ANNUAL REPORT 2018 Tabcorp Annual Report 2018 Notice of meeting The Annual General Meeting of Tabcorp Holdings Limited will be held at 10.00am (Brisbane time) on Wednesday 17 October 2018 at the Brisbane Convention & Exhibition Centre, corner of Merivale and Glenelg Streets, South Bank (Brisbane), Queensland. T F A R D Board of Directors Executive Leadership Team Directors’ Report Remuneration Report Financial Report 30 32 34 47 77 Independent auditor’s report 127 At the back Five year review Shareholder information Major announcements Online shareholder services Company directory Key dates 133 134 136 136 137 137 CONTENTS Operating and Financial Review 01 02 Company overview 03 Operations 04 FY18 overview 05 FY19 priorities 06 FY18 financial performance 09 Value for our stakeholders 10 Chairman’s message 12 Managing Director’s message 14 Wagering and Media business 16 Lotteries and Keno business 18 Gaming Services business Sun Bets business Corporate Responsibility Community Workplace Governance Responsible entertainment Environment 20 21 22 25 27 28 29 About the Annual Report Tabcorp publishes its Annual Report as a single document and on the day it releases its full year results, which provides information to stakeholders in a timely and efficient manner. A copy of the Annual Report is available, free of charge, on request. Current and past Annual Reports are available from the Company’s website at www.tabcorp.com.au. Elect not to receive a hard copy Shareholders can elect not to receive a hard copy Annual Report by updating their communications preferences with the share registry – go online at linkmarketservices.com.au or call 1300 665 661. Tabcorp Holdings Limited ABN 66 063 780 709 Tabcorp and Tatts combined effective December 2017, creating a world-class, diversified gambling entertainment group. More brands, more possibilities, more entertainment. WAGERING AND MEDIA LOTTERIES AND KENO GAMING SERVICES The combined group has a large national footprint, an extensive portfolio of leading brands and a diverse product offering across wagering, media, lotteries, Keno and gaming services. The combination brings together two highly complementary businesses and a strong pool of talent from within each organisation, ensuring that the combined group is well positioned to invest, innovate and compete for future growth. TABCORP’S VISION IS TO BE THE WORLD’S MOST RESPECTED GAMBLING-LED ENTERTAINMENT COMPANY. F I N A N C I A L R E V I E W O P E R A T I N G & 01 Tabcorp Annual Report 2018 COMPANY OVERVIEW More than 3 million registered customers $3.8 billion(i) of revenues in FY18 $7.2 billion of net assets $2.8 billion (i) of taxes and racing industry funding in FY18 The largest financial contributor to the Australian racing industry 9,000+ venues, the biggest retail footprint in Australia More than 5,000 employees (i) Includes contribution from Tatts Group from 14 December 2017. 02 Tabcorp Annual Report 2018 OPERATIONS Northern Territory Australian Operations Queensland 8 Western Australia New South Wales South Australia 8 LEGEND Wagering Media Lottery 8 Keno Gaming Services Global Operations Media broadcasting to 50+ countries Media operations in the USA Wagering and pooling in the Isle of Man 8 8 8 Victoria ACT Tasmania 03 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW FY18 OVERVIEW HIGHLIGHTS KEY POINTS Combination with Tatts Group completed and integration on track › EBITDA synergies and business improvements are on track – Delivered $8 million in FY18 – Decisions taken underpin $50 million in FY19 – Target remains at least $130 million in FY21 Exited loss-making businesses › Sun Bets exit announced July 2018 › Luxbet closure December 2017 A more sustainable regulatory environment › Federal legislation passed banning synthetic lottery products › Wagering point of consumption tax regimes announced › New advertising restrictions and stronger consumer protections introduced Capital management Well positioned for growth › Refinanced $1.8 billion bridge loan into long-dated maturities in US market › Full year dividends totalled 21.0 cents per share fully franked, including final dividend of 10.0 cents per share fully franked › Positive 2H18 performance, driven by Wagering and Media, and Lotteries and Keno businesses › Accelerated digitalisation across the company › New products launched › Licences renewed 04 Tabcorp Annual Report 2018 FY19 PRIORITIES › Deliver the expected benefits from the combination with Tatts › Continue to execute on growth opportunities across all businesses – Enhance digital capability and improve consistency of customer digital experience – Deepen integration of digital technology into retail network – Deploy new products across all markets for all businesses – Strengthen customer relationship management capability by effectively integrating systems and customer data platforms › Ensure the highest levels of regulatory compliance › Maintain a disciplined approach to operating expenditure, capital investment and balance sheet management 05 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW FY18 FINANCIAL PERFORMANCE › Statutory results(i) – Revenues $3,828.7 million, up 71.4% – EBITDA(v) $529.4 million, up 69.5% – NPAT $28.7 million, up from $20.8 million loss – EPS(iii) 1.9 cents per share, up from 2.5 cents loss per share – Results impacted by significant expense items after tax(iv) of $217.5 million from Tatts combination, Sun Bets exit and Luxbet closure › Results before significant items(i)(ii) – Revenues $3,828.7 million, up 71.7% – EBITDA(v) $736.4 million, up 46.1% – NPAT $246.2 million, up 37.6% – EPS(iii) 16.6 cents per share, down 22.4% › Final dividend of 10.0 cents per share fully franked, taking the full year ordinary dividends to 21.0 cents per share fully franked (i) Results include Tatts Group from 14 December 2017. (ii) Tabcorp results before significant items include the Sun Bets operating result in FY18 (treated as a significant item in FY17). (iii) Earnings per share (EPS) calculated using weighted average shares for the period. (iv) Significant items after tax in FY18 totalled $217.5 million, which comprised Tatts Group combination costs of $114.6 million, Sun Bets exit costs of $90.5 million, and Luxbet closure costs of $12.4 million. (v) Earnings before interest, taxation, depreciation and amortisation (EBITDA) is non-IFRS financial information. 