Harvests is a significant user of bees for pollinating its orchards. We are committed to achieving effective and efficient pollination and bee management and are active in the bee community through conference attendance and sharing industry insights. As part of our bee stewardship, we plant alternative forage crops to almonds, such as canola, in order to assist bee health and performance. In future, we will plant perennial native species to further aid. We also provide water at hive sites to assist bee hydration. Solar PanelS aT allInga orcHard 13 www.selectharvests.com.au Executive Team PAul CHAMBErS / Chief Financial Officer and Company Secretary Joined Select Harvests as Chief Financial Officer and Company Secretary in September 2007. He is a Chartered Accountant and has over 25 years experience in senior financial management roles in Australian and European organisations, including corporate positions with the Fosters Group, and Henkel Australia and New Zealand. He is a member of the Australian Institute of Company Directors. BruCE vAn TWEST / General Manager Operations Bruce joined Select Harvests in 2012. With a deep working knowledge of complex ‘end to end’ supply chains, Bruce has been a highly successful contributor within the executive management teams of large-scale corporates across food production, apparel, industry consumables and suppliers to automotive industries. Prior to joining Select Harvests he was Operations Director at Kraft Foods, CEO of Bizwear & Alert Safety and Director Supply, ANZ at SCA Hygiene Australasia. PETEr rOSS / General Manager Horticulture Peter joined Select Harvests in 1999. He has held the positions of Plant Manager, Project Manager and General Manager for the processing area of the Almond Division before being appointed to the role of General Manager for Horticulture in November 2012. Prior to joining Select Harvests Peter ran his own maintenance and fabrication business servicing agriculture, mining and heavy industry. lAurEnCE vAn DriEl / General Manager Trading and Industrial Laurence joined Select Harvests in 2000. Laurence has over 30 years’ experience in trading edible nuts and dried fruits. He has a comprehensive knowledge of international trade and deep insights into the trading cultures of the various countries in which these commodities are sold. He has held senior purchasing and sales management positions with internationally recognised companies. MArK EvA / General Manager Sales & Marketing – Consumer Products Mark joined Select Harvests in 2012. Mark has strong FMCG experience across branded, private label and commodity products with a track record of driving profitable sales growth. He joined Select Harvests from SCA Hygiene where he was the Director of Sales and Marketing, Consumer. He was previously General Manager – Marketing, Sales and Innovation at Bulla Dairy Foods. KATHiE TOMEO / General Manager, Human Resources Kathie Tomeo joined Select Harvests as General Manager, Human Resources in May 2016. Kathie is an HR Director with international experience gained in Agricultural, Banking, Financial Services, Technology and Retail industries. Kathie brings over 10 years’ experience in senior HR generalist roles with expertise in change and project management at local, country and regional levels. Kathie holds a Master degree in Human Resource Management and Bachelor of Commerce. 14 Select Harvests Annual Report 2016 Board of Directors MiCHAEl iWAniW / Chairman Appointed to the board on 27 June 2011 and appointed Chairman 3 November 2011. He began his career as a chemist with the Australian Barley Board (ABB), became managing director in 1989 and retired 20 years later. During these years he accumulated extensive experience in all facets of the company’s operations, including leading the transition from a statutory authority and growing the business from a small base to an ASX 100 listed company. Helped orchestrate the merger of ABB Grain, AusBulk Ltd and United Grower Holdings Limited to form one of Australia’s largest agri-businesses. He has a Bachelor of Science, a graduate diploma in business administration and is a member of the Australian Institute of Company Directors. He is Chairman of Australian Grain Technologies and a former director of Australian Renewable Fuels Ltd. He is a member of the Remuneration and Nomination Committee. PAul THOMPSOn / Managing Director Appointed the Managing Director and Chief Executive Officer (CEO) of Select Harvests Limited on 9 July 2012. Has over 30 years of management experience. Formerly President of SCA Australasia, part of the SCA Group, one of the world’s largest personal care and tissue products manufacturers. He is a member of the Australian Institute of Company Directors and has formerly held positions as a Director of the Food and Grocery Council and councillor in the Australian Industry Group. rOSS HErrOn / Non-Executive Director Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as a Senior Partner of PricewaterhouseCoopers in December 2002. He was a member of the Coopers and Lybrand (now PricewaterhouseCoopers) Board of Partners where he was National Deputy Chairman and was the Melbourne office Managing Partner for six years. He also served on several international committees within Coopers and Lybrand. He is Chairman of GUD Holdings Ltd, Deputy Chairman of Insurance Manufacturers Australia Limited and a non-executive director of Kinetic Superannuation Ltd as well as being the immediate past chairman of RACV Pty Ltd. He is Chairman of the Audit and Risk Committee. MiCHAEl CArrOll / Non-Executive Director Joined the board on 31 March, 2009. He brings to the Board diverse experience from executive and non-executive roles in food and agribusiness. Current board roles include Sunny Queen Australia, Gardiner Dairy Foundation, Tassal, Rural Funds Management, Paraway Pastoral Company and the Australian Rural Leadership Foundation. Previous board roles include the Australian Farm Institute, Rural Finance Corporation, Queensland Sugar Limited, Meat and Livestock Australia and Warrnambool Cheese & Butter. During his executive career Mike established and led the NAB’s agribusiness division with earlier senior executive roles including marketing, investment banking and corporate advisory services. He is Chairman of the Remuneration and Nomination Committee. FrED GriMWADE / Non-Executive Director Appointed to the board on 27 July, 2010. Fred is a Principal and Director of Fawkner Capital, a specialist corporate advisory firm, and works with a wide range of companies in a board or advisory capacity. He is Chairman of CPT Global Ltd and Troy Resources Ltd. He is also a director of Australian United Investment Company Ltd, XRF Scientific Ltd and NewSat Limited. He has held general management positions with Colonial Agricultural Company, Colonial Mutual Group, Colonial First State Investments Group, Western Mining Corporation and Goldman, Sachs and Co. He is a current member of the Audit and Risk Committee and was a member of the Remuneration and Nomination Committee. PAul riOrDAn / Non-Executive Director Appointed to the board on 2 October 2012. He has worked in various rural enterprises during his career, in Australia and the United States, including small seed production, large-scale sheep and grain organisations, and beef cattle. He is co-founder and Executive Director (Operations) of Boundary Bend Olives, Australia’s largest vertically integrated olive company. Paul has a Diploma of Farm Management from Marcus Oldham Agriculture College, Geelong and has extensive operational and business experience in vertically integrated agri-businesses. He is a member of the Audit and Risk Committee. niCKi AnDErSOn / Non-Executive Director Appointed to the board on 21 January 2016. She is an accomplished leader with deep experience in marketing and innovation within branded food and consumer goods businesses, which include SPC Ardmona and McCain. Nicki had held senior positions in marketing within world class FMCG companies and was most recently Managing Director within the Blueprint Group concentrating on sales, marketing and merchandising within retail sales channel. She is currently a director on the Board of Australia Made Campaign Limited. She is a member of the Remuneration and Nomination Committee. 15 www.selectharvests.com.au Historical Summary SelecT HarVeSTS conSolIdaTed reSulTS For YearS ended 30 june 2007 2008 2009 2010 2011 2012 2013 2014 2015 * 2016 Total sales 229,498 224,655 248,581 238,376 248,316 246,766 190,918 188,088 223,474 285,917 Earnings before interest and tax 40,549 27,120 26,827 26,032 22,612 (2,495) 5,241 31,288 85,845 49,785 Operating profit/(loss) before tax 40,014 25,384 23,047 23,603 18,473 (8,743) 198 26,833 80,514 44,290 28,098 18,130 16,712 17,253 17,674 (4,469) 2,872 21,643 56,766 33,796 Net profit after tax Earnings per share (Basic) Return on shareholders’ equity Dividend per ordinary share Dividend franking Dividend payout ratio Financial ratios (cents) (%) (cents) (%) (%) 71.0 29.4 57 100 80.0 46.7 19.3 45 100 96.7 Net tangible assets per share ($) 1.57 1.41 Net interest cover Net debt/equity ratio Current asset ratio Balance sheet data as at 30 june (times) 75.80 15.60 (%) (times) 1.7 1.32 49.7 0.87 42.6 16.6 12 100 28.2 1.56 7.10 51.9 0.79 43.3 15.2 21 100 48.5 1.87 10.70 39.6 1.44 33.7 10.5 13 100 (7.9) (2.8) 8 100 5.0 1.8 12 100 37.5 12.3 20 55 82.9 19.8 50 – 46.7 11.6 46 54 38.6 (101.3) 239.8 53.5 60.3 99.1 2.17 6.70 43.3 1.96 2.19 (0.4) 41.7 1.42 2.14 1.0 49.6 1.61 2.38 6.9 54.0 4.02 3.35 15.9 38.2 3.36 3.22 9.0 23.1 1.90 Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Share capital Reserves Retained profits Total shareholders’ equity other data as at 30 june 70,983 77,014 81,075 83,993 91,228 76,936 123,303 136,639 207,782 155,521 89,170 118,934 133,884 145,612 214,352 202,371 180,542 194,080 280,130 294,251 160,153 195,948 214,959 229,605 305,580 279,307 303,845 330,719 487,912 449,772 53,680 88,162 102,348 58,469 46,454 54,369 76,800 33,988 61,893 81,783 10,969 13,715 11,735 57,515 90,311 64,608 67,540 121,325 138,632 77,088 64,649 101,877 114,083 115,984 136,765 118,977 144,340 155,313 200,525 158,871 95,504 94,071 100,876 113,621 168,815 160,330 159,505 175,406 287,387 290,901 41,953 44,375 46,433 47,470 95,066 95,957 97,007 99,750 170,198 178,553 11,273 11,235 12,949 11,327 11,201 10,472 9,144 12,190 12,818 11,168 42,278 38,461 41,494 54,824 62,548 53,901 53,354 63,466 104,371 101,180 95,504 94,071 100,576 113,621 168,815 160,330 159,505 175,406 287,387 290,901 Fully paid shares (’000) 38,739 39,009 39,519 39,779 56,227 56,813 57,463 57,999 71,436 72,919 Number of shareholders 2,953 3,319 3,296 3,039 3,227 3,359 3,065 3,779 4,328 8,928 Select Harvests’ share price – close ($) 11.60 6.00 2.16 3.46 1.84 1.30 3.27 5.14 11.00 6.74 Market capitalisation 449,372 234,054 85,361 137,635 103,458 73,857 187,904 298,115 785,796 491,474 $’000 (except where indicated) * The 2014 result has been restated due to the early adoption of changes to Accounting Standards, AASB 116 Property, Plant and Equipment, and AASB 141 Agriculture, impacting ‘bearer plants’. 16 Select Harvests Annual Report 2016 Financial Report Contents 18 Directors’ Report 36 Auditor’s Independence Declaration 38 Statement of Comprehensive Income 39 Balance Sheet 40 Statement of Changes in Equity 41 Statement of Cash Flows 42 Notes to the Financial Statements 72 Directors’ Declaration 73 Independent Auditor’s Report to the Members of Select Harvests Limited 75 ASX Additional Information 17 www.selectharvests.com.au Directors’ Report The directors present their report together with the financial report of Select Harvests Limited and controlled entities (referred to hereafter as the “Company”) for the year ended 30 June 2016. Directors The qualifications, experience and special responsibilities of each person who has been a director of Select Harvests Limited at any time during or since the end of the financial year is provided below, together with details of the company secretary. Directors were in office for this entire period unless otherwise stated. 18 Names, qualificatioNs, experieNce aND special respoNsibilities m iwaniw, b sc, Graduate Diploma in business management, maicD (chairman) Appointed to the board on 27 June 2011 and appointed Chairman 3 November 2011. He began his career as a chemist with the Australian Barley Board (ABB), became managing director in 1989 and retired 20 years later. During these years he accumulated extensive experience in all facets of the company’s operations, including leading the transition from a statutory authority and growing the business from a small base to an ASX 100 listed company. Helped orchestrate the merger of ABB Grain, AusBulk Ltd and United Grower Holdings Limited to form one of Australia’s largest agri-businesses. He has a Bachelor of Science, a graduate diploma in business administration and is a member of the Australian Institute of Company Directors. He is Chairman of Australian Grain Technologies and a former director of Australian Renewable Fuels Ltd. He is a member of the Remuneration and Nomination Committee. Interest in shares: 199,097 fully paid shares. p thompson (managing Director and chief executive officer) Appointed the Managing Director and Chief Executive Officer (CEO) of Select Harvests Limited on 9 July 2012. Has over 30 years of management experience. Formerly President of SCA Australasia, part of the SCA Group, one of the world’s largest personal care and tissue products manufacturers. He is a member of the Australian Institute of Company Directors and has formerly held positions as a Director of the Food and Grocery Council and councillor in the Australian Industry Group. Interest in Shares: 338,379 fully paid shares. m carroll, mba, b agsc and faicD (Non-executive Director) Joined the board on 31 March, 2009. He brings to the Board diverse experience from executive and non-executive roles in food and agribusiness. Current board roles include Sunny Queen Australia, Gardiner Dairy Foundation, Tassal, Rural Funds Management, Paraway Pastoral Company and the Australian Rural Leadership Foundation. Previous board roles include the Australian Farm Institute, Rural Finance Corporation, Queensland Sugar Limited, Meat and Livestock Australia and Warrnambool Cheese & Butter. During his executive career Mike established and led the NAB’s agribusiness division with earlier senior executive roles including marketing, investment banking and corporate advisory services. He is Chairman of the Remuneration and Nomination Committee. Interest in Shares: 10,941 fully paid shares. f s Grimwade, mba, llb (Hons), b com, faicD, sf fin and fcis (Non-executive Director) Appointed to the board on 27 July, 2010. Fred is a Principal and Director of Fawkner Capital, a specialist corporate advisory firm, and works with a wide range of companies in a board or advisory capacity. He is Chairman of CPT Global Ltd and Troy Resources Ltd. He is also a director of Australian United Investment Company Ltd, XRF Scientific Ltd and NewSat Limited. He has held general management positions with Colonial Agricultural Company, Colonial Mutual Group, Colonial First State Investments Group, Western Mining Corporation and Goldman, Sachs and Co. He is a current member of the Audit and Risk Committee and was a member of the Remuneration and Nomination Committee. Interest in shares: 102,804 fully paid shares. Select Harvests Limited ABN 87 000 721 380 corporate iNformatioN Nature of operations and principal activities The principal activities during the year of entities within the Company were: • Processing, packaging, marketing and distribution of edible nuts, dried fruits, seeds, and a range of natural health foods, and • The growing, processing and sale of almonds to the food industry from company owned almond orchards, the provision of management services to external owners of almond orchards, including orchard development, tree supply, farm management, land rental and irrigation infrastructure, and the marketing and selling of almonds on behalf of external investors. employees The Company employed 630 full time equivalent employees as at 30 June 2016 (2015: 564 full time equivalent employees). Full time equivalent employees include: executive, permanent, contractor and seasonal (casual and labour agency hire) employment types. r m Herron, fca and faicD (Non-executive Director) N anderson, emba, b bus, GaicD (Non-executive Director) Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as a Senior Partner of PricewaterhouseCoopers in December 2002. He was a member of the Coopers and Lybrand (now PricewaterhouseCoopers) Board of Partners where he was National Deputy Chairman and was the Melbourne office Managing Partner for six years. He also served on several international committees within Coopers and Lybrand. He is Chairman of GUD Holdings Ltd, Deputy Chairman of Insurance Manufacturers Australia Limited and a non-executive director of Kinetic Superannuation Ltd as well as being the immediate past chairman of RACV Pty Ltd. He is Chairman of the Audit and Risk Committee. Interest in Shares: 53,920 fully paid shares. p riordan (Non-executive Director) Appointed to the board on 2 October 2012. He has worked in various rural enterprises during his career, in Australia and the United States, including small seed production, large-scale sheep and grain organisations, and beef cattle. He is co-founder and Executive Director (Operations) of Boundary Bend Olives, Australia’s largest vertically integrated olive company. Paul has a Diploma of Farm Management from Marcus Oldham Agriculture College, Geelong and has extensive operational and business experience in vertically integrated agri- businesses. He is a member of the Audit and Risk Committee. Interest in shares: 10,000 fully paid shares. Appointed to the board on 21 January 2016. She is an accomplished leader with deep experience in marketing and innovation within branded food and consumer goods businesses, which include SPC Ardmona and McCain. Nicki had held senior positions in marketing within world class FMCG companies and was most recently Managing Director within the Blueprint Group concentrating on sales, marketing and merchandising within retail sales channel. She is currently a director on the Board of Australia Made Campaign Limited. She is a member of the Remuneration and Nomination Committee. Interest in shares: 3,500 fully paid shares. p chambers, bsc Hons, ca, GaicD (chief financial officer and company secretary) Joined Select Harvests as Chief Financial Officer and Company Secretary in September 2007. He is a Chartered Accountant and has over 25 years experience in senior financial management roles in Australian and European organisations, including corporate positions with the Fosters Group, and Henkel Australia and New Zealand. He is a member of the Australian Institute of Company Directors. Interest in shares: 113,171 fully paid shares. V Huxley, bcom, ca, (assistant company secretary) Joined Select Harvests in 2011 and appointed Assistant Company Secretary in November 2014. She is a Chartered Accountant with over 15 years experience in senior financial management and corporate advisory roles across agriculture, manufacturing, retail and the healthcare industry. Interest in shares: Nil. 19 www.selectharvests.com.au Directors’ Report Continued operatiNG aND fiNaNcial reView Highlights and Key developments during the year In the financial year ended 30 June 2016 Select Harvests has delivered a strong result with record cash flows and low debt. The focus this year by the Board, Executive Management and employees, has been on strengthening the balance sheet, continuing to grow the almond orchard foot print, improving the Food Division profitability, whilst progressing significant capital projects. The Company completed the sale and leaseback of three orchards to First State Super (FSS) for proceeds of $64.0 million during the year. 2,084 acres (844 Ha) of new almond orchards have been planted out on FSS properties in Victoria and New South Wales. Over $22 million has been invested in the construction of the new cogeneration plant and value added processing facility at Carina West, both of which will be commissioned in the first half of FY17. financial performance review Profitability Reported Net Profit After Tax (NPAT) is $33.8 million, which compares to a reported Net Profit After Tax of $56.8 million in 2015. Earnings Before Interest and Taxes (EBIT) is $49.8 million, which compares to EBIT of $85.8 million in FY15. Adjusting for the impact of gains on sale of assets of $8.5 million incurred in FY16, underlying EBIT is $41.3 million, and underlying NPAT is $27.9 million. To better understand the underlying performance of the business in comparison to last year, the impact of adjusting items is set out in the table below: Results Summary and Reconciliation $000’S eBIt ($000’s) Almond Division Food Division Corporate Costs operating eBIt Interest Expense net Profit Before tax Tax Expense net Profit After tax Earnings Per Share RePoRted ReSult (AIFRS) undeRlyIng ReSult Fy16 44,575 10,342 (5,132) 49,785 (5,495) 44,290 Fy15 83,713 6,817 (4,685) 85,845 (5,331) 80,514 (10,494) (23,748) 33,796 46.7 56,766 82.9 Fy16 Fy15 36,093 (1) 87,503 (2) 10,342 (5,132) 41,303 (5,495) 35,808 (7,949) 27,857 38.5 6,817 (4,685) 89,635 (5,331) 84,304 (24,855) 59,419 86.8 (1) The adjustment to the reported Almond division EBIT in FY16 relates to gains on asset sales of $8.5 million, to exclude these gains from the underlying EBIT in the period. (2) The adjustment to the reported Almond division EBIT in FY15 relates to acquisition transaction costs of $3.8 million, to exclude these costs from the underlying EBIT in the period. Any further commentary set out below reviews divisional performance on a like for like basis, taking into account the adjustments referred to above. 20 Select Harvests Limited ABN 87 000 721 380 Almond division Profitability Revenues of $161.2 million, compared to $115.4 million in 2015. The increase in revenues is driven by the realised sales of the 2015 and 2016 crop in the financial year, with an increase in volumes and at almond prices higher than average prices achieved in the previous financial year. Underlying EBIT is $36.1 million which compares to underlying EBIT of $87.5 million last year. This result is driven by the valuation of the 2016 crop, based on a yield of 14,200 MT and an almond price projection of $8.08/kg compared to higher volume and record prices of the 2015 crop. Food division Profitability Revenues of $161.8 million compare to $138.8 million in 2015, an increase of 16.6%. EBIT of $10.3 million, compares to $6.8 million in 2015. The increase in revenues and EBIT is driven by the combined impact of increased sales of branded products, strong sales to industrial food manufacturers, increases in commodity trading, offset by reduced sales in private label. A continuation in the improved sales mix during the year has again improved the overall quality of earnings, in spite of the challenge of increased raw material cost, and a tough pricing environment in this segment. Interest expense Interest expense has increased to $5.5 million in FY16 compared to $5.3 million in FY15, with finance lease interest replacing some bank interest as a result of the sale and lease back transaction. Balance Sheet Net assets at 30 June 2016 are $290.9 million, compared to $287.4 million last year. The balance sheet includes the impact of $88.0 million of financing cash outflows resulting from the pay down of bank debt following the completion of the sale and lease back of almond orchards during the financial year. Net working capital has decreased by 24%. As summarised below, the main decrease relates to the value of inventory, which comprises the fair value of the unsold 2016 almond crop, which is lower than the corresponding period last year, due to the combined impact of the lower almond price valuation and lower yield. $000’s Trade and other receivables Inventories Trade and other payables net working capital 2016 48,477 104,316 (23,180) 129,613 2015 60,082 142,354 (31,273) 171,163 Cash flow and net Bank debt Net bank debt at 30 June 2016 was $67.3 million (including finance lease commitments of $41.8 million), with a gearing ratio (net bank debt/net assets) of 23.1%. Operating cash inflow in the financial year is $92.9 million, compared to $30.4 million last year. The improvement in operating cash inflow is mainly driven by the cash flows derived from the proceeds on selling through the 2015 crop, and sales to date of the 2016 crop. Capital expenditures of $47.5 million are primarily a result of the investment in the cogeneration plant, new almond value added production facility, new orchard developments, and upgrades to existing irrigation systems. Proceeds from the sale and leaseback of almond orchards have fully funded these investments as well as providing a land bank for future new almond developments. dividends A fully franked final dividend of 25 cents per share has been declared, resulting in a total dividend of 46 cents per share. This compares to a total dividend of 50 cents per share in FY15. corporate social respoNsibility occupational Health and Safety (oH&S) Our first and foremost objective is the safety of our people. Through our Zero Harm safety strategy, we strive to improve our safety performance. This strategy targets to reduce our Lost Time Injury Frequency Rates (LTIFR) and Medically Treated Injury Frequency Rate (MTIFR) by 25% and an increase of Hazard Identification Frequency Rate (HIFR) by 75%. Our focus is to prevent injuries before they occur. We are pleased to report that we have exceeded our LTIFR by 29% and our HIFR by 436%. Unfortunately, our MTIFR has significantly increased from last year, resulting from minor injuries. Our OH&S Committees meet on a monthly basis with the objective to continuously improve our safety performance. These meetings are focused on driving continuous safety improvement and sharing information across the business. The scope of the meetings includes ongoing hazard identification and closure, toolbox talks, safety audits and results, injury elimination, site inspections and reviews and a review of training and procedures. All salaried staff have safety included as part of their KPIs. All procedures include a safety analysis and all new equipment is reviewed from a safety perspective prior to being implemented. We acknowledge that we can continue to improve our safety performance and that all incidents are preventable. Despite the improvements made, opportunities exist to continue to complete more detailed safety investigations to enable a greater number of hazards to be identified in advance. Following this year’s results, our OH&S strategy will be reviewed and updated to include wellness. The Executive and the Board review the safety performance on a monthly basis. Sustainability Sustainability at Select Harvests is about providing long term environmental benefits which generate value for our shareholders, customers, consumers and the communities in which we operate. We are pleased to share the various sustainability and environmental achievements across our business which 21 www.selectharvests.com.au Directors’ Report Continued corporate social respoNsibility Continued we will continue in pursuit of being a leader within the almond industry. The Company is committed to preserving native vegetation and wildlife through our wildlife management plan. All orchards have strict policies relating to the preservation of native vegetation and wildlife. All developments ensure that regulations around native vegetation and wildlife are adhered to. We are a signatory of the National Packaging Industry Covenant, which aims to deliver more sustainable packaging, increased recycling rates and reduced packaging litter. In addition, all office and farm waste is recycled where appropriate. Select Harvests holds licences issued by the Environmental Protection Authority which specify limits for discharges to the environment. These licences regulate the management of discharge to the air and storm water runoff associated with the operations. In 2015/16, no environmental breaches have been notified by the Environmental Protection Authority. Water utilisation We recognise that water is a scarce and finite resource and a necessity for the growth of our orchards and for our manufacturing facilities. We conserve, recycle and save water wherever possible through a variety of approaches taken across our business. This includes the installation of drainage to recycle orchard water, the use of low friction irrigation products and technology to avoid overuse. In the past three years several capital projects have focused on the increased efficiency of water distribution to our orchards. This has included the replacement of old and obsolete dripper tape, the blocking off of irrigation to non-productive areas of our orchards and the installation of modern water management infrastructure. Based on weather conditions, we manage irrigation on a daily basis through efficient usage of our pumps and labour utilisation to coincide with the irrigation demand required. energy Savings We have taken a variety of actions to reduce energy utilisation and subsequent costs. These include the installation of energy saving electric pumps and low friction irrigation products. In our facility and orchard 22 development, the replacement of existing equipment with low energy technology is being used. This is evident in the pumping stations at the farms and the redevelopment work at the Carina West facility. In 2016 we installed our first off-the-grid farm hub. This farm hub is powered by solar electricity and we are looking to replicate this approach across our remaining farms. In addition, we perform load shedding during high demand power events for days of extreme heat when the power consumption from the grid is high. Pollination Management Our commitments to efficient pollination and bee management has included attendance at various Eastern Australian bee conferences to share our insights with industry, in addition to efforts taken to maximise the bee habitat during pollination. As part of our bee stewardship, we supply alternative forage sources for bee arrivals to aid bee health. Crops such as canola have been planted in 2016 and in future we will seek perennial native floral species as alternative forage sources. We have also supplied the provision of water at hive sites and ensure that no spraying of weedicides occurs when the hives are present. infrastructure projects Project H2e (Hull to energy) – Biomass Cogeneration Power Plant Project H2E is a world first installation using almond hull & shell and orchard waste as a fuel source for generating electricity and steam directly to a manufacturing site. Project H2E will generate enough energy to power the Carina West Processing Facility and the nearby irrigation pumps at our Carina Orchard. This project is due to be completed by the end of 2016. This project has created 8 new career opportunities for permanent staff. Half of the electricity generated by the power plant will be consumed within Select Harvests’ site infrastructure and the remaining power distributed into the local electricity network grid. Our Hull to Energy project will result in a carbon footprint reduction of 27% which is equivalent to removing 8,210 cars off the road and will consume 30,000 tonnes of almond and orchard waste per annum. Project Parboil (Almond Value-Add Production Facility) Project Parboil will be a state-of-the-art, fully integrated almond processing facility, enabling the processing of blanched, roasted and sliced almonds which will add value to the existing packing line at Carina West. The electricity and steam energy will be supplied from Project H2E. Commissioning of Project Parboil is due to be commissioned in the first half of FY17. This project has created 12 new career opportunities for permanent staff. Further information on these projects (including time lapse photos of their construction) can be located on our website www.selectharvests.com.au/our-projects. Quality and Food Safety Improvements Project Parboil will supply almond products from a world class food production site giving Select Harvests a step change in food safety technology. This site will enable Select Harvests’ to continue its progress in improved customer satisfaction. In the last four years, our customer complaints per million packets sold have reduced by 78%. This reflects our level of commitment into food safety, which is also evidenced by the following certifications: AQIS Certificate HACCP Certificate SQF2000 L3 Certificate HALAL Certificate KOSHER Certificate UNILEVER Sustainable Supplier Diploma Select Harvests will see FY2017 as a year of continuing to drive innovative and environmentally sustainable projects to deliver improved food quality, safety and security as a leader in our industry. Communities We work in regions which have diverse cultural and ethnic backgrounds. We are proud to continue partnering with a number of diverse regional communities where we operate to support the creation of a sustainable future workforce. We have contributed over $100,000 to community projects. Through our participation, fundraising and education efforts, we continue to support a Select Harvests Limited ABN 87 000 721 380 number of community groups, clubs, charities and schools. The following examples show some of the commitments made to our local communities: • We have developed a strategic partnership with Robinvale College where we have donated a school bus and trailer to improve the attendance and transportation of students to school safely • We are a sponsor of the Mallee Almond Festival • We have donated the equivalent of 18,000 meals to Foodbank Victoria • Thomastown facility participation in Australia’s Biggest Morning Tea for the Cancer Council • Donations to the Leeton and Loxton areas to purchase and upgrade infrastructure for schools, clubs and community centres • Providing student tours of our offices, processing plant and farms • Partnership with the Clontarf Foundation program* *The Clontarf Foundation is a charitable not-for-profit organisation which exists to improve the education, discipline, life skills, self-esteem and employment prospects of young Aboriginal men and by doing so equips them to participate meaningfully in society. We have recently had Zeke Bowden-Hall commence employment with Select Harvests as an Apprentice, following his participation in the Clontarf program. Zeke participated in Select Harvests’ work experience program when he decided to join the team. Zeke will be enrolled