06 Tabcorp Annual Report 2018 NPAT before significant items(i)(ii)(iii) $m Revenue(i) $m 246.2 3,828.7 185.9 178.9 2,188.7 2,234.1 FY16 FY17 FY18 FY16 FY17 FY18 Group results (i)(ii) for the year ended 30 June Revenue Taxes, levies, commissions and fees Operating expenses Depreciation and amortisation Impairment EBIT NPAT NPAT before significant items(iii) FY18 $m 3,828.7 (2,331.2) (968.1) (248.6) (39.4) 241.4 28.7 246.2 FY17 $m 2,234.1 (1,235.5) (686.2) (183.3) (27.5) 101.6 (20.8) 178.9 Change % 71.4 88.7 41.1 35.6 43.3 >100 >100 37.6 REVIEW OF RESULTS The financial results of the Group for the financial year ended 30 June 2018 relate to the Group’s operations, which comprise its four businesses of Wagering and Media, Lotteries and Keno, Gaming Services and Sun Bets. Reported net profit after tax (NPAT) of the Group was $28.7 million. This year’s result was impacted by significant items after tax of $217.5 million. This compared to a statutory net loss after tax of $20.8 million for the prior financial year. The significant items after tax which impacted this year’s result related to Tatts Group combination costs of $114.6 million, Sun Bets exit costs of $90.5 million, and Luxbet closure costs of $12.4 million. Basic EPS for the financial year was 1.9 cents per share, compared to negative 2.5 cents per share in the previous year. Before significant items, NPAT was $246.2 million, 37.6% above the previous year, and EPS was 16.6 cents per share, 22.4% below the prior year. Statutory revenue was 71.4% above the previous financial year, at $3,828.7 million. Shareholders’ funds as at the end of the financial year totalled $7,238.6 million, compared to $1,483.4 million at the end of the previous financial year. The 2018 financial year was a company-defining year for Tabcorp. The combination with Tatts has created a world-class, diversified gambling entertainment group with an attractive portfolio of market-leading brands across wagering, media, lotteries, Keno and gaming services. The integration of the two businesses is on track, with initial business improvements and cost initiatives implemented. We have taken decisions to underpin $50 million of EBITDA synergies and business improvements in FY19 and are on target to deliver at least $130 million in FY21. We are focused on delivering the substantial value the combination is expected to create for shareholders, customers, the racing industry and venue partners. During the year we accelerated digitalisation across the company, launched new products and implemented new licences. The group delivered a positive second half performance and we are well positioned for profitable growth and sustainable returns to shareholders. (i) Results include Tatts Group from 14 December 2017. (ii) Tabcorp results before significant items include the Sun Bets operating result in FY18 (treated as a significant item in FY17). (iii) Significant items after tax in FY18 totalled $217.5 million, which comprised Tatts Group combination costs of $114.6 million, Sun Bets exit costs of $90.5 million, and Luxbet closure costs of $12.4 million. 07 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW EBITDA before significant items(i)(ii)(iii) $m 736.4 515.8 504.1 Dividends per share Cents per share (fully franked) 25 24 21 FY16 FY17 FY18 FY16 FY17 FY18 DIVIDENDS A final dividend of 10.0 cents per share fully franked has been announced. The final dividend will be payable on 14 September 2018 to shareholders registered at 16 August 2018. The ex-dividend date is 15 August 2018. The interim and final dividends payable in respect of the full year totalled 21.0 cents per share fully franked. Reflecting the phasing of integration benefits, the FY19 dividend target is 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. Tabcorp’s Dividend Reinvestment Plan (DRP) will operate in respect of the 2018 final dividend. The DRP operated in respect of the 2018 interim dividend, but did not operate in respect of the 2017 final dividend as it was suspended in accordance with the Merger Implementation Deed between Tabcorp and Tatts Group Limited. The table below shows the dividends paid, declared or recommended by the Company since the end of the previous financial year. Further information regarding dividends may be found in note A3 to the Financial Report. Description 2018 final dividend 2018 interim dividend 2017 final dividend Amount per share fully franked 10.0 cents 11.0 cents 12.5 cents Record date 16 August 2018 14 February 2018 14 August 2017 Payment date 14 September 2018 13 March 2018 18 September 2017 Total $201.3m $221.2m $104.4m (i) Results include Tatts Group from 14 December 2017. (ii) Tabcorp results before significant items include the Sun Bets operating result in FY18 (treated as a significant item in FY17). (iii) Earnings before interest, taxation, depreciation and amortisation (EBITDA) is non-IFRS financial information. 