at Sunraysia Institute of TAFE to complete a Certificate III in Engineering Fabrication Trade. risK maNaGemeNt It is a policy of Select Harvests to ensure that a formal risk management process is in place to identify, analyse, assess, manage and monitor risks throughout all parts of the business. The Company maintains and refreshes its detailed risk register annually. The register provides a framework and benchmark against which risks are reported on at different levels in the business, with a bi annual report presented to the Board. During this financial year a number of specific risks have been focussed on, being: • Safety (including employee safety and fire prevention); • Horticultural Risks (including climatic, disease, water management, pollination, and quality); and • Processing and manufacturing Risks (including product quality, utilities supply, major equipment failure); The Company continues to focus on product quality with process improvements and capital investments being made, both on farm and at the processing facilities to mitigate risks associated with inventory management from harvest through to consumer. Managing financial risks, including exposure to currency volatility has once again been a key focus area for management and the Board. outlooK Select Harvests now has a defined growth plan to increase future almond production to over 23,000 tonnes by FY24/25. The horticultural program for the 2017 crop is well underway. Recent rain has resulted in water prices returning to similar levels to last year. Our 2016/17 water management strategy is formulated, and the annual plan to supply water to the almond orchards is fully funded for the new season. The trees have received sufficient chill hours through the dormancy period, and pollination during early August has occurred. Bud growth indicates that on the basis of normal growing conditions through the rest of season, crop potential is good for 2017. The commissioning of the 2 major investments in cogeneration and value– added processing (Parboil) assets remain a key priority for the business, along with the management of our new almond orchard plant outs. The unlocking of productivity improvements from our existing asset base, meaning improved yield, quality, sales mix and cost out, remains an absolute focus for the business, with the potential for significant financial outcomes to be achieved. The Food Business will continue the strategy to enter new markets and channels, including growth in the export markets and the launch of new products and innovations. The expansion of export sales, in particular through developing distribution and marketing models in China, is a strategic priority with increased investment and resources being applied in this area. The fundamentals underpinning Select Harvests’ strategy such as the global almond industry, and trends towards healthy consumption of wholesome foods remain very strong, meaning that the outlook for the company remains positive. siGNificaNt cHaNGes iN tHe state of affairs There have been no significant changes in the state of affairs of the Company. siGNificaNt eVeNts after tHe balaNce Date On 26 August 2016, the directors declared a final fully franked dividend of 25 cents per share payable on 30 September 2016 to shareholders on the register on 5 September 2016. eNViroNmeNtal reGulatioN aND performaNce The Company’s operations are subject to environmental regulations under laws of the Commonwealth or of a State or Territory. The Company holds licences issued by the Environmental Protection Authority which specify limits for discharges to the environment which are the result of the Company’s operations. These licences regulate the management of discharge to the air and stormwater runoff associated with the operations. There have been no significant known breaches of the Company’s licence conditions. The Company takes its environmental responsibilities seriously, has a good record in environmental management to date, and adheres to environmental plans that preserve the habitat of native species. Almond developments have had a positive environmental impact. The change in land use and the increase in food source have seen a rejuvenation of remnant native vegetation and an increase in the wildlife population, in particular bird species. The Company has committed funding to the monitoring of Regent parrot populations around our orchards and the effectiveness of protecting native vegetation corridors in preserving wildlife. NoN ifrs fiNaNcial iNformatioN The non IFRS financial information included within this Directors’ Report has not been audited or reviewed in accordance with Australian Auditing Standards. 23 www.selectharvests.com.au executive remuneration Executive remuneration has three components: 1. Base salary and benefits; 2. Short term performance incentives; and 3. Long term incentives. An overview of these remuneration arrangements is included in the table below. Directors’ Report Continued NoN ifrs fiNaNcial iNformatioN Continued non-executive directors’ remuneration Non-executive directors receive fees (including statutory superannuation) but do not receive any performance related remuneration nor are they issued options or performance rights on securities. This reflects the responsibilities and the Group’s demands of directors. Non-executive directors’ fees are periodically reviewed by the Board to ensure that they are continually appropriate and in line with market expectations. The current aggregate fee limit of $830,000 was approved by shareholders at the 26 November 2015 Annual General Meeting. For the reporting period the total amount paid to non-executive directors was $592,267. The remuneration is a base fee with the Chair of the Board and each of the Committees receiving additional amounts commensurate with their responsibilities. The current directors’ fees are as follows: Base Fees (including superannuation) Chairman Other non-executive directors $202,500 $90,000 Additional Fees (including superannuation) Chair of the Audit and Risk Committee Chair of the Remuneration Committee $12,000 $12,000 Non IFRS financial information includes underlying EBIT, underlying result, underlying NPAT, underlying earnings per share, net interest expense, net bank debt, net debt, net working capital and adjustments to reconcile from reported results to underlying results. remuNeratioN report The directors present the 2016 Remuneration Report which sets out remuneration information for the Company’s non-executive directors, executive director and other key management personnel. For the purposes of this report, key management personnel are members of the Executive Management team who have the authority and responsibility for planning, directing and controlling the activities of the Company. They include all directors of the Board, executive and non-executive. 1. overview of remuneration arrangements Remuneration strategy The objective of the Group’s executive reward framework is to set remuneration levels to attract and retain appropriately qualified and experienced directors and senior executives. The framework aligns executive reward with achievement of specific business plans and performance indicators, which include occupational health and safety, financial and operational targets relevant to performance at the consolidated entity level, divisional level, or functional level, as applicable, for the financial year. Remuneration packages include a mix of fixed remuneration, performance based remuneration and equity based remuneration. Executive directors and other key management personnel may receive short and long term incentives. The Remuneration Committee makes recommendations to the Board on remuneration packages and other terms of employment for executive and non-executive directors. The Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in the marketplace. The Group has structured an executive reward framework that is market competitive, performance driven and compliant with the Group’s reward strategy. 24 Select Harvests Limited ABN 87 000 721 380 table 1: overview of executive Remuneration Arrangements FIxed ReMuneRAtIon Base salary and benefits Consists of cash salary, superannuation and non cash benefits, in the form of salary sacrifice arrangements such as motor vehicles and certain private expense reimbursements. Reviewed annually with reference to the market and Company objectives. There are no guaranteed base pay increases in any executives’ contracts. VARIABle ReMuneRAtIon % oF FIxed ReMuneRAtIon Short term incentives (STI) Purpose Create incentive to exceed the annual business objectives. Term 1 year Instrument Cash Ceo Up to 40% executives Up to 40% Performance conditions* • It is a condition of any STI payment that key OH&S foundations are in place to ensure a safe working environment for all employees. • 30% Financial (including exceeding the annual NPAT targets) • 50% Project goals (achievement of stretching and balanced Key Performance Indicators as established in annual performance plans) • 20% Values and Challenges (Company values displayed and response to challenge) Why these were chosen To incentivise successful and sustainable financial outcomes, annual business objectives that drive the achievement of long term business objectives, continuous safety improvement and behaviour consistent with Company values and objectives. Long term incentives (LTI) Up to 133% Up to 30% Purpose Reward achievement of long term business objectives and sustainable value creation for shareholders Term 3 years, vesting at the end of the period. Instrument Performance rights Performance conditions* • Continuing service • 50% Compound Annual Growth Rate (CAGR) in Underlying earnings per share (EPS) over three years • 50% Total shareholder return (TSR) compared to the TSR of a peer group of ASX listed companies over three years The performance targets and vesting proportions are as follows: PReVIouS ISSueS CuRRent ISSueS**** Measure Rights to Vest Measure Rights to Vest Underlying EPS** Below 5% CAGR 5% CAGR Nil 25% Underlying EPS** Below 5% CAGR 5% CAGR Nil 25% 5.1% – 6.9% CAGR Pro rata vesting 5.1% – 19.9% CAGR Pro rata vesting 7% or higher CAGR 50% 20% or higher CAGR 50% TSR TSR Below the 60th percentile*** Nil Below the 50th percentile*** Nil 60th percentile*** 25% 50th percentile*** 25% 61st – 74th percentile*** Pro rata vesting 51st – 74th percentile*** Pro rata vesting At or above 75th percentile*** 50% At or above 75th percentile*** 50% Why these were chosen Underlying EPS represents a strong measure of overall business performance. TSR provides a shareholder perspective of the Company’s relative performance against comparable companies. * The Remuneration Committee is responsible for assessing whether the targets are met. Financial performance conditions are determined on an underlying results basis. ** Underlying EPS is basic EPS adjusted for the impact of the following (underlying adjustments being consistent with guidance for underlying measures as issued by the Australian Institute of Company Directors and Financial Services Institute of Australasia in March 2009 and ASIC Regulator Guide RG230 ‘Disclosing Non-IFRS financial information’) *** Of the peer group of ASX listed companies. **** Relates to the FY16-FY17 performance period. 25 www.selectharvests.com.au Directors’ Report Continued remuNeratioN report Continued 2. company performance The following section provides an overview of the Company’s performance and its link to remuneration outcomes. table 2: Performance of Select Harvests limited The overall level of executive reward takes into account the performance of the consolidated entity over a number of years, with greater emphasis given to the current year. Net profit after tax ($ million) Basic EPS (cents) Basic EPS Growth Dividend per share (cents) Opening share price 1 July ($) Change in share price ($) Closing share price 30 June ($) TSR % p.a.+ 2016 33,796 46.7 (44%) 46.0 11.00 (4.26) 6.74 (35%) 2015 56,766 82.9 121% 50.0 5.14 5.86 11.0 124% 2014* 21,643 37.5 650% 20.0 3.27 1.87 5.14 63% 2014 29,007 50.2 904% 20.0 3.27 1.87 5.14 63% 2013 2,872 5.0 163% 12.0 1.30 1.97 3.27 161% 2012 (4,469) (7.9) (123%) 8.0 1.84 (0.54) 1.30 (25%) * Restated as a result of early adopting the amendments made to AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. + TSR is calculated as the change in share price for the year plus dividends announced for the year, divided by opening share price. Short term Incentive (StI) Details of the range of potential STI cash payments, actual payments made and the amounts forfeited by the CEO and executive team in relation to the 2016 financial year are shown in Table 3 below. The actual outcomes are based on performance against the conditions outlined in Table 1. table 3: StI Executive director 2016 2015 StI Range (of tFR#) StI Payment ($) % Achieved % Forfeited StI Payment ($) % Achieved % Forfeited P Thompson 0%-40% 133,371 57% 43% 169,950 75% 25% Other key management personnel 0%-40% 0%-40% 0%-40% 0%-40% 0%-40% 0%-30% 0%-20% 78,439 74,986 70,817 90,792 80,297 – 56% 60% 57% 71% 59% – 44% 40% 43% 29% 41% – 101,198 94,554 91,155 85,641 99,498 – (3,893) (17%) 117% 17,400 75% 75% 75% 69% 75% – 75% 25% 25% 25% 31% 25% – 25% P Chambers M Eva P Ross L Van Driel B Van Twest K Tomeo* C Barbuto** # Total Fixed Remuneration * Commenced 09 May 2016 ** Resigned 26 January 2016. 26 Select Harvests Limited ABN 87 000 721 380 The STI is usually paid in September following determination of the STI entitlement, so the above STI payment amounts represent an accrual in relation to the current financial performance year, which will be paid in the following financial year, plus any over or under accrual of the prior year following STI entitlement. The STI program is also available to a select group of other key senior managers within the business. long term Incentive (ltI) Vesting of performance rights is based on performance against the hurdles over the three years prior to vesting. The following illustrates the Company’s performance against the metrics in the LTI plan. table 4: ltI Performance Conditions and Current outcomes ePS growth Basic EPS (cents) Underlying EPS* (cents) 3 Year EPS CAGR 3 Year EPS CAGR target 5% – 7% Percentage vested * Underlying EPS is basic EPS adjusted for the impact of the following: 1. In FY16, gains on asset sales of $8.5 million and $2.8m in R&D tax offsets. 2. In FY15, acquisition transaction costs of $3.8 million. 3. The tax impact of items 1 to 2. Relative tSR Performance TSR % p.a. 3 Year Median TSR % 3 Year Median TSR Ranking 3 Year Median TSR Ranking target 60th – 75th percentile Peer group 3 Year Median TSR SHV Ranking against peer group* Percentage vested 2016 46.7 38.5 0% 2015 82.9 86.8 73% 2014 50.2 50.2 44% 0% 100% 100% 2016 (35%) 108% 2015 124% 749% 2014 63% 164% 73rd percentile 100th percentile 71st percentile 64% 61% 30% 5th out of 16 1st out of 15 5th out of 15 94% 100% 88% * TSR ranking relative to ASX Consumer Staples also included in the All Ordinaries index, excluding alcohol and tobacco products companies. 3. Details of remuneration Details of the remuneration of the directors and other key management personnel of Select Harvests Limited and the consolidated entity are set out in the following tables. It should be noted that performance rights granted, referred to in the remuneration details set out in this report, comprise a proportion of rights which have not yet vested and are reflective of rights that may or may not vest in future years. 27 www.selectharvests.com.au Directors’ Report Continued remuNeratioN report Continued table 5: 2016 and 2015 Remuneration AnnuAl ReMuneRAtIon long teRM ReMuneRAtIon Short term Incentives $ non Cash Benefits $ Base Fee $ Super- annuation Contri- butions $ long Service leave Accrued $ Perform- ance Rights granted $ termina- tion Benefits $ 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 183,650 160,000 89,849 84,018 78,725 73,059 89,849 84,018 78,725 73,059 36,018 – – – – – – – – – – – – – – – – – – – – – – – – – – – 8,531 7,982 7,475 6,941 8,531 7,982 7,475 6,941 3,439 – 510,612 133,371 53,575 19,221 504,512 169,950 43,289 18,699 – – – – – – – – – – – – – – – – – – – – – – – – – – 153,164 446,857 312,398 78,439 15,739 19,264 7,942 113,649 303,158 101,198 15,468 18,699 7,443 36,051 266,698 74,986 28,567 19,264 242,928 94,554 47,853 18,699 – – 34,739 92,690 289,672 70,817 3,986 19,264 34,654 113,822 274,267 91,155 10,884 18,699 – 33,625 292,595 90,792 284,073 85,641 – – 27,797 34,654 8,230 117,769 7,644 74,258 307,088 80,297 15,739 19,264 298,095 99,498 14,866 18,699 34,633 – – – 95,511 (3,893) 117,082 17,400 – – – – 3,290 – 10,357 11,123 – – – – – – 35,269 100,548 – – – – Non Executive Directors M Iwaniw M Carroll F Grimwade R M Herron P Riordan N Anderson* Executive Director P Thompson Other key management personnel P Chambers M Eva P Ross L Van Driel B Van Twest K Tomeo* C Barbuto* + Appointed 21 January 2016 * Commenced 09 May 2016 ** Resigned 26 January 2016. 