08 Tabcorp Annual Report 2018 VALUE FOR OUR STAKEHOLDERS Tabcorp is the largest financial contributor to the racing industry and is a substantial contributor to public funding for governments and communities. Through our industry arrangements, licences and taxation, our business returned the following in FY18 (including Tatts Group contributions from 14 December 2017): › › › Returns to the racing industry of $916.8 million. State and territory gambling taxes and GST of $1,166.4 million. Income taxes paid and payable of $84.8 million. › Commissions to our venue partners of $593.4 million. Tabcorp also provided $1.9 million of voluntary community support. $2.8 billion of taxes and industry funding generated by Tabcorp’s businesses in FY18. 09 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW CHAIRMAN’S MESSAGE I am pleased to report that the 2018 financial year was a successful year for Tabcorp. During the year Tabcorp completed the combination with Tatts; refinanced borrowings of $1.8 billion at a competitive rate with long-dated maturities; led several initiatives to improve the gambling regulatory environment; resolved longstanding stakeholder issues and strengthened industry relationships; closed the loss- making Luxbet business and reached an agreement to exit the unsuccessful UK wagering and gaming business Sun Bets. COMBINATION WITH TATTS On 22 December 2017, Tabcorp officially combined with Tatts following a lengthy and challenging process which formally commenced on 19 October 2016 and notably was implemented on the original transaction terms. The combination with Tatts has brought together two highly complementary businesses which combined, are better positioned to compete, innovate and invest in a rapidly evolving gambling environment. Tabcorp is now a world-class, diversified gambling entertainment group, with a national footprint, more than three million registered customers and over 170,000 shareholders. Work on integrating Tatts into Tabcorp is well advanced, and while this is a complex process that will take until the end of FY20 to complete, it will deliver substantial value for shareholders. We are on target to unlock at least $130 million per annum of EBITDA benefits from synergies and business improvements in FY21, the first full year after integration. At the same time, the management team is focused on delivering the substantial benefits expected to flow to our customers, the racing industry and venue partners. Tabcorp now operates a set of market-leading brands across three businesses – Wagering and Media, Lotteries and Keno, and Gaming Services under a series of long- dated government-issued licences and authorisations. A benefit of the extended transaction timetable was the opportunity afforded to prepare detailed integration plans. Since the transaction completed, a new Executive Leadership Team has been established, led by Managing Director and Chief Executive Officer David Attenborough. The team has been drawn from the talent within both organisations and has come together with clear plans and priorities for each business. Pleasingly, integration is on track with preliminary benefits already realised in the FY18 results. REFINANCING The successful US$1.4 billion note issuance in the US private placement market announced in March 2018, raised a total of A$1.8 billion and was used to fully repay the A$1.8 billion bridge finance facility put in place in connection with the Tatts combination. This significant transaction extended Tabcorp’s debt maturity profile and de-risks and secures the balance sheet for the long term. POSITIVE LEGAL AND REGULATORY OUTCOMES Tabcorp has welcomed recent Federal and State Government reforms which aim to create a better regulated and more sustainable gambling industry. These reforms include the prohibition of synthetic lotteries and Keno products, the introduction of point of consumption taxes on wagering and advertising restrictions. In addition, the Federal Government has introduced enhanced consumer protection initiatives such as the prohibition on offering of credit by wagering operators and restrictions on online in-play betting. Paula Dwyer Chairman 10 Tabcorp Annual Report 2018 These initiatives demonstrate the commitment of Governments and Regulators to a well-regulated gambling sector. Enforcement of regulation is a significant part of this and Tabcorp welcomes the opportunity to play our part in an efficiently regulated and transparent market, characterised by integrity at all levels. During the year Tabcorp concluded a number of legacy regulatory compliance and stakeholder dispute matters, including the successful enforcement of our retail exclusivity arrangements in NSW and the arbitration of the Sky media fees charged to the racing bodies in Victoria. WORKING WITH OUR STAKEHOLDERS Tabcorp’s operations underpin the sustainability of our racing industry partners and support the customer offer for newsagents and licensed venues. In FY18, Tabcorp’s operations (including Tatts Group contributions from 14 December 2017) returned $916.8 million to the Australian racing industry and $593.4 million in commissions to our venue partners. In addition, $1,166.4 million in taxes and GST were returned to State and Territory Governments through our licences and authorisations. These significant returns are reflective of a model which ensures the proceeds of our gambling operations support the communities in which we operate. We remain committed across the business to maintaining strong relationships with our key stakeholders. LUXBET, ODYSSEY AND SUN BETS During the year Tabcorp decommissioned the loss-making Luxbet business and as part of the process for securing Australian Competition Tribunal authorisation for the combination with Tatts, divested Odyssey Gaming Services. The UK online wagering and gaming business Sun Bets was operated under an agreement with News UK since 2016. Its trading performance has been consistently disappointing and below expectations since its establishment and on completion of a strategic review announced at the end of 1H18, we executed an agreement in July 2018 