28 total $ 183,650 160,000 98,380 92,000 86,200 80,000 98,380 92,000 86,200 80,000 39,457 – 869,943 – – – – – – – – – – – – – – 1,183,307 – – – – – – – – – – – – – – 547,431 482,017 424,254 496,724 532,215 428,630 537,183 486,270 457,657 531,706 37,923 – 101,975 145,605 Select Harvests Limited ABN 87 000 721 380 notes The elements of remuneration have been determined on the basis of the cost to the consolidated entity. Performance rights granted have been independently valued using the Black Scholes simulation option pricing model, which takes account of factors such as the exercise price of the rights, the current level and volatility of the underlying share price and the time to maturity of the rights. The amount shown here is an accounting expense and reflects the value as determined using this model. The value is expensed over the vesting period of the rights. Fixed and Variable Remuneration Table 6 details the proportion of fixed and variable remuneration earned by directors and key management personnel during the 2016 and 2015 financial years. table 6: Fixed and Variable Remuneration FIxed ReMuneRAtIon At RISk – StI At RISk – ltI # 2016 % 2015 % 2016 % 2015 % 2016 % 2015 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 – – – – – – – – – – – – – – – – – – – – – – – – – 67.1 47.9 15.3 14.4 17.6 37.8 64.9 74.1 65.3 61.2 74.7 100.0 103.8 71.5 62.3 70.9 67.1 61.3 – 88.0 14.3 17.7 13.3 16.9 17.5 – (3.8) 21.0 19.0 21.3 17.6 19.3 – 12.0 20.8 8.2 21.4 21.9 7.7 – – 7.5 18.7 7.8 15.3 19.5 – – Non Executive Directors M Iwaniw M Carroll F Grimwade R M Herron P Riordan N Anderson+ Executive Director P Thompson Other key management personnel P Chambers M Eva P Ross L Van Driel B Van Twest K Tomeo* C Barbuto** + Appointed 21 January 2016 * Commenced 09 May 2016 ** Resigned 26 January 2016 # based on the value of performance rights as at grant date as valued using the option pricing model. 29 www.selectharvests.com.au Directors’ Report Continued remuNeratioN report Continued Performance Rights Table 7 details awards of performance rights granted to executives under the LTI Plan that are still in progress. table 7: Performance Rights affecting Remuneration Performance Period Participating executives 30 June 2014 P Chambers* 30 June 2015 P Ross* 30 June 2016 30 June 2014 L Van Driel** 30 June 2015 30 June 2016 30 June 2015 P Thompson** 30 June 2016 M Eva** 30 June 2017 B Van Twest** Performance Achieved Vested % 30 June 2014 rights achieved 100% of EPS condition rights and 88% of TSR condition rights 30 June 2015 rights achieved 100% of EPS condition rights and 100% of TSR condition rights 30 June 2016 rights achieved 0% of EPS condition rights and 94% of TSR condition rights 30 June 2014 rights achieved 100% of EPS condition rights and 88% of TSR condition rights 30 June 2015 rights achieved 100% of EPS condition rights and 100% of TSR condition rights 30 June 2016 rights achieved 0% of EPS condition rights and 94% of TSR condition rights 30 June 2015 rights achieved 100% of EPS condition rights and 100% of TSR condition rights 30 June 2016 rights achieved 0% of EPS condition rights and 94% of TSR condition rights 2017period to be determined. 94% of 30 June 2014 rights 100% of 30 June 2015 rights 47% of 30 June 2016 rights 94% of 30 June 2014 rights 100% of 30 June 2015 rights 47% of 30 June 2016 rights 100% of 30 June 2015 rights 47% of 30 June 2016 rights N/A other periods N/A other periods 30 June 2017 P Chambers*** 2017 period to be determined. P Ross*** L Van Driel*** grant year Vesting Conditions 2012 2013 2016 • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service * Granted 29 June 2012 ** Granted 30 April 2013 *** Granted 11 February 2016. The LTI Plan provides for the offer of a parcel of performance rights with a three year performance period to participating employees. The rights vest at the end of the three year period on achievement of the performance hurdles. Performance rights are granted under the plan for no consideration. The plan rules contain a restriction on removing the ‘at risk’ aspect of the instruments granted to executives. Plan participants may not enter into any transaction designed to remove the ‘at risk’ aspect of an instrument before it vests. 30 Select Harvests Limited ABN 87 000 721 380 table 8: grants of Performance Rights The following table details the grants of performance rights available to the Managing Director & CEO and executive team. RIgHtS to deFeRRed SHAReS name P Thompson P Chambers M Eva P Ross L Van Driel B Van Twest year granted 2013 2013 2013 2012 2012 2012 2016 2013 2013 2013 2012 2012 2012 2016 2013 2013 2013 2016 2013 2013 2013 number granted 300,000 300,000 300,000 57,960 57,960 57,960 60,000 52,687 60,000 60,000 54,060 54,060 54,060 60,000 50,600 50,600 50,600 60,600 60,000 60,000 60,000 Value per right* Vested % $2.26 $2.26 $2.26 $1.08 $1.15 $1.20 $4.44 $2.26 $2.26 $2.26 $1.08 $1.15 $1.20 $4.44 $2.25 $2.26 $2.26 $4.44 $2.26 $2.26 $2.26 100% 47% 0% 94% 100% 47% 0% 100% 47% 0% 94% 100% 47% 0% 94% 100% 47% 0% 100% 47% 0% Vested number 300,000 141,450 0 54,511 57,960 27,328 0 52,687 28,290 0 50,843 54,060 25,489 0 47,589 50,600 23,858 0 60,000 28,290 0 Forfeited number Financial years in which rights may vest Max. Value yet to vest* 0 30 June 2015 158,550 30 June 2016 $0 $0 0 30 June 2017 $678,136 3,449 30 June 2014 0 30 June 2015 30,632 30 June 2016 $0 $0 $0 0 0 0 0 30 June 2017 $266,570 30 June 2015 31,710 30 June 2016 $0 $0 0 30 June 2017 $135,627 3,217 30 June 2014 0 30 June 2015 28,571 30 June 2016 $0 $0 $0 0 30 June 2017 $266,570 3,011 30 June 2014 0 30 June 2015 26,742 30 June 2016 $0 $0 $0 30 June 2017 $266,570 30 June 2015 31,710 30 June 2016 $0 $0 0 30 June 2017 $135,627 * This represents the value of the performance rights as at their grant date as valued using the option pricing model. The minimum possible total value of the rights is nil if the applicable vesting conditions are not met. 31 www.selectharvests.com.au Directors’ Report Continued remuNeratioN report Continued table 9: details of Performance Rights granted, Vested and exercised The following table illustrates the movements in performance rights granted to the Managing Director & CEO and executive team during the period. 2016 Executive Director P Thompson Other key management personnel P Chambers M Eva P Ross L Van Driel B Van Twest opening Balance granted during the year nuMBeR Vested during the year Forfeited during the year Closing Balance 600,000 – 141,450 158,550 300,000 57,960 120,000 54,060 50,600 120,000 60,000 – 60,000 60,000 – 27,328 28,290 25,489 23,858 28,290 30,632 31,710 28,571 26,742 31,710 60,000 60,000 60,000 60,000 60,000 All vested rights are exercisable at the end of the year. table 10: number of shares held by directors and other key management personnel The movement during the financial year in the number of ordinary shares of the company held, directly or indirectly, by each director and other key management personnel, including their personally related entities, is as follows: Held at 1 July 2015 Received on exercise of performance rights other – dRP, sales and purchases Held at 30 June 2016 188,087 49,879 3,202 102,804 10,000 – – – – – – – 37,111 300,000 76,511 50,843 – 47,589 – – – 57,960 54,060 52,687 50,600 60,000 – – 11,010 4,041 7,739 – – 3,500 1,268 (21,300) – – (98,189) (37,500) – – 199,097 53,920 10,941 102,804 10,000 3,500 338,379 113,171 104,903 52,687 – 22,500 – – Non-executive directors M Iwaniw R M Herron M Carroll F Grimwade P Riordan N Anderson+ Executive director P Thompson Other key management personnel P Chambers P Ross M Eva L Van Driel B Van Twest K Tomeo* C Barbuto** + Appointed 21 January 2016 * Commenced 09 May 2016 ** Resigned 26 January 2016 32 Select Harvests Limited ABN 87 000 721 380 4. service agreements On appointment to the Board, all non-executive directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation, relevant to the office of director. Remuneration and other terms of employment for the managing director, chief financial officer and other key management personnel are also formalised in service agreements. Each of these agreements provide for performance related cash bonuses. the major provisions of the agreements are set out below. name Title P Thompson Managing Director & CEO P Chambers Chief Financial Officer M Eva P Ross General Manager Sales and Marketing Consumer General Manager Horticulture L Van Driel Group Trading Manager B Van Twest General Manager Operations K Tomeo* General Manager Safety, People and Sustainability C Barbuto** Group Human Resource * Commenced 09 May 2016 ** Resigned 26 January 2016 notice Period Base Salary incl. Super annuation term On-going 6 months On-going 3 months On-going 3 months On-going 3 months On-going 3 months On-going 3 months On-going 3 months On-going 3 months 583,408 347,401 314,529 312,922 320,392 342,091 255,000 200,000 Base salaries quoted are for the year ended 30 June 2016. They are reviewed annually by the Remuneration Committee, however at the time of preparing the remuneration report the review for the 30 June 2017 year is yet to be completed. Other than the notice periods noted above there are no specific termination benefits applicable to the service agreements. 5. use of remuneration consultants In October 2015, the Remuneration Committee engaged Mercer Consulting (Mercer) and Guerdon Associates (Guerdon) to review its existing remuneration policies and to provide recommendations on executive short-term and long-term incentive plan respectively. Total consulting fees paid were $42,940. Mercer and Guerdon have confirmed that any remuneration recommendations have been made free from undue influence by members of the Group’s key management personnel. The following arrangements were made to ensure that the remuneration recommendations were free from undue influence: • Mercer and Guerdon was engaged by, and reported directly to, the chair of the remuneration committee. The agreement for the provision of remuneration consulting services was executed by the chair of the Remuneration Committee under delegated authority on behalf of the Board. • The report containing the remuneration recommendations was provided by Mercer and Guerdon directly to the chair of the Remuneration Committee; and • Mercer and Guerdon was permitted to speak to management throughout the engagement to understand company processes, practices and other business issues and obtain management perspectives. However, Mercer and Guerdon was not permitted to provide any member of management with a copy of their draft or final report that contained the remuneration recommendations. As a consequence, the Board is satisfied that the recommendations were made free from undue influence from any members of the key management personnel. 33 www.selectharvests.com.au Directors’ Report Continued DiViDeNDs Interim unfranked dividend for 2016 • on ordinary shares Final fully franked dividend declared for 2016 • on ordinary shares Cents 21.0 25.0 2016 $’000 15,255 18,230 iNDemNificatioN aND iNsuraNce of Directors aND officers During the year the Company entered into an insurance contract to indemnify directors and officers against liabilities that may arise from their position as directors and officers of the Company and its controlled entities. The terms of the contract do not permit disclosure of the premium paid. Officers indemnified include the company secretary, all directors, and executive officers participating in the management of the Company and its controlled entities. committee membersHip During or since the end of the financial year, the Company had an Audit and Risk Committee and a Remuneration and Nomination Committee comprising members of the Board of Directors. Members acting on the Committees of the Board during or since the end of the financial year were: Audit and Risk Remuneration and nomination R M Herron (Chairman) M Carroll (Chairman) F Grimwade P Riordan directors’ meetings M Iwaniw N Anderson (replacing F Grimwade) F Grimwade (resigned from committee) The number of meetings of directors (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director was as follows: MeetIngS oF CoMMItteeS dIReCtoRS’ MeetIngS AudIt And RISk ReMuneRAtIon And noMInAtIon number eligible to Attend number Attended number eligible to Attend number Attended number eligible to Attend number Attended 13 13 13 13 13 13 6 13 13 11 13 13 12 6 – – 4 – 4 4 – – – 4 – 4 4 – 2 – – 2 1 – – 2 – – 2 1 – – M Iwaniw P Thompson R M Herron M Carroll F Grimwade P Riordan N Anderson+ + Appointed 21 January 2016 34 Select Harvests Limited ABN 87 000 721 380 Director’s iNterests iN coNtracts Directors’ interests in contracts are disclosed in Note 24 to the financial statements. auDitor’s iNDepeNDeNce DeclaratioN A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 36. NoN-auDit serVices Non-audit services are approved by resolution of the Audit and Risk Committee and approval is provided in writing to the board of directors. Non-audit services provided by the auditors of the Company during the year are detailed in Note 23. The directors are satisfied that the provision of the non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by Corporations Act 2001 as non-audit services are reviewed by the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor. rouNDiNG corporate GoVerNaNce The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which the Class Order applies. proceeDiNGs oN beHalf of tHe compaNy There are no material legal proceedings in place on behalf of the Company as at the date of this report. In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Select Harvests Limited support and have adhered to the ASX principles of corporate governance. This year, the Company has adopted Listing Rule 4.10.3 which allows companies to publish their corporate governance statement on their website rather than in their annual report. A copy of the statement along with any related disclosures is available at: http:// www.selectharvests.com.au/governance. This report is made in accordance with a resolution of the directors. M Iwaniw Chairman Melbourne, 26 August 2016 35 www.selectharvests.com.au Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of Select Harvests Limited for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: 1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Select Harvests Limited and the entities it controlled during the period. Andrew Cronin Partner PricewaterhouseCoopers Melbourne 26 August 2016 PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 36 Select Harvests Limited ABN 87 000 721 380 Annual Financial Report coNteNts 38 Statement of Comprehensive Income 39 Balance Sheet 40 Statement of Changes in Equity 41 Statement of Cash Flows 42 Notes to the Financial Statements 72 Directors’ Declaration 73 Independent Auditor’s Report to the Members of Select Harvests Limited 75 ASX Additional Information This financial report covers the Group consisting of Select Harvests Limited and its subsidiaries. The financial report is presented in Australian currency. Select Harvests Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Select Harvests Limited 360 Settlement Road Thomastown Vic 3074 A description of the nature of the Company’s operations and its principal activities is included in the review of operations and activities and in the directors’ report, both of which are not part of this financial report. The financial report was authorised for issue by the directors on 26 August 2016. The Company has the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Company. All financial reports and other information are available on our website: www.selectharvests.com.au. 37 www.selectharvests.com.au Statement of Comprehensive Income For the year ended 30 June 2016 For the year ended 30 June 2016 Revenue Sales of goods and services Other revenue total revenue other income Inventory fair value adjustment Gain on sale of assets total other income expenses Cost of sales Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Finance costs Other expenses PRoFIt BeFoRe InCoMe tAx Income tax expense PRoFIt AttRIButABle to MeMBeRS oF SeleCt HARVeStS lIMIted other comprehensive income/(expense) Items that may be reclassified to profit or loss Changes in fair value of cash flow hedges, net of tax other comprehensive income/(expense) for the year totAl CoMPReHenSIVe InCoMe AttRIButABle to MeMBeRS oF SeleCt HARVeStS lIMIted earnings per share for profit attributable to the ordinary equity holders of the company: Note 6 6 ConSolIdAted 2016 $’000 2015 $’000 285,917 223,474 251 170 286,168 223,644 (43,033) 47,517 8,644 – (34,389) 47,517 7 (186,286) (168,130) 7 8 (4,463) (1,304) (1,314) (6,642) (5,538) (1,942) 44,290 (4,349) (1,181) (1,304) (5,180) (5,387) (5,116) 80,514 (10,494) (23,748) 33,796 56,766 1,053 1,053 (156) (156) 34,849 56,610 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 22 22 46.7 46.0 82.9 81.0 The above statement should be read in conjunction with the accompanying Notes. 38 Select Harvests Limited ABN 87 000 721 380 Balance Sheet As at 30 June 2016 As at 30 June 2016 CuRRent ASSetS Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Assets held for sale totAl CuRRent ASSetS non-CuRRent ASSetS Other assets Property, plant and equipment (includes bearer plants) Intangible assets totAl non-CuRRent ASSetS totAl ASSetS CuRRent lIABIlItIeS Trade and other payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Deferred gain on sale Employee entitlements totAl CuRRent lIABIlItIeS non-CuRRent lIABIlItIeS Interest bearing liabilities Deferred tax liabilities Deferred gain on sale Employee entitlements totAl non-CuRRent lIABIlItIeS totAl lIABIlItIeS net ASSetS eQuIty Contributed equity Reserves Retained profits totAl eQuIty The above balance sheet should be read in conjunction with the accompanying Notes. ConSolIdAted Note 2016 $’000 2015 $’000 10 11 12 13 14 15 16 12 17 16 8(c) 17 1,435 48,477 270 60,082 104,316 142,354 1,293 76 155,521 202,782 – 5,000 155,521 207,782 – 349 238,187 231,442 56,064 294,251 449,772 48,339 280,130 487,912 23,180 30,619 – 25,142 175 2,667 81,783 38,082 34,452 3,197 1,357 77,088 158,871 290,901 31,273 22,418 288 5,473 – 2,441 61,893 93,461 44,064 – 1,107 138,632 200,525 287,387 18 178,553 170,198 11,168 101,180 290,901 12,818 104,371 287,387 39 www.selectharvests.com.au Statement of Changes in Equity For the year ended 30 June 2016 ConSolIdAted Balance at 30 June 2014 Profit for the year Other comprehensive loss total comprehensive income for the year transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs and deferred tax Issue of ordinary shares Dividends paid or provided Employee performance rights Balance restated at 30 June 2015 Profit for the year other comprehensive income total comprehensive profit for the year transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs and deferred tax Transfer to retained earnings Dividends paid or provided Employee performance rights Balance at 30 June 2016 (1) Nature and purpose of reserves (i) Capital reserve Contributed equity $’000 Notes Reserves (1) $’000 Retained earnings $’000 total $’000 99,750 12,190 63,466 175,406 – – – – (156) (156) 56,766 56,766 – (156) 56,766 56,610 18 9 25 18 9 25 5,792 64,656 – – – – – – – 5,792 64,656 (15,861) (15,861) 784 – 784 170,198 12,818 104,371 287,387 – – – – 33,796 1,053 1,053 – 33,796 33,796 1,053 34,849 8,355 – – – – (3,271) – 568 – 3,271 8,355 – (40,258) (40,258) – 568 178,553 11,168 101,180 290,901 The capital reserve was previously used to isolate realised capital profits from disposal of non-current assets. This has now been transferred to retained profits in the current year as this is longer required. (ii) Asset revaluation reserve The asset revaluation reserve was previously used to record increments and decrements in the value of non-current assets. This revaluation reserve is no longer in use given assets are now recorded at cost. This is in line with accounting policies within Note 1. (iii) Options reserve The options reserve is used to recognise the fair value of performance rights granted and expensed but not exercised. (iv) Cash flow hedge reserve The cash flow hedge reserve is used to record gains or losses on the fair value movements in the interest rate swap and foreign currency contracts in a cash flow hedge that are recognised directly in equity. The above statement of changes in equity should be read in conjunction with the accompanying Notes. 40 Select Harvests Limited ABN 87 000 721 380 Statement of Cash Flows For the year ended 30 June 2016 For the year ended 30 June 2016 CASH FloWS FRoM oPeRAtIng ACtIVItIeS Receipts from customers Payments to suppliers and employees Interest received Interest paid Income tax paid net cash inflow from operating activities CASH FloWS FRoM InVeStIng ACtIVItIeS Proceeds from Government grants Proceeds from sale of property, plant and equipment Proceeds from sale and leaseback transaction Payment for water rights Payment for property, plant and equipment Acquisition of almond orchards Tree development costs net cash outflow from investing activities CASH FloWS FRoM FInAnCIng ACtIVItIeS Proceeds from sale and leaseback transaction Proceeds from issues of shares Proceeds from borrowings Repayments of borrowings Repayments of finance leases Dividends on ordinary shares, net of Dividend Reinvestment Plan net cash (outflow)/inflow from financing activities net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year Reconciliation to cash at the end of the year: Cash and cash equivalents Bank overdrafts The above cash flow statement should be read in conjunction with the accompanying Notes. ConSolIdAted Note 2016 $’000 2015 $’000 304,306 205,747 (205,688) (170,330) 19 3 98,618 294 (5,156) (890) 92,866 4,118 9,800 34,922 (9,591) (32,717) (5,285) (4,408) (3,161) 28,362 – 197,000 35,417 136 (5,154) – 30,399 2,302 227 – (11,218) (33,833) (54,600) (2,810) (99,932) – 64,656 97,332 (279,608) (91,500) (1,911) (31,903) (88,060) 1,645 (5,100) (3,455) 1,435 (4,890) (3,455) – (10,068) 60,420 (9,113) 4,013 (5,100) 270 (5,370) (5,100) 41 www.selectharvests.com.au Notes to the Financial Statements 1. summary of siGNificaNt accouNtiNG policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the Company consisting of Select Harvests Limited and its subsidiaries. (a) basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Select Harvests Limited is a for profit entity for the purpose of preparing the financial statements. Compliance with IFRS The consolidated financial statements of the Select Harvests Limited group comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through the income statement, biological assets, and certain classes of property, plant and equipment. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher level of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. new and amended standards Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2016 reporting period. The Company’s assessment of the impact of these new standards and interpretations is set out below. 42 (i) aasb 9 financial instruments (effective from 1 January 2018) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities and introduces new rules for hedge accounting. The standard is not applicable until 1 January 2018 but is available for early adoption. The Company is yet to assess its full impact and has not yet decided when to adopt AASB 9. (ii) aasb15 revenue from contracts with customers (effective from 1 January 2017) The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard is not applicable until 1 January 2018 but is available for early adoption. The Company is yet to assess its full impact and has not yet decided when to adopt AASB 15. (iii) aasb 16 leases (effective from 1 april 2019) The standard was released on 23 February 2016 and will primarily affect the accounting treatment of leases by lessees and will result in the recognition of almost all leases on the balance sheet. The current standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for almost all lease contracts. The Company is yet to assess its full impact and has not yet decided when to adopt AASB 16. (b) principles of consolidation (i) subsidiaries Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the group (refer to note 1(z)). Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. (c) foreign currency translation (i) functional and presentation currency Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is the functional and presentation currency of Select Harvests Limited. (ii) transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. (d) revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, and amounts collected on behalf of third parties. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity, the revenue can be reliably measured, and the risks and rewards have passed to the buyer. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Risk and reward for the goods has passed to the buyer. Interest Interest income is recognised using the effective interest method. When a receivable is impaired, the group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income Select Harvests Limited ABN 87 000 721 380 on impaired loans is recognised using the original effective interest rate. at amortised cost using the effective interest method, less provision for impairment. Almond Pool Revenue (h) inventories Under contractual arrangements, the group acts as an agent for external growers by simultaneously acquiring and selling the almonds and therefore, does not make a margin on those sales. These amounts are not included in the group’s revenue. As at 30 June 2016 the group held almond inventory on behalf of external growers which was not recorded as inventory of the Company. All revenue is stated net of the amount of Goods and Services Tax (GST). (e) Government grants Government grants are assistance by the government in the form of transfers of resources to the Group in return for past or future compliance with certain conditions relating to the operating activities of the consolidated entity. Government grants relating to income are recognised as income over the periods necessary to match them with the related costs. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as income of the period in which they become receivable. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are deducted from the carrying amount of the asset on the Balance sheet. The Grant is recognised in profit or loss over the life of the depreciable asset as a reduced depreciation expense. (f) cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, money market investments readily convertible to cash within two working days, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. (g) trade receivables Trade receivables are recognised initially at fair value and subsequently measured Inventories are valued at the lower of cost and net realisable value except for almond stocks which are measured at fair value less estimated cost to sell at the point of harvest, and subsequently at Net Realisable Value under AASB 102 Inventories. Costs, incurred in bringing each product to its present location and condition, are accounted for as follows: • Raw materials and consumables: purchase cost on a first in first out basis; • Finished goods and work in progress: cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity; and • Almond stocks are valued in accordance with AASB 141 Agriculture whereby the cost of the non-living (harvested) produce is deemed to be its net market value immediately after it becomes non-living. This valuation takes into account current almond selling prices and current processing and selling costs. • Other inventories comprise consumable stocks of chemicals, fertilisers and packaging materials. (i) Derivatives Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges). The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. (i) fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (j) property, plant and equipment Cost and valuation All classes of property, plant and equipment are measured at historical cost less accumulated depreciation. The carrying amount of property, plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from those assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets’ employment and subsequent disposal. The expected net cash flows have been discounted to present values in determining recoverable amounts. 43 www.selectharvests.com.au Notes to the Financial Statements Continued 1. summary of siGNificaNt accouNtiNG policies Continued (j) property, plant and equipment Continued depreciation The depreciable amount of all fixed assets including buildings and capitalised leased assets, but excluding freehold land water rights are depreciated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The useful lives for each class of assets are: Buildings: 25 to 40 years Leasehold improvements: 5 to 40 years Plant and equipment: 5 to 20 years Leased plant and equipment: 5 to 10 years Bearer plants Irrigation systems: 10 to 30 years 10 to 40 years Capital works in progress Capital works in progress are valued at cost and relate to costs incurred for owned orchards and other assets under development. (k) leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis over the term of the lease. Finance leases Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the Company are capitalised at the present value of the minimum lease payments and disclosed as plant and equipment under lease. A lease liability of equal value is also recognised. 44 Capitalised leased assets are depreciated over the shorter of the estimated useful life of the assets and the lease term. Minimum lease payments are allocated between interest expense and reduction of the lease liability with the interest expense calculated using the interest rate implicit in the lease and charged directly to the income statement. The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter. impaired, and are carried at cost less any accumulated impairment losses. Permanent water rights Permanent water rights are recorded at historical cost. Such rights have an indefinite life, and are not depreciated. As an integral component of the land and irrigation infrastructure required to grow almonds, the carrying value is tested annually for impairment. If events or changes in circumstances indicate impairment, the carrying value is adjusted to take account of any impairment losses. (l) agriculture produce growing almond crop The growing almond crop is valued in accordance with AASB 141 Agriculture. The fair value amount is an aggregate of the fair valuation of the current year almond crop and the reversal of the fair valuation of the prior year almond crop. The current year fair valuation takes into account current almond selling prices and current growing, processing and selling costs. The calculated crop value is then discounted to take into account that it is only partly developed, and then further discounted by a suitable factor to take into account the agricultural risk until crop maturity. (m) intangibles goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary/business at the date of acquisition. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less any accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Brand names Brand names are measured at cost. Directors are of the view that brand names have an indefinite life. Brand names are therefore not depreciated. Instead, brand names are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be (n) impairment of assets Goodwill and other Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (o) income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, Select Harvests Limited ABN 87 000 721 380 other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (i) investment allowances and similar tax incentives Companies within the group may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (eg the Research and Development Tax Incentive regime in Australia or other investment allowances). The group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward. (ii) Goods and services tax (Gst) Revenues, expenses and assets are recognised net of the amount of GST except: • Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the cash flow statement 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. (p) trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. These amounts are unsecured and are usually paid within 30 days of recognition. (q) employee benefits (i) short-term obligations: Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) other long-term benefit obligations The liability for long service leave and annual leave which is not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit 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 end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Contributions are made by the Company to an employee superannuation fund and are charged as expenses when incurred. Share-based payments Share-based compensation benefits are provided to employees via the Select Harvests Limited Long Term Incentive Plan (LTIP). Information relating to this scheme is set out in Note 25. The fair value of performance rights granted under the Select Harvests Limited LTIP is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the performance rights. The fair value at grant date is independently determined using a Black Scholes option pricing model that takes into account the term of the right, the vesting and performance criteria, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the right. The fair value of the performance rights granted is adjusted to reflect market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non market vesting conditions are included in assumptions about the number of rights that are expected to vest. At each balance sheet date, the entity revises its estimate of the number of rights that are expected to vest. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. (r) financial instruments Financial Assets Collectability of trade receivables is reviewed on an ongoing basis. Trade receivables are carried at full amounts due less any provision for doubtful debts. A provision for doubtful debts is recognised when collection of the full amount is no longer probable, and where there is objective evidence of impairment, debts which are known to be non-collectible are written off immediately. Amounts receivable from other debtors are carried at full amounts due. Other debtors are normally settled on 30 days from month end unless there is a specific contract which specifies an alternative date. Amounts receivable from related parties are carried at full amounts due. 45 www.selectharvests.com.au Notes to the Financial Statements Continued 1. summary of siGNificaNt accouNtiNG policies Continued liquidity services and amortised over the period of the facility to which it relates. (r) financial instruments Continued Financial liabilities The bank overdraft disclosed within interest bearing liabilities is carried at the principal amount and is part of the Net Cash balance in the Statement of Cash Flows. Interest is charged as an expense as it accrues. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Company. Finance lease liabilities are accounted for in accordance with AASB 117 Leases. (s) fair value estimation The fair value of certain financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets, such as foreign exchange hedge contracts and the interest rate swap, are based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Company is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar instruments. (t) borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for 46 Borrowings 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 period. (u) borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs, inclusive of all facility fees, bank charges, and interest, are expensed as incurred. (v) provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. (w) contributed equity Ordinary shares are classified as equity. The value of new shares or options issued is shown in equity. (x) earnings per share (i)basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the financial year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive ordinary shares, and the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares. (y) segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer (z) business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred the amount of any non-controlling interest in the acquire and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the income statement as a discount on acquisition. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. (aa) comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. Select Harvests Limited ABN 87 000 721 380 (ab) rounding amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191 in relation to the “rounding off” of amounts in the financial report. Consequently, amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. (ac) parent entity financial information The financial information for the parent entity, Select Harvests Limited, disclosed in Note 27 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) investments in subsidiaries and associates Investments in subsidiaries and associates are accounted for at cost in the financial statements of Select Harvests Limited. (ii) tax consolidation legislation Select Harvests Limited and its wholly- owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Select Harvests Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Select Harvests Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Select Harvests Limited for any current tax payable assumed and are compensated by Select Harvests Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Select Harvests Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. assumptions and any change may have a material impact on these valuations. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. 2. critical accouNtiNG estimates aND JuDGemeNts Estimates and judgements are continually evaluated and are based on historical experience and other factors. Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Inventory – Current year Almond Crop The current year almond crop is classified as a biological asset and valued in accordance with AASB 141 Agriculture. In applying this standard, the consolidated entity has made various assumptions at the balance date as the selling price of the crop can only be estimated and the actual crop yield will not be known until it is completely processed and sold. The assumptions are the estimated average almond selling price at the point of harvest of $8.08 per kg and almond yield based on a crop estimate for the Company orchards of 14,200mt. Fair Value of Acquired Assets In calculating the fair value of acquired assets, in particular almond orchards, the Company has made various assumptions. These include future almond price, long term yield and discount rates. The valuation of almond trees is very sensitive to these Carrying value of intangible assets The Group tests annually whether intangible assets, have suffered any impairment, in accordance with the accounting policy stated in Note 1(n). The recoverable amounts of cash generating units have been determined based on value-in-use calculations. Key assumptions and sensitivities are disclosed in Note 14. 3. busiNess combiNatioNs (a) summary of acquisitions On 18 September 2015, Select Harvests acquired 370 acres of land, which includes 200 acres of almond orchards, in New South Wales for $5.3 million cash consideration. The fair values of assets and liabilities recognised as a result of the acquisitions are as follows: $’000 Plantation land and irrigation systems 1,792 Buildings Biological assets-trees Permanent water rights Net Identifiable Assets Net cash outflow on acquisition Total purchase consideration 200 2,340 953 5,285 5,285 5,285 Included in other expenses in the income statement are transaction costs totalling $0.4 million relating to statutory, legal and advisors fees associated with the acquisitions. (b) financial contribution of acquisitions The acquired businesses contributed earnings before interest and tax of $503,000 to the group for the period from acquisition date to 30 June 2016. If the acquisition had occurred on 1 July 2015, consolidated profit after tax for the year ended 30 June 2016 would have remained unchanged from the reported results. 47 www.selectharvests.com.au Notes to the Financial Statements Continued 4. fiNaNcial risK maNaGemeNt The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate risk, foreign exchange and other price risks, and ageing analysis for credit risk. Risk management is carried out by management pursuant to policies approved by the Board of Directors. (a) market risk (i) foreign exchange risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company’s functional currency. The Group sells both almonds harvested from owned orchards through the almond pool and processed products internationally in United States dollars, and purchases raw materials and other inputs to the manufacturing and almond growing process from overseas suppliers predominantly in United States dollars. The Group also acquires capital related items internationally in Euro. Management and the Board review the foreign exchange position of the Group and, where appropriate, take out forward exchange contracts, transacted with the Group’s banker’s, to manage foreign exchange risk. The exposure to foreign currency risk at the reporting date was as follows: group Trade receivables net of payables Overdraft Foreign exchange contracts – buy foreign currency (cash flow hedges) – sell foreign currency (cash flow hedges) group sensitivity analysis 30 June 2016 uSd $’000 30 June 2016 euR $’000 30 June 2015 uSd $’000 30 June 2015 euR $’000 21,995 (3,627) 991 19,033 – – 1,625 – 24,045 (4,141) 6,198 10,864 – – 5,158 – Based on financial instruments held at 30 June 2016, had the Australian dollar strengthened/weakened by 5% against the US dollar and the EUR, with all other variables held constant, the Group’s post tax profit for the year would have been $825,000 lower/$912,000 higher (2015: $860,000 lower/$951,000 higher), mainly as a result of the US dollar denominated financial instruments as detailed in the above table. Equity would have been $1,555,000 lower/$1,719,000 higher (2015: $811,000 lower/$896,000 higher), arising mainly from foreign forward exchange contracts designated as cash flow hedges. (ii) cash flow interest rate risk The Group’s interest rate risk arises from borrowings issued at variable rates, which exposes the Group to cash flow interest rate risk. The Group’s borrowings at variable interest rate are denominated in Australian dollars. At the reporting date the Group had the following variable rate borrowings: Debt facilities (AUD) Overdraft (USD) An analysis of maturities is provided in (c) below. 30 June 2016 Average Interest Rate % 6.37% 1.29% 30 June 2015 Average Interest Rate % 5.06% 1.43% Balance $’000 22,000 4,890 Balance $’000 94,608 5,370 The Group analyses interest rate exposure on an ongoing basis in conjunction with the debt facility, cash flow and capital management. With the current low level of debt and soft market sentiment, the Company has chosen not to enter into an interest rate agreement. group sensitivity At 30 June 2016, if interest rates had changed by +/- 25 basis points from the weighted average interest rate with all other variables held constant, post tax profit for the year would have been $45,000 lower/higher (2015: $182,000 lower/higher). 48 Select Harvests Limited ABN 87 000 721 380 Interest rate risk The Company’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities both recognised and unrecognised at the balance date, are as follows: FloAtIng InteReSt RAte 1 yeAR oR leSS oVeR 1 to 5 yeARS MoRe tHAn 5 yeARS non-InteReSt BeARIng FIxed InteReSt RAte MAtuRIng In: totAl CARRyIng AMount AS PeR tHe BAlAnCe SHeet WeIgHted AVeRAge eFFeCtIVe InteReSt RAte Financial Instruments 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 % 2015 % (i) financial assets Cash 1,435 270 Trade and other receivables Forward exchange contracts – – – – Total financial assets 1,435 270 (ii) financial liabilities Bank overdraft – USD @ AUD 4,890 5,370 Commercial Bills 22,000 94,609 – – – – – – – – Trade creditors Other creditors Interest Rate Swap Forward exchange contracts Total financial liabilities (b) credit risk 26,890 99,979 10,000 – – – – – – – – – – – – – – 10,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,435 270 44,888 58,308 44,888 58,308 1,293 76 1,293 76 46,181 58,384 47,616 58,654 – – – – – – – – – – 4,890 5,370 22,000 104,609 1.29 6.37 1.43 5.06 8,007 8,112 8,007 8,112 15,173 23,161 15,173 23,161 – – 135 153 135 – 153 23,180 31,561 50,070 141,540 – – – – – – – – – – Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as exposure to wholesale, retail and farm investor customers, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The credit quality of financial assets that are neither past due or impaired can be assessed by reference to external credit ratings (if available) or to historical information about default rates. Given that the majority of income is derived from large, blue chip customers with no history of default, the provision raised against receivables is deemed to be satisfactory. The Group’s banking partners have long-term credit ratings of AA- and A+ (Standard and Poor’s). (c) liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. 49 www.selectharvests.com.au Notes to the Financial Statements Continued 4. fiNaNcial risK maNaGemeNt Continued (c) liquidity risk Continued Financing arrangements The following debt facilities are held with the National Australia Bank (NAB), Rabobank (Rabo) and Commonwealth Bank (CBA) in proportions of 50%, 25% and 25% respectively, except as noted. Debt facilities 1. Revolving 2. Working capital 3. Seasonal*# 4. Overdraft* * Held with NAB only expiry date 01/03/2019 01/03/2018 01/09/2019 Facility limit $65,000,000 $29,000,000 $21,000,000 AUD $115,000,000 01/03/2017 USD $5,000,000 # Available for the period 1 March to 30 June each year. The interest rate paid on these facilities is determined by an incremental margin on the BBSY or LIBOR rate. The Group had access to the following undrawn borrowing facilities at the reporting date: Floating rate – Revolving/Working capital/Seasonal facility – Bank overdraft facility USD 2016 $’000 2015 $’000 AUD $93,000 AUD $170,392 USD $1,373 USD $859 The bank overdraft facility may be drawn at any time and may be terminated by the bank without notice. The debt facilities (revolving, working capital, seasonal) may be drawn at any time over the term. 50 Select Harvests Limited ABN 87 000 721 380 Maturities of financial liabilities The table below analyses the Group’s financial liabilities, net and gross settled derivative instruments into relevant maturity groupings based on the remaining period at the reporting date on the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. less than 6 months $’000 6 – 12 months $’000 More than 12 months $’000 total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 Group at 30 June 2016 Non derivatives Variable Rate Derivatives Group at 30 June 2015 Non derivatives Variable Rate Derivatives Bank Overdraft Interest Rate Swap EUR buy – outflow USD buy – outflow USD sell – (inflow) USD net 22,624 – – 1,625 991 (19,033) (18,042) – – – – – – – – 4,890 – – – – – 22,624 4,890 – 1,625 991 (19,033) (18,042) 22,000 4,890 – 24 (2) 1,271 1,269 less than 6 months $’000 6 – 12 months $’000 More than 12 months $’000 total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 Debt facilities Trade finance Bank Overdraft Interest Rate Swap EUR buy – outflow USD buy – outflow USD sell – (inflow) USD net – – 5,370 101 2,710 4,518 (10,864) (6,346) 21,511 3,182 – 34 2,448 1,680 – 1,680 96,698 118,209 101,427 – – – – – – – 3,182 5,370 135 5,158 6,198 (10,864) (4,666) 3,182 5,370 135 (58) (18) 153 135 (d) fair Value measurement The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. Disclosures are required of fair value measurements by level of the following fair value measurement hierarchy: (a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level one); (b) Inputs other than quoted prices included within level one that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level two); and (c) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level three). At 30 June 2016 the group’s assets and liabilities measured and recognised at fair value comprised the foreign exchange forward contracts while at 30 June 2015, it comprised the interest rate swap derivative and foreign exchange forward contracts. Both are level 2 measurements under the hierarchy. 51 www.selectharvests.com.au Notes to the Financial Statements Continued 5. seGmeNt iNformatioN Segment products and locations The segment reporting reflects the way information is reported internally to the Chief Executive Officer. The Company has the following business segments: • Food Division – processes, markets, and distributes edible nuts, dried fruits, seeds, and a range of natural health foods. • Almond Division – grows, processes and sells almonds to the food industry from company owned almond orchards, and provides a range of management services to external owners of almond orchards, including orchard development, tree supply, farm management, land and irrigation infrastructure rental, and the sale of almonds on behalf of external investors. The Company operates predominantly within the geographical area of Australia. The segment information provided to the Chief Executive Officer is referenced in the following table: Food dIVISIon AlMond dIVISIon elIMInAtIonS And CoRPoRAte ConSolIdAted entIty ($’000) ($’000) ($’000) ($’000) Jun 2016 Jun 2015 Jun 2016 Jun 2015 Jun 2016 Jun 2015 Jun 2016 Jun 2015 Revenue Total revenue from external customers 161,825 138,757 124,092 84,717 – – 285,917 223,474 Intersegment revenue – – 36,887 30,550 (36,887) (30,550) – – Total segment revenue 161,825 138,757 160,979 115,267 (36,887) (30,550) 285,917 223,474 Other revenue Total revenue EBIT Interest received Finance costs expensed Profit before income tax Segment assets (excluding intercompany debts) Segment liabilities (excluding intercompany debts) Acquisition of non- current segment assets Depreciation and amortisation of segment assets – – 208 113 43 57 251 170 161,825 138,757 161,187 115,380 (36,844) (30,493) 286,168 223,644 10,342 6,817 44,575 83,713 (5,132) (4,685) 49,785 85,845 – – – – – (2,127) – (182) 43 56 43 56 (3,411) (5,205) (5,538) (5,387) 10,342 6,817 42,448 83,531 (8,500) (9,834) 44,290 80,514 75,039 77,059 375,295 418,225 (562) (7,372) 449,772 487,912 (10,446) (11,489) (96,588) (78,115) (51,837) (110,921) (158,871) (200,525) 240 584 60,476 98,741 1,852 326 62,568 99,651 454 475 12,091 10,033 54 38 12,599 10,546 Sales to major customers include Coles 31% and Woolworths 17% of total sales of the Food Division 52 Select Harvests Limited ABN 87 000 721 380 6. reVeNue Revenue from continuing operations – Management services – Sale of goods – Other revenue total revenue 7. expeNses Profit before tax includes the following specific expenses: Cost of goods and services sold Depreciation of non-current assets: Buildings Plantation land and irrigation systems Plant and equipment Bearer plants Total depreciation of non-current assets Employee benefits Finance costs Operating lease rental minimum lease payments Net (gain)/loss on disposal of property, plant and equipment Acquisition transaction costs ConSolIdAted Notes 2016 $’000 2015 $’000 4,400 5,725 281,517 217,749 251 170 286,168 223,644 ConSolIdAted Notes 2016 $’000 2015 $’000 186,286 168,130 205 1,364 5,241 5,789 12,599 23,854 5,538 5,169 (8,644) 381 193 1,202 3,649 5,502 10,546 20,803 5,387 5,334 251 3,790 53 www.selectharvests.com.au Notes to the Financial Statements Continued 8. iNcome tax (a) income tax expense Current tax Deferred tax Over provided in prior years Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Deferred income tax benefit included in income tax benefit comprises: (Increase)/Decrease in deferred tax assets Increase/(Decrease) in deferred tax liabilities (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2015 – 30%) Tax effect of amounts that are not deductible/(taxable) in calculating taxable income Other assessable items Over provided in prior years Income tax expense Notes ConSolIdAted 2016 $’000 (25,142) 11,609 3,039 2015 $’000 (10,406) (13,461) 119 (10,494) (23,748) (10,494) (10,494) (23,748) (23,748) 8(c) 8(c) 7,163 4,446 (17,599) 4,138 11,609 (13,461) Notes ConSolIdAted 2016 $’000 44,290 (13,287) (246) 3,039 2015 $’000 80,514 (24,154) 287 119 (10,494) (23,748) 54 Select Harvests Limited ABN 87 000 721 380 (c) Deferred tax liabilities (Non-current) The balance comprises temporary differences attributable to: Amounts recognised in profit and loss Accruals and provisions Inventory Property, plant and equipment (includes bearer plants) Intangibles Lease liabilities Amounts recognised directly in other comprehensive income Cash flow hedges Amounts recognised directly in equity Equity raising costs Net deferred tax liabilities Movements: Opening balance 1 July Prior period under provision (Credited)/Charged to income statement Debited/(Credited) to equity Use of carry forward tax losses Closing balance at 30 June ConSolIdAted Notes 2016 $’000 2015 $’000 (2,305) 10,437 34,824 750 (8,561) 35,145 (3,499) 23,078 25,571 134 – 45,284 (276) (664) (417) 34,452 44,064 1,470 (11,609) 527 – 34,452 (556) 44,064 26,553 (119) 13,461 (1,223) 5,392 44,064 55 www.selectharvests.com.au Notes to the Financial Statements Continued 9. DiViDeNDs paiD or proposeD (a) Dividends paid during the year (i) interim – paid 15 April 2016 (2015: 16 April 2015) Unfranked dividend (21c per share) (2015: Fully franked 15c per share) (ii) final – paid 13 October 2015 (2015: 15 October 2014) Unfranked dividend (35c per share) (2015: Fully franked 20c per share) (b) Dividends proposed and not recognised as a liability. A final fully franked dividend of 25 cents per share has been declared by the directors ($18,229,689). (c) franking credit balance Franking credits available for subsequent reporting periods based on a tax rate of 30% (2015: 30%) ConSolIdAted Notes 2016 $’000 2015 $’000 15,255 10,641 25,003 40,258 5,220 15,861 ConSolIdAted Notes 2016 $’000 2015 $’000 1,699 331 The above amounts represent the balance of the franking account (presented as the gross dividend value) as at the end of the financial year, adjusted for: (i) Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date (ii) Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date. 10. traDe aND otHer receiVables Notes ConSolIdAted 2016 $’000 2015 $’000 44,956 58,338 (68) 44,888 3,589 48,477 (30) 58,308 1,774 60,082 Trade receivables Provision for impairment of trade receivables Prepayments 56 Select Harvests Limited ABN 87 000 721 380 (a) trade receivables past due but not impaired As at 30 June 2016, trade receivables of $3,692,661 (2015: $5,796,640) were past due but not impaired. (b) effective interest rates and credit risk All receivables are non-interest bearing. The Company minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a large number of customers from across the range of business segments in which the Company operates. Refer to Note 4 for more information on the risk management policy of the Company. Information concerning the effective interest rate and credit risk of both current and non-current receivables is set out in Note 4. (c) fair value Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. 11. iNVeNtories Raw materials at cost Finished goods at cost Other inventory at cost Almond stock at cost 12. DeriVatiVe fiNaNcial iNstrumeNts Current Assets Forward exchange contracts – cash flow hedges Total current derivative financial instrument assets Current Liabilities Interest rate swap – cash flow hedges Forward exchange contracts – cash flow hedges Total current derivative financial instrument liabilities (i) cash flow hedges Notes 1(l) Notes ConSolIdAted 2016 $’000 7,311 20,495 8,804 67,706 104,316 2015 $’000 9,522 10,889 9,684 112,259 142,354 ConSolIdAted 2016 $’000 1,293 1,293 – – – 2015 $’000 76 76 135 153 288 The Company entered into forward exchange contracts to buy and sell specified amounts of foreign currency in the future at stipulated exchange rates. The objective of entering the forward exchange contracts is to protect the Company against unfavourable exchange rate movements for highly probable contracted and forecasted sales and purchases undertaken in foreign currencies. The accounting policy in regard to forward exchange contracts is detailed in Note 1(c). 57 www.selectharvests.com.au Notes to the Financial Statements Continued 12. DeriVatiVe fiNaNcial iNstrumeNts Continued (i) cash flow hedges Continued At balance date, the details of outstanding forward exchange contracts are: Less than 6 months Buy United States Dollars Settlement Buy Euro Dollars Settlement Less than 6 months Sell United States Dollars Settlement More than 6 months Buy United States Dollars Settlement Buy Euro Dollars Settlement (ii) credit risk exposures Sell AuStRAlIAn dollARS AVeRAge exCHAnge RAte 2016 $’000 991 1,625 2015 $’000 4,518 2,710 2016 $’000 0.74 0.67 2015 $’000 0.77 0.70 Buy AuStRAlIAn dollARS AVeRAge exCHAnge RAte 2016 $’000 2015 $’000 19,033 10,864 2016 $’000 0.71 2015 $’000 0.77 Sell AuStRAlIAn dollARS AVeRAge exCHAnge RAte 2016 $’000 – – 2015 $’000 1,680 2,448 2016 $’000 – – 2015 $’000 0.76 0.68 The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount of those assets, net of any provisions for doubtful debts of those assets, as disclosed in the balance sheet and Notes to the financial statements. Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations at maturity. The credit risk exposure to forward exchange contracts and the interest rate swap are the net fair values of these instruments. The net amount of the foreign currency the Company will be required to pay or purchase when settling the brought forward exchange contracts should the counterparty not pay the currency it is committed to deliver to the Company at balance date was USD $18,042,745 and EUR $1,625,403 (2015: USD $4,665,372; EUR $5,158,417). The Company does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the Company. 58 Select Harvests Limited ABN 87 000 721 380 13. property, plaNt aND equipmeNt (a) reconciliations Reconciliations of the carrying amounts of property, plant and equipment for the current financial year. Plantation land and irrigation systems $’000 Buildings $’000 Plant and equipment $’000 Bearer Plants $’000 Capital work in progress $’000 total $’000 At 1 July 2014 Cost Accumulated depreciation net book amount year ended 30 June 2015 Opening net book amount Additions Acquired through business combinations Disposals Depreciation expense Transfers between classes Closing net book amount At 30 June 2015 Cost Accumulated depreciation net book amount year ended 30 June 2016 Opening net book amount Additions Acquired through business combinations Disposals Depreciation expense Transfers between classes Closing net book amount At 30 June 2016 Cost Accumulated depreciation net book amount 12,591 (2,040) 10,551 88,262 49,142 (28,538) (38,574) 59,724 10,568 10,551 59,724 35 23,451 – (1,202) 4,728 86,736 10,568 10,552 – (564) (3,649) 2,795 19,702 75,201 (4,493) 70,708 70,708 4,476 25,223 – (5,502) 2,653 97,558 4,782 229,978 – (73,645) 4,782 156,333 4,782 18,075 3,375 (8) – 156,333 33,138 53,089 (572) (10,546) (10,233) – 15,991 231,442 116,476 (29,740) 86,736 61,610 107,553 15,991 315,318 (41,908) 19,702 (9,995) 97,558 – (83,876) 15,991 231,442 11,455 86,736 – 1,792 (23,832) (1,364) 4,865 68,197 19,702 9,053 – (151) (5,241) 6,596 29,959 97,558 7,191 2,340 15,991 31,294 – – (8,543) (5,789) – 231,442 47,538 4,332 (32,526) (12,599) – (11,461) – 101,300 27,281 238,187 – 1,040 – (193) 57 11,455 13,688 (2,233) 11,455 – 200 – (205) – 11,450 13,888 (2,438) 11,450 99,301 76,959 (31,104) (47,000) 68,197 29,959 117,084 (15,784) 101,300 27,281 334,513 – (96,326) 27,281 238,187 59 www.selectharvests.com.au Notes to the Financial Statements Continued 13. property, plaNt aND equipmeNt Continued (b) leased assets Plant and equipment and bearer plants includes the following amounts where the Group is a lessee under a finance lease. leasehold plant and equipment and bearer plants Notes At cost Accumulated depreciation and impairment (c) assets held for sale Property, plant and equipment ConSolIdAted 2016 $’000 44,938 (3,231) 41,707 2015 $’000 6,673 (452) 6,221 Notes ConSolIdAted 2016 $’000 – 2015 $’000 5,000 During the financial year, the Company successfully disposed the Western Australian orchards for $9.5 million. This resulted in net gain on sale of $4.5 million during the year. 14. iNtaNGibles year ended 30 June 2015 Opening net book amount Acquisition of permanent water rights Disposal of permanent water rights Acquired through business combinations Closing net book amount year ended 30 June 2016 Opening net book amount Acquisition of permanent water rights Disposal of permanent water rights Acquired through business combinations Closing net book amount ConSolIdAted Brand names* $’000 Permanent Water Rights $’000 goodwill $’000 25,995 2,905 – – – – – – 25,995 2,905 25,995 2,905 – – – – – – 8,263 573 (583) 11,186 19,439 19,439 9,745 (2,973) 953 total $’000 37,163 573 (583) 11,186 48,339 48,339 9,745 (2,973) 953 25,995 2,905 27,164 56,064 * Brand name assets principally relate to the “Lucky” brand, which has been assessed as having an indefinite useful life. This assessment is based on the Lucky brand having been sold in the market place for over 50 years, being a market leader in the cooking nuts category and remaining a heritage brand. 60 Select Harvests Limited ABN 87 000 721 380 (a) impairment tests for goodwill and brand names Goodwill is allocated to the Company’s cash-generating units (CGU) identified according to operating segment. The total value of goodwill and brand names relates to the Food Products CGU. The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. These calculations use cash flow forecasts based on financial projections by management covering a five year period based on growth rates taking into account past performance and its expectations for the future, in line with the Strategic Review. Assumptions made include that new product development, enhanced marketing and market penetration and the exiting of lower margin business will improve EBIT over the forecast period. Cash flow projections beyond the five year period are not extrapolated, but a terminal value is included in the calculations. A real pre-tax weighted average cost of capital of 12.7% (2015:12.6%) has been used to discount the cash flow projections. (b) impact of possible changes to key assumptions The recoverable amount of the goodwill and brand names in the Food Division exceeds the carrying amount of goodwill at 30 June 2016. A decrease of 10% in the projected annual cash flows, or an increase of 1% in the pre-tax discount rate of 12.7% does not result in an impairment of the goodwill and brand names at 30 June 2016. These changes would be considered reasonably possible changes to the key assumptions. (c) permanent water rights The value of permanent water rights relates to the Almond Division Cash Generating Unit (CGU) and is an integral part of land and irrigation infrastructures required to grow almond orchards. The fair value of permanent water rights is supported by the tradeable market value, which at current market prices is in excess of book value. 15. traDe aND otHer payables Trade creditors Other creditors and accruals 16. iNterest beariNG liabilities Current – Secured Bank overdraft Trade finance Debt facilities Finance lease non-current – Secured Debt facilities Finance lease Notes ConSolIdAted 2016 $’000 8,007 15,173 23,180 2015 $’000 8,112 23,161 31,273 ConSolIdAted Notes 2016 $’000 2015 $’000 4,890 – 22,000 3,729 30,619 – 38,082 38,082 20(b) 20(b) 5,370 3,182 12,499 1,367 22,418 88,927 4,534 93,461 61 www.selectharvests.com.au Notes to the Financial Statements Continued 16. iNterest beariNG liabilities Continued (a) security Details of the security relating to each of the secured liabilities and further information on the bank overdrafts and bank facilities are set out in 16(c). Finance lease is secured with plant and equipment and bearer plants with various leasing companies and First State Super respectively. (b) interest rate risk exposures Details of the Company’s exposure to interest rate changes on borrowings are set out in Note 4. (c) assets pledged as security The bank overdraft and debt facilities of the parent entity and subsidiaries are secured by the following: (i). A registered mortgage debenture is held as security over all the assets and undertakings of Select Harvests Limited and the entities of the wholly owned group. (ii). A deed of cross guarantee exists between the entities of the wholly owned group. The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Receivables Inventories Derivative financial instruments Assets held for sale Total current assets pledged as security non–current Floating charge Prepayments Property, plant and equipment Permanent water rights Total non-current assets pledged as security Total assets pledged as security financing arrangements ConSolIdAted Notes 2016 $’000 2015 $’000 1,435 48,477 270 60,082 104,316 142,354 1,293 – 76 5,000 155,521 207,782 – 349 196,480 231,442 27,164 223,644 379,165 19,439 251,230 459,012 The Company has a debt facility available to the extent of $115,000,000 as at 30 June 2016 (2015: $275,000,000). The Company has bank overdraft facilities available to the extent of US$5,000,000 (2015: US$5,000,000). The current interest rates at balance date are 2.83% (2015: 4.37%) on the debt facility, and 1.62% (2015: 1.16%) on the United States dollar bank overdraft facility. At 30 June 2016 the Company was in technical breach of one of the banking facility covenants and therefore the total debt facility drawn has been disclosed as a current liability. Subsequent to year end this covenant has been waived and the Company is negotiating with its lenders to reset its covenant thresholds to more appropriate levels. All other covenants and financial undertakings associated with the banking facilities have been met during the period and as at 30 June 2016. 62 Select Harvests Limited ABN 87 000 721 380 17. DeferreD GaiN oN sale Current Sale and leaseback non-Current Sale and leaseback Notes ConSolIdAted 2016 $’000 175 3,197 2015 $’000 – – The deferred gain on sale relates to the sale and leaseback of bearer plants for three orchards that were sold to First State Super. The lease is for a 20 years term. 18. coNtributeD equity (a) issued and paid up capital Ordinary shares fully paid (b) movements in shares on issue Beginning of the financial year Issued during the year: • Dividend reinvestment plan • Long term incentive plan – tranche vested • Ordinary shares issued under equity raising (net of transaction costs and deferred tax) Notes ConSolIdAted 2016 $’000 178,553 178,553 2015 $’000 170,198 170,198 2016 2015 number of Shares $’000 number of Shares 71,435,801 170,198 57,999,427 $’000 99,750 5,792 – 907,649 575,307 – 8,355 – – 894,540 152,943 12,388,891 64,656 end of financial year 72,918,757 178,553 71,435,801 170,198 (c) performance rights long term Incentive Plan The Company offered employee participation in long term incentive schemes as part of the remuneration packages for the employees. In determining the quantum of rights offered the board considers a number of factors including: the corporate strategy; the appropriate mix of fixed and at risk remuneration; the fair value and face value of the rights; and the market relativity of employees with equivalent responsibilities. The long term scheme involves the issue of performance rights to the employee, under the Long Term Incentive Plan. During the financial year, performance rights granted during the 2012 and 2013 year have vested under this plan (refer Note 25 and Directors’ Report for further details). The market value of ordinary Select Harvests Limited shares closed at $6.74 on 30 June 2016 ($11.00 on 30 June 2015). 63 www.selectharvests.com.au Notes to the Financial Statements Continued 18. coNtributeD equity Continued (d) ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (e) capital risk management The group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 19. recoNciliatioN of tHe Net profit after iNcome tax to tHe Net casH flows from operatiNG actiVities Net profit after tax non-cash items Depreciation and amortisation Inventory fair value adjustment Net (gain)/loss on sale of assets Options expense Income tax expense Changes in assets and liabilities Decrease/(Increase) in receivables Decrease/(Increase) in inventory Decrease/(Increase) in other assets Decrease in trade payables Increase/(Decrease) in income tax payable (Decrease)/increase in deferred tax liability Increase in employee entitlements (Decrease) in other payables Net cash flow from operating activities Non cash financing activities Notes ConSolIdAted 2016 $’000 33,796 12,599 43,033 (8,644) 568 10,494 13,428 (6,175) (1,599) (8,747) 19,668 (9,613) 477 (6,418) 92,866 2015 $’000 56,766 10,546 (47,517) 251 784 23,748 (20,786) (14,990) (619) 9,730 (5,473) 17,511 448 – 30,399 During the current year the company issued 907,649 (2015: 894,540) and Nil (2015: $12,388,891) of new equity as part of the Dividend Reinvestment Plan and Equity Raising respectively. 