to exit the Sun Bets business. The Company has evaluated the performance of Sun Bets since its inception and the lessons from this unsuccessful venture have been embedded into our strategic planning processes. DIVIDEND Tabcorp announced a final dividend of 10.0 cents per share, fully franked, bringing the full year dividends to 21.0 cents per share fully franked. Reflecting the phasing of integration benefits, the FY19 dividend target is 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. BOARD CHANGES In January 2018, the Board reviewed the operation and membership of Board Committees and separated the Audit, Risk and Compliance Committee to establish an Audit Committee and Risk and Compliance Committee. At the same time the focus of the Remuneration Committee was expanded and to reflect this was renamed the People and Remuneration Committee. Tabcorp welcomed Harry Boon to its Board of Directors in December 2017. Harry led Tatts as Chairman since 2006 and brings to Tabcorp his significant non executive director experience and deep insight into the Tatts business. Harry has agreed to serve on each of the Audit, Risk and Compliance, and People and Remuneration Committees. As previously advised, Jane Hemstritch retired from the Board at the 2017 Annual General Meeting and again I would like to acknowledge Jane for her contribution to Tabcorp over many years. At the 2018 Annual General Meeting to be held on 17 October 2018, Elmer Funke Kupper will retire from the Board of Tabcorp. On behalf of all at Tabcorp I extend our good wishes to Elmer and thank him for his significant contribution to the Company. CONCLUSION In conclusion, I would like to thank our customers and stakeholders for their support in FY18. I would also like to acknowledge and thank all our employees and my Director colleagues across the Tabcorp and Tatts communities for their substantial efforts over the last 12 months to bring the combination of our businesses to life. Tabcorp has entered FY19 with a clear plan to successfully progress the integration of Tatts and to deliver the expected synergies and business improvements. We will continue to execute on customer- led growth opportunities across our businesses while remaining committed to the highest levels of regulatory compliance. Tabcorp had a successful year in FY18 and is now well positioned to deliver sustainable shareholder returns into the future. Thank you for your continued support of Tabcorp. Paula J Dwyer Chairman 11 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW MANAGING DIRECTOR’S MESSAGE The 2018 financial year was company-defining for Tabcorp. The combination with Tatts Group has brought together two highly complementary organisations creating a leading, diversified portfolio of gambling entertainment businesses. Since completing the transaction in December 2017, we have prioritised the integration of the two businesses. We have made good progress, including establishing new leadership teams across the Group and setting the foundations for a strong and aligned organisational culture. Initial business improvements and synergies were delivered at the back end of 2H18 and we are on track to achieve our target of at least $130 million of annualised EBITDA benefits in FY21. During the year we conducted strategic reviews of Luxbet and Sun Bets and made decisions to exit these loss-making businesses. We also implemented a number of strategic initiatives to drive growth in our three businesses. These included accelerating digitalisation across the company, launching new products and implementing the NSW gaming Centralised Monitoring System and new Victorian Public Lottery Licence. Tabcorp is well positioned to deliver not only substantial financial benefits but also a winning offer for customers. GROUP FINANCIAL PERFORMANCE The statutory results for FY18 include a full year’s contribution from Tabcorp and trading from Tatts Group from 14 December 2017 to 30 June 2018. The Group reported NPAT of $28.7 million, which was impacted by a number of significant expense items totalling $217.5 million after tax. The significant items related to costs associated with the Tatts combination and the exits of Sun Bets and Luxbet. NPAT before significant items was $246.2 million (up 37.6%). Before significant items, Group revenues were $3,828.7 million (up 71.7%) and EBITDA was $736.4 million (up 46.1%) reflecting underlying performance and Tatts Group contributions from 14 December 2017. BUSINESSES IN REVIEW The results for each of our three businesses reflect the completion of the combination with Tatts Group in December 2017 and the significant work associated with integration. The combined Wagering and Media business significantly improved its earnings in 2H18 supported by improved variable contribution and expense management. The business delivered FY18 statutory revenues of $2,186.1 million and EBITDA of $396.9 million. Our investment in the digital customer experience supported strong TAB digital turnover growth of 16.3%. New products, such as TAB Multiplier, also helped drive digital growth as did the enhanced performance of the TAB app, which substantially improved its customer rating metrics. A successful Soccer World Cup campaign helped grow active account customer numbers across TAB and UBET to almost 720,000. The stronger performance of TAB relative to UBET highlights the opportunity to improve the UBET business across its digital and retail channels, products and yield management. We plan to start rolling the TAB brand out into the UBET states post the Spring Racing Carnival this financial year. The combined Lotteries and Keno business delivered strong earnings, with FY18 statutory revenues of $1,390.7 million and EBITDA of $255.6 million. Sales in the Lottery and Keno retail channels grew in