64 Select Harvests Limited ABN 87 000 721 380 20. expeNDiture commitmeNts (a) operating lease commitments Commitments payable in relation to leases contracted for at the reporting date but not recognised as liabilities: Within one year Later than one year but not later than five years Later than five years (i) Property and equipment leases (non–cancellable): Minimum lease payments • Within one year • Later than one year and not later than five years • Later than five years Aggregate lease expenditure contracted for at reporting date Property and equipment lease payments are for rental of premises, farming and factory equipment. (ii) Almond orchard leases: Minimum lease payments • Within one year • Later than one year and not later than five years • Later than five years Aggregate lease expenditure contracted for at reporting date The almond orchard leases comprises: Notes ConSolIdAted 2016 $’000 20,351 77,871 191,957 2015 $’000 11,039 41,487 92,873 290,179 145,399 3,431 7,120 – 4,062 9,205 – 10,551 13,267 16,920 70,751 191,957 6,977 32,282 92,873 279,628 132,132 (i) 20 years lease of a 512 acre almond orchard and a 1,002 acre lease from Arrow Funds Management in which the Company has the right to harvest the almonds from the trees owned by the lessor for the term of the agreement. The Company also has first right of refusal to purchase the properties in the event that the lessor wished to sell. Other leases within the consolidated entity have renewal and first right of refusal clauses. (ii) A 20 years lease term of 3,017 acres at Hillston with Rural Funds Management. (iii) 2,458 acres of almond orchards and approximately 2,500 acres for future development of almonds with First State Super for a lease term of 20 years. The Company has the right to harvest the almonds from the trees owned by the lessor for the term of the agreement. The Company also has first right of refusal to purchase the properties in the event that the lessor wished to sell. 65 www.selectharvests.com.au Notes to the Financial Statements Continued 20. expeNDiture commitmeNts Continued (b) finance lease commitments Commitments payable in relation to leases contracted for at the reporting date and recognised as liabilities: Within one year Later than one year but not later than five years Later than 5 years Minimum lease payments Future finance charges Total lease liabilities The present value of finance lease liabilities is as follows: Within one year Later than one year but not later than five years Later than 5 years Minimum lease payments Notes ConSolIdAted 2016 $’000 6,392 20,792 36,575 63,759 (21,948) 41,811 3,729 12,963 25,119 41,811 2015 $’000 1,610 4,788 – 6,398 (497) 5,901 1,367 4,534 – 5,901 Finance lease payments are for rental of farming equipment and bearer plants with a net carrying amount of $14,273,752 (2015: $6,220,629) and $27,433,668 (2015: Nil) respectively. (c) capital commitments Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows: Property, plant and equipment 21. eVeNts occurriNG after balaNce Date Notes ConSolIdAted 2016 $’000 13,456 2015 $’000 9,070 On 26 August 2016, the Directors declared a final fully franked dividend of 25 cents per share in relation to the financial year ended 30 June 2016 to be paid on 30 September 2016. 66 Select Harvests Limited ABN 87 000 721 380 22. earNiNGs per sHare Basic earnings per share attributable to equity holders of the company Diluted earnings per share attributable to equity holders of the company The following reflects the income and share data used in the calculations of basic and diluted earnings per share: 2016 Cents 46.7 46.0 2015 Cents 82.9 81.0 ConSolIdAted 2016 $’000 2015 $’000 Basic earnings per share: Profit attributable to equity holders of the company used in calculating basic earnings per share 33,796 56,766 diluted earnings per share: Profit attributable to equity holders of the company used in calculating diluted earnings per share 33,796 56,766 Weighted average number of ordinary shares used in calculating basic earnings per share 72,426,703 68,455,421 effect of dilutive securities: Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 73,498,364 70,074,337 23. remuNeratioN of auDitors nuMBeR oF SHAReS 2016 2015 Audit and other assurance services Audit and review of financial statements Other assurance services total remuneration for audit and other assurance services Taxation services tax consulting Total remuneration for taxation services Total remuneration of PricewaterhouseCoopers ConSolIdAted Notes 2016 $’000 2015 $’000 264,200 – 264,200 297,000 151,000 448,000 – – 31,818 31,818 264,200 479,818 67 www.selectharvests.com.au Notes to the Financial Statements Continued 24. relateD party Disclosures (a) parent entity The parent entity within the consolidated entity is Select Harvests Limited. (b) subsidiaries Parent entity: Select Harvests Limited (i) Subsidiaries of Select Harvests limited: Kyndalyn Park Pty Ltd (i) Select Harvests Food Products Pty Ltd (i) Meriram Pty Ltd (i) Kibley Pty Ltd (i) Select Harvests Nominee Pty Ltd (i) Select Harvests Orchards Nominee Pty Ltd (i) Select Harvests Water Rights Unit Trust (i) Select Harvests Water Rights Trust (i) Select Harvests Land Unit Trust (i) Select Harvests South Australian Orchards Trust (i) Select Harvests Victorian Orchards Trust (i) Select Harvests NSW Orchards Trust (i) (i) Members of extended closed group (c) Key management personnel compensation Short term employment benefits Post-employment benefits Long service leave Share based payments CountRy oF InCoRPoRAtIon PeRCentAge oWned (%) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 2016 100 100 100 100 100 100 100 100 100 100 100 100 100 2015 100 100 100 100 100 100 100 100 100 100 100 100 100 ConSolIdAted Notes 2016 $ 2015 $ 3,308,438 3,275,159 173,172 169,118 50,826 15,087 568,412 784,029 4,100,848 4,243,393 Other disclosures relating to key management personnel are set out in the Remuneration Report. (d) Director related entity transactions There were no director related entity transactions during the year. 68 Select Harvests Limited ABN 87 000 721 380 25. sHare baseD paymeNts long term Incentive Plan The Group offers executive directors and senior executives the opportunity to participate in the long term incentive plan (LTI Plan) involving the issue of performance rights to the employee under the LTI Plan. The LTI Plan provides for the offer of a parcel of performance rights with a three year performance period to participating employees on an annual basis. One third of the rights vesting each year, with half of the rights vesting upon achievement of underlying earnings per share (EPS) CAGR targets and the other half vesting upon achievement of total shareholder return (TSR) targets. The underlying EPS growth targets are based on the CAGR of the company’s underlying EPS over the three years prior to vesting. The TSR targets are measured based on the company’s average TSR compared to the TSR of a peer group of ASX listed companies over the three years prior to vesting. The performance targets and vesting proportions are as follows: measure underlying ePS Below 5% CAGR 5% CAGR PReVIouS ISSueS rights to Vest Nil 25% measure underlying ePS Below 5% CAGR 5% CAGR CuRRent ISSueS rights to Vest Nil 25% 5.1% – 6.9% CAGR Pro rata vesting 5.1% – 19.9% CAGR Pro rata vesting 7% or higher CAGR tSR Below the 60th percentile* 60th percentile* 50% Nil 25% 20% or higher CAGR tSR Below the 50th percentile* 50th percentile* 50% Nil 25% 61st – 74th percentile* Pro rata vesting 51st – 74th percentile* Pro rata vesting At or above 75th percentile* 50% At or above 75th percentile* 50% * Of the peer group of ASX listed companies as outlined in the directors’ report. summary of performance rights over unissued ordinary shares Details of performance rights over unissued ordinary shares at the beginning and ending of the reporting date and movements during the year are set out below: 2016 gRAnt dAte exPIRy dAte exeRCISe PRICe BAlAnCe At StARt oF tHe yeAR gRAnted duRIng tHe yeAR FoRFeIted duRIng tHe yeAR VeSted duRIng tHe yeAR BAlAnCe At end oF tHe yeAR PRoCeedS ReCeIVed SHAReS ISSued Number Number Number Number on issue Vested 29/06/2012 29/06/2015 30/04/2013 30/04/2016 11/02/2016 11/02/2017 – – – 112,020 890,600 – – 59,203 52,817 – 248,712 221,888 420,000 – 180,000 – – 180,000 – – – $ – – – $ – – – 2015 gRAnt dAte exPIRy dAte exeRCISe PRICe BAlAnCe At StARt oF tHe yeAR gRAnted duRIng tHe yeAR FoRFeIted duRIng tHe yeAR VeSted duRIng tHe yeAR BAlAnCe At end oF tHe yeAR PRoCeedS ReCeIVed SHAReS ISSued Number Number Number Number on issue Vested 29/06/2012 29/06/2015 – 224,040 30/04/2013 30/04/2016 – 1,353,887 – – – 112,020 112,020 – 463,287 890,600 – – $ – – $ – – FAIR VAlue PeR SHARe $ 1.14 2.26 4.44 FAIR VAlue PeR SHARe $ 1.14 2.26 FAIR VAlue AggRegAte $ – 949,200 799,200 FAIR VAlue AggRegAte $ 127,703 2,012,756 69 www.selectharvests.com.au Notes to the Financial Statements Continued 25. sHare baseD paymeNts Continued fair value of performance rights granted The assessed fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the term of the rights, the impact of dilution, the share price at offer date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the right. The model inputs for rights granted in the tables above included: Share price at grant date Expected volatility* Expected dividends Risk free interest rate 11 February 2016 Performance Rights Issue 30 April 2013 Performance Rights Issue 29 June 2012 Performance Rights Issue $4.44 30% Nil 5% $2.90 30% Nil 5% $1.62 30% Nil 5% * Expected share price volatility was calculated with reference to the annualised standard deviation of daily share price returns on the underlying security over a specified period. expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Performance rights granted under employee long term incentive plan 26. coNtiNGeNt liabilities (i) Guarantees Cross guarantees given by the entities comprising the Group are detailed in Note 24(b). ConSolIdAted 2016 $ 568,412 568,412 2015 $ 784,029 784,029 70 Select Harvests Limited ABN 87 000 721 380 27. pareNt eNtity fiNaNcial iNformatioN (a) summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance Sheet Current Assets total Assets Current liabilities total liabilities Shareholders’ equity Issued capital Reserves Capital reserve Cash flow hedge reserve Options reserve Retained profits total Shareholders’ equity Profit for the year Total comprehensive income 2016 $’000 6,231 2015 $’000 1,475 524,109 569,084 56,915 28,362 316,654 368,420 178,553 170,198 – 904 2,621 25,377 3,270 (149) 2,052 25,293 207,455 200,664 21,815 5,901 20,762 5,745 (b) tax consolidation legislation Select Harvests Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2003. The accounting policy in relation to this legislation is set out in Note 1(o). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which limits the joint and several liabilities of the wholly-owned entities in the case of a default by the head entity, Select Harvests Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Select Harvests Limited for any current tax payable assumed and are compensated by Select Harvests Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Select Harvests Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables. (c) Guarantees entered into by parent entity Each entity within the consolidated group has entered into a cross deed of financial guarantee in respect of bank overdrafts and loans of the group. 71 www.selectharvests.com.au Directors’ Declaration Loans are made by Select Harvests Limited to controlled entities under normal terms and conditions. In the directors’ opinion: (a) the financial statements and Notes set out on pages 38 to 71 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in Note 24 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 36. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Managing Director and Chief Financial Officer required under section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. M Iwaniw Chairman Melbourne, 26 August 2016 72 Select Harvests Limited ABN 87 000 721 380 Independent Auditor’s Report to the Members of Select Harvests Limited Independent auditor’s report to the members of Select Harvests Limited Report on the financial report We have audited the accompanying financial report of Select Harvests Limited (the company), which comprises the balance sheet as at 30 June 2016, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Select Harvests Limited group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 73 www.selectharvests.com.au Independent Auditor’s Report to the Members of Select Harvests Limited Continued Auditor’s opinion In our opinion: (a) the financial report of Select Harvests Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Select Harvests Limited for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Andrew Cronin Partner Melbourne 26 August 2016 74 Select Harvests Limited ABN 87 000 721 380 ASX Additional Information Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. (a) DistributioN of equity securities The following information is current as at 31 July 2016. The number of shareholders, by size of holding, in each class of share is: number of ordinary shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over The number of shareholders holding less than a marketable parcel of shares is: number of ordinary shares 5,496 (b) tweNty larGest sHareHolDers The following information is current as at 31 July 2016. The names of the twenty largest registered holders of quoted shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD INVIA CUSTODIAN PTY LIMITED THE TRUST COMPANY SUPERANNUATION LIMITED TRINITY MANAGEMENT PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED UBS NOMINEES PTY LTD BRAZIL FARMING PTY LTD MR PETER ROBIN JOY NATIONAL NOMINEES LIMITED SANDHURST TRUSTEES LTD REZANN PTY LTD WARD MCKENZIE PTY LTD ROBERT FERGUSON + JENNIFER FERGUSON + RACHEL FERGUSON BOND STREET CUSTODIANS LIMITED INVIA CUSTODIAN PTY LIMITEDINVIA CUSTODIAN PTY LIMITED number of Shareholders 4,379 3,264 711 514 40 number of Shareholders 327 number of Shares Percentage of Shares 19,635,615 26.93% 6,776,412 4,625,503 3,405,131 1,074,060 1,000,000 725,995 567,561 513,663 454,763 450,000 446,900 408,540 357,556 329,000 300,000 280,000 250,000 250,000 250,000 9.29% 6.34% 4.67% 1.47% 1.37% 1.00% 0.78% 0.70% 0.62% 0.62% 0.61% 0.56% 0.49% 0.45% 0.41% 0.38% 0.34% 0.34% 0.34% 75 www.selectharvests.com.au ASX Additional Information Continued (c) substaNtial sHareHolDers The names of substantial shareholders are: FMR LLC Goldman Sachs Group (D) VotiNG riGHts All ordinary shares (whether fully paid or not) carry one vote per share without restriction. The Company is listed on the Australian Stock Exchange. The home exchange is Melbourne. number of Shares 6,851,754 4,734,173 76 Select Harvests Limited ABN 87 000 721 380 Corporate Information ABN 87 000 721 380 Directors M Iwaniw (Chairman) P Thompson (Managing Director) R M Herron (Non-Executive Director) M Carroll (Non-Executive Director) F S Grimwade (Non-Executive Director) P Riordan (Non-Executive Director) N Anderson (Non-Executive Director) Company Secretaries P Chambers V Huxley (Assistant) registered Office – Select Harvests limited 360 Settlement Road THOMASTOWN VIC 3074 Postal address PO Box 5 THOMASTOWN VIC 3074 T (03) 9474 3544 F (03) 9474 3588 E info@selectharvests.com.au Solicitors Minter Ellison Lawyers Bankers National Australia Bank Limited Rabobank Australia Commonwealth Bank of Australia Auditor PricewaterhouseCoopers Share register Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 T (03) 9415 4000 F (03) 9473 2555 Website www.selectharvests.com.au 77 www.selectharvests.com.au S E L E C T H A R V E S T S A n n u A L R E p o R T 2 0 1 6 Select Harvests Limited ABN 87 000 721 380 PO Box 5 Thomastown VIC 3074 360 Settlement Road Thomastown VIC 3074 T (03) 9474 3544 F (03) 9474 3588 E info@selectharvests.com.au ASX ticker code: SHV www.selectharvests.com.au Company Websites www.luckynuts.com.au www.sunsol.com.au www.soland.com.au www.allingafarms.com.au Company Instagram Sites www.instagram.com/select_harvests/ www.instagram.com/lucky.nuts/ www.instagram.com/sunsol_muesli/ www.instagram.com/nuvitalityau/ Product range nuts, dried fruit, legumes and pulses, cereals, grains, seeds, flour, muesli and organic foods Bulk and convenient packs Distribution health and food stores and pharmacies nationally Product range muesli, dried fruit, nuts and snacks Distribution major supermarkets (muesli) and export markets including Hong Kong, Singapore, Malaysia, Indonesia and the Pacific Rim Product range muesli, dried fruit, wholefoods, nuts and snacks Distribution Health aisle of major supermarkets and export markets including Hong Kong, Singapore, Malaysia, Indonesia and Pacific Rim Product range almonds and other nuts, dried fruit, seeds, nut pastes, pralines and muesli Bulk and convenient packs Products sold to local and overseas food manufacturers, wholesalers, distributors and re-packers Supplies bulk product to major bakeries, manufacturers and wholesalers who depend on quality and service. Market leader in the cooking nut category Cooking Nut product range almonds, walnuts, cashews, brazilnuts, pine nuts, pistachios, macadamias, sunflower seeds and pepitas (market share – July 2016 MAT – 42.3%) Snacking product range portion control packs, Lucky Smart Snax and Lucky Snack Tubs Distribution major supermarkets and export markets including the Middle East, Indonesia and Papua New Guinea ANNUAL REPORT 2016