FY18, however the results were primarily driven by strong digital sales growth coupled with expense management. Lotteries has over 2.9 million registered digital customers and digital accounted for 17.7% of all lottery sales. Keno has over 58,000 digital customers and digital accounted for 3.8% of all Keno sales. David Attenborough Managing Director and Chief Executive Officer 12 Tabcorp Annual Report 2018 In April 2018, we launched an updated Powerball game. Powerball now promises bigger jackpots and more overall winners, which we know from our customer insights data drives stronger engagement. Keno Mega Millions was also launched in Queensland in FY18 with approval in Victoria expected in FY19. Our combined Gaming Services business conducts gaming machine monitoring operations in NSW, Queensland and the Northern Territory, and venue services nationwide. The business delivered FY18 statutory revenues of $249.7 million and EBITDA of $121.8 million. Gaming Services is a business with increased scale and reach across the gaming industry. During the year, the Victorian Government announced new gaming machine arrangements post-2022, providing certainty to hotels and clubs. As well as attracting new sign-ups, Tabcorp Gaming Solutions is seeking to transition existing Victorian venue customers to longer term contracts beyond 2022. These extensions will support the sustainability of the business, albeit at lower margins. FY18 was a highly competitive year in wagering and lotteries as competing operators aggressively sought to acquire customers ahead of regulatory change. A number of reforms have now been introduced which aim to create a more sustainable gambling industry. Tabcorp regards these changes as positive for the sector. We are well placed in this improved environment. OUR PEOPLE AND OUR PARTNERS I would like to thank our teams of people across Australia and other parts of the world who have worked tirelessly to deliver for customers of Tabcorp and Tatts in a year of substantial change. We want to continue to make Tabcorp a great place to work. Our focus is on creating an aligned, high-performing culture that delivers great outcomes for customers, shareholders and our people. We also remain committed to building an inclusive workplace and recently finalised our new Inclusion and Diversity Policy. I’m pleased to report that Tabcorp was recognised for the third successive year as an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency. This reflects the initiatives we’ve implemented to support our commitment to gender equality such as flexible working arrangements, diversity targets and our annual gender pay gap analysis, which found there was no pay gap in like-for-like roles across the combined Group. I would also like to thank our many partners across the racing industry and venue network for their continued support. It is our goal to maintain partnerships where we win together through shared interests and deep collaboration. FUTURE PRIORITIES Continuing to successfully integrate Tabcorp and Tatts and deliver the transaction’s benefits is a priority in the year ahead. We will also execute on growth initiatives across each of our three businesses by continuing to invest in the powerful mix of our retail and digital channels, as well as product initiatives. We will also continue to embed the highest standards of regulatory compliance across the Group and maintain a disciplined approach to operating expenditure, capital investment and balance sheet management. Thank you for your support of Tabcorp. David R H Attenborough Managing Director and Chief Executive Officer 13 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW WAGERING AND MEDIA BUSINESS OPERATIONS Totalisator (or pari-mutuel) and fixed odds betting offered on racing, sporting and other events. Network of TAB and UBET agencies, hotels and clubs, and on-course operations in Victoria, NSW, Queensland, South Australia, Tasmania, Northern Territory and the ACT. Wagering channels include retail, internet, mobile devices and phone. Trackside, a computer simulated racing product, operating in Victoria, NSW and the ACT, and licensed in other Australian and overseas jurisdictions. International wagering and pooling through Premier Gateway International (PGI) joint venture on the Isle of Man (50% interest). › › › Three Sky Racing television channels broadcasting thoroughbred, harness and greyhound racing and other sports to audiences in TAB outlets, hotels, clubs, other licensed venues, and in-home to pay TV subscribers. Sky Sports Radio network in NSW and the ACT, RadioTAB network in Queensland, South Australia, Northern Territory and Tasmania, and advertising and sponsorship arrangements with Radio Sport National. Broadcasting Australian racing throughout Australia and distributing Australian and international racing to other countries, and importing overseas racing to Australia. › › › › › 14 LICENCES/APPROVALS › › › › Victorian Wagering and Betting Licence expires in August 2024, and may be extended by the State of Victoria for a further two year period. NSW Wagering Licence expires in March 2097, with retail exclusivity period to expire in June 2033. Queensland Race Wagering Licence and Sports Wagering Licence expire in June 2098. South Australian Major Betting Operations Licence expires in June 2100, with retail exclusivity period to expire in December 2032. › › › › › Tasmanian Gaming Licence expires in March 2062. Northern Territory Totalisator Licence and Sports Bookmaker Licence expire in October 2035. ACT Totalisator Licence expires in October 2064. ACT Sports Bookmaking Licence expires in October 2029, with further rolling extensions to October 2064. ACT Approval to Conduct Trackside expires in October 2064. FY18 HIGHLIGHTS › › › › Improved earnings in 2H18 supported by improved variable contribution and expense management. Next phase of digitalisation with new products Multiplier (TAB) and Tappy (UBET) launched, and commercialisation of digital vision, including licensing Sky Racing vision. Closure of Luxbet, the Northern Territory based online and phone bookmaking business. Successful Soccer World Cup campaign. Wagering and Media results(i) for the year ended 30 June Revenue Taxes, levies, commissions and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY18 $m 2,186.1 (1,308.6) (480.6) 396.9 (135.2) 261.7 FY17 $m 1,873.0 (1,122.2) (400.8) 350.0 (122.0) 228.0 Change % 16.7 16.6 19.9 13.4 10.9 14.8 (i) Results include the Tatts UBET Wagering business from 14 December 2017. Tabcorp Annual Report 2018 REVIEW OF RESULTS Statutory revenue for the Wagering and Media business was $2,186.1 million, up 16.7% and EBIT was $261.7 million, up 14.8% primarily as a result of contributions from the Tatts Group from 14 December 2017. The business experienced second half earnings momentum supported by improved variable contribution and expense management following the closure of Luxbet and some initial business improvements and synergies delivered. TAB revenue growth in the year was 2.5%. The TAB performance relative to UBET highlights business improvement opportunities across UBET’s digital and retail channels, products and yield management. TAB’s key drivers performed well. Investment in the digital customer exeperience supported strong digital turnover of $5,071.8 million, up 16.3%, off a larger base, offsetting a decline in retail turnover ($6,033.3 million, down 3.3%). Fixed odds products drove revenue growth (racing $680.3 million, up 12.7%; sport $244.0 million, up 14.4%), more than offsetting the decline in tote revenue ($1,037.5 million, down 5.2%). Tabcorp achieved successful results for the Soccer World Cup. This was supported by an integrated campaign across retail and digital, with 2H18 total business revenues of $17.0 million across the TAB and UBET brands. The World Cup helped boost TAB and UBET active account customer numbers to almost 720,000. Revenue $2,186.1m Up | 16.7% EBIT $261.7m Up | 14.8% 15 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW LOTTERIES AND KENO BUSINESS OPERATIONS LICENCES/APPROVALS › › › › › › Victorian Public Lottery Licence expires in June 2028. Queensland Licensed Lottery Operator Agreement expires in July 2072. NSW Operator Licence and various product licences expire in April 2050. Tasmanian Lottery Licence expires in June 2020. Northern Territory Lottery Agreement expires in June 2032. ACT Lottery Licence granted in perpetuity. › Victorian Keno Licence expires in April 2022. › › › › NSW Keno Licence expires in April 2050. In NSW Tabcorp operates Keno under a management agreement with ClubKENO Holdings Pty Ltd. Queensland Keno Licence expires in June 2047. Keno operates under an agreement with the Lotteries Commission of South Australia which runs until December 2052. › ACT Approval to Conduct Keno expires in October 2064. The Lott is Australia’s leading lottery business with operations in all states and territories of Australia, except Western Australia. Our leading game brands include Set for Life, Powerball, Oz Lotto, TattsLotto, Saturday Lotto, Gold Lotto, X Lotto, Monday & Wednesday Lotto, Lucky Lotteries, The Pools, Lotto Strike, Super 66, Keno and Instant Scratch-Its. Our lotteries products can be purchased in approximately 4,000 retail outlets, online at theLott.com and via our mobile app. Keno is a random number game that is played every three minutes with the chance for customers to win instant prizes and multi-million dollar life- changing jackpots. Keno is distributed to over 3,600 venues across clubs, hotels and TABs in Victoria, Queensland, South Australia and ACT, and in clubs and hotels in NSW. Keno jackpot pooling across Victoria, NSW, Queensland and ACT. › › › › › › 16 FY18 HIGHLIGHTS › › Powerball game change launched in April 2018, increasing prize frequency and opportunity for bigger jackpots. Keno Mega Millions launched in Queensland in March 2018, pooling with NSW. › › Lotteries new digital point of sale displays installed in more than 1,000 outlets. New Victorian Public Lottery Licence commenced 1 July 2018. Lotteries and Keno results (i) for the year ended 30 June Revenue Taxes, levies, commissions and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY18 $m 1,390.7 (998.1) (137.0) 255.6 (55.9) 199.7 FY17 $m 212.7 (90.8) (49.9) 72.0 (22.5) 49.5 Change % >100 >100 >100 >100 >100 >100 (i) Results include the Tatts Lotteries business from 14 December 2017. Tabcorp Annual Report 2018 Keno revenue growth skewed to 2H18 given less favourable jackpot sequence in 1H18 versus the prior comparative period. During the year Keno launched Mega Millions in Queensland and accelerated its digital expansion. Digital accounted for 3.8% of Keno sales, with 58,000 digital account holders. REVIEW OF RESULTS Statutory revenue for the Lotteries and Keno business was $1,390.7 million, up >100% and EBIT was $199.7 million, up >100% resulting from contributions from the Tatts Group from 14 December 2017. Strong business unit earnings growth driven by variable contribution margin expansion due to digital growth, cost control and initial business improvements and synergy benefits. Lotteries sales growth experienced in the retail network and digital. Lotteries has more than 2.9 million registered online lottery players. A Powerball game change was launched in April 2018 creating bigger jackpots and more overall winners, in line with consumer demand. Revenue EBIT $1,390.7m $199.7m Up | >100% Up | >100% 17 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW GAMING SERVICES BUSINESS › › › The MAXtech business provides a mix of services including logistics, installation, relocation, repair and maintenance of EGMs, lottery and wagering terminals and other transaction devices across Australia. The TGS business has approximately 10,360 EGMs under contract. TGS has 7,800 EGMs under contract in Victoria, of which 87% are contracted to 2022 and 11% beyond 2022. FY18 HIGHLIGHTS › › › The new MAX NSW Centralised Monitoring System Licence which commenced on 1 December 2017 provides a platform for future venue services opportunities. New Victorian gaming arrangements now provide industry certainty to 2032 (previously 2022). The Odyssey business which provided EGM monitoring in Queensland was divested in December 2017. LICENCES/APPROVALS › › › › › NSW Centralised Monitoring System Licence expires in November 2032. NSW Inter-Club Linked Gaming Systems Licence and Inter- Hotel Linked Gaming Systems Licence expire in October 2019. NSW Gaming Machine Dealer’s and Seller’s Licences. Queensland Monitoring Operator’s Licence expires in August 2027 and Service Contractor Licence. Victorian listings on the Roll of Manufacturers, Suppliers and Testers. › South Australian Gaming Machine Dealer’s Licence (voluntarily suspended) and Gaming Machine Service Licence. › ACT Supplier Certificates. › › Northern Territory Monitoring Provider’s Licence, listing on the Roll of Approved Gaming Equipment Suppliers, Gaming Machine Service Contractors Licence and other approvals. Tasmanian listings on the Roll of Recognised Manufacturers, Suppliers and Testers of Gaming Equipment. Gaming Services results (i) for the year ended 30 June Revenue Taxes, levies, commissions and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY18 $m 249.7 (14.4) (113.5) 121.8 (56.2) 65.6 FY17 $m 143.9 (10.3) (51.5) 82.1 (34.2) 47.9 Change % 73.5 39.8 >100 48.4 64.3 37.1 (i) Results include the Tatts MAX and MAXtech business from 14 December 2017. OPERATIONS The Tatts MAX business operates across NSW, Queensland, and Northern Territory providing electronic gaming machine (EGM) monitoring and value-add services to venues such as reporting, loyalty systems management, linked jackpots, cashless pre-commitment and ticket in ticket out (TITO) services. Tabcorp Gaming Solutions (TGS) operates across Victoria and NSW. TGS provides a mix of gaming machine expertise, specialised services, strategic advice and financing to licensed gaming venues, with the aim of optimising gaming and total venue performance. The eBet business provides gaming and promotional management systems and related services in NSW, Victoria, Queensland, Tasmania and the ACT. › › › 18 Tabcorp Annual Report 2018 REVIEW OF RESULTS Statutory revenue for the Gaming Services business was $249.7 million, up 73.5% and EBIT was $65.6 million, up 37.1% with contributions from the Tatts Group from 14 December 2017. During the year, the Victorian Government announced new gaming machine arrangements post-2022, providing certainty to hotels and clubs. As well as attracting new sign-ups, Tabcorp Gaming Solutions is seeking to transition existing Victorian venue customers to longer term contracts beyond 2022. These extensions will support the sustainability of the business, albeit at lower margins. An operational highlight for the year was MAX’s successful roll-out of the Centralised Monitoring System for gaming machines in NSW, which creates a platform for future venue services opportunities. Revenue $249.7m Up | 73.5% EBIT $65.6m Up | 37.1% 19 Tabcorp Annual Report 2018OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW SUN BETS BUSINESS OPERATIONS LICENCES/APPROVALS REVIEW OF RESULTS › Sun Bets provided wagering and gaming services to UK and Ireland residents via internet, mobile devices and phone. › Sun Bets operated under a UK Remote Operating Licence with no expiry, and an Irish Remote Bookmaker’s Licence which was to expire in June 2019. Sun Bets recorded statutory revenue of $7.4 million and an EBIT loss of $38.2 million for FY18. Sun Bets’ trading has been disappointing and material improvement was not expected. As previously announced, Tabcorp executed an agreement with News UK to exit the Sun Bets business. Sun Bets ceased trading in July 2018. Sun Bets results (i) for the year ended 30 June Revenue Taxes, levies, commissions and fees Operating expenses EBITDA Depreciation and amortisation EBIT (i) Sun Bets was treated as a significant item in FY17. FY18 $m 7.4 (18.6) (25.7) (36.9) (1.3) (38.2) 20 Revenue $7.4m EBIT $38.2m Loss Tabcorp Annual Report 2018 CORPORATE RESPONSIBILITY CORPORATE RESPONSIBILITY FRAMEWORK AND STRATEGY The year ended 30 June 2018 was the first full year of operating under our corporate responsibility framework and strategy following its establishment during the previous financial year. The strategy supports Tabcorp’s vision to be the world’s most respected gambling-led entertainment company and builds upon the progress and outcomes achieved by Tabcorp over many years. The strategy was developed to generate value for our shareholders, employees, industry partners, community and other stakeholders over the short, mid, and longer term and helps us to guide our corporate responsibility efforts in the areas that matter to Tabcorp and our stakeholders. It also plays an important role in securing and enhancing Tabcorp’s social licence to operate. A summary of key developments and achievements under the strategy during the year is set out in this section of the Annual Report and includes six months’ contribution from the Tatts business following the Combination. During the year, the corporate responsibility practices of the Tabcorp and Tatts businesses were combined and now operate under this framework and strategy. By combining the best elements from both organisations, we will continue to evolve and strengthen our corporate responsibility practices and activities. Our corporate responsibility framework and strategy is based on the five pillars below. Tabcorp publishes annually a Corporate Responsibility Review on the Tabcorp website which sets out Tabcorp’s key corporate responsibility activities and progress against each of these pillars during the relevant year. The five pillars of Tabcorp’s corporate responsibility framework Community Workplace Governance Responsible Entertainment Environment Corporate community investment, employee and community engagement, and support for improving social impacts. Leading workplace practices to foster fairness, safety and wellbeing, diversity, inclusiveness, opportunity, performance and growth. Stakeholder engagement, Board and executive performance, policies, transparency, measurement and reporting. Responsible gambling and advertising practices, and supporting the racing industry in enhancing animal welfare. A good foundation to improve performance and awareness for delivering positive environmental outcomes. 21 Tabcorp Annual Report 2018CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY COMMUNITY OUR CONTRIBUTIONS TO THE COMMUNITY Tabcorp and its team members are proud to support our industry and charity partners, and provide significant contributions to the local communities in which we live, work and play. We have established key partnerships with charitable organisations, such as Prostate Cancer Foundation Australia, OzHarvest, Conservation Volunteers Australia and Starlight Children’s Foundation, and industry based not-for-profits such as the National Jockeys Trust. We manage a number of programs and events that allow us to engage with industry partners and communities to help improve the communities around us. We also have the Tabcorp Charitable Games team which focusses on fundraising activities for the not-for-profit sector. Initially established by Tatts, the Charitable Games team provides expertise and supplies technology solutions and innovative products that support charitable organisations in their fundraising endeavours. Tabcorp provides access to technology and marketing resources to support the activities of the 50-50 Foundation and the delivery of the 50-50 Charity Raffle and Play For Purpose charity lottery. During the year, the value of our voluntary contributions totalled approximately $1.9 million. This was a substantial increase from last year (FY17: approximately $1.3 million) and includes six months’ contribution from the Tatts businesses following the Combination. This voluntary support is in the form of cash donations, in-kind support, management and employee time, and leveraged support. The major developments during the year are outlined on the following pages. These voluntary contributions are in addition to the $2.8 billion in taxes, community contributions and industry funding that our businesses generated in FY18 through our industry arrangements, licences and taxation. One such example is the $500,000 contribution paid annually by our Golden Casket lotteries 22 business to the Mater Foundation healthcare group in Queensland. Also, as the largest funder of the Australian racing industry and with the largest retail footprint of any Australian company, our businesses support thousands of industry jobs and communities across the country. Total voluntary community contributions $m 1.9 50-50 FOUNDATION Tabcorp has a partnership with and provides support to the 50-50 Foundation, which is a registered Australian charity that fundraises for charitable causes. Since establishment in 2012 with the support of Tatts and now Tabcorp, the 50-50 Foundation has operated more than 300 charity raffles and lotteries and raised significant funds for over 100 Australian charities. The Foundation is governed by a pro-bono board and currently operates two products (50-50 Charity Raffle and Play For Purpose) that are powered by Tabcorp technology. The 50-50 Charity Raffle gives sports fans the chance to play for large cash prizes whilst supporting local charities. The 50-50 Foundation works with sporting clubs and charity partners to host fundraising raffles at large sporting events. The 50-50 Charity Raffle now has over 25 sporting partners across the AFL, NRL, Super Rugby, Big Bash, racing and A-League. In FY18, Tabcorp team members and community volunteers conducted 144 charity raffles across Queensland, New South Wales and South Australia raising over $370,000 for independent Australian charities. 1.3 0.8 FY16 FY17 FY18(i) (i) Results include Tatts Group from 14 December 2017. 5050foundation.net.au 5050charityraffle.com.au playforpurpose.com.au Tabcorp Annual Report 2018 NATIONAL JOCKEYS TRUST FY18 was the third year of Tabcorp’s major partnership with the National Jockeys Trust. Our partnership helps the Trust to support injured jockeys and families of fallen riders. This year we donated $40,000 to the Trust and were the major sponsor of the National Jockeys Trust race day at Caulfield in July 2017, and the TAB National Jockeys Trust T20 cricket match in January. The charity cricket match is the biggest annual fundraising event for the Trust, and through the support of our team members, industry partners, sporting and racing ambassadors, and the public, the event raised a record $114,000. UBET is also a partner of the National Jockeys Trust, and in FY18 UBET launched an inaugural radio appeal which raised $40,000 for the Trust. PROSTATE CANCER FOUNDATION AUSTRALIA In FY17, UBET entered into a partnership with Prostate Cancer Foundation Australia (PCFA) and in FY18 we were pleased to extend this partnership to include TAB. Through the national footprint of our TAB and UBET wagering businesses, Tabcorp will be able to increase support and awareness of PCFA and men’s health issues. In June 2018, we donated $100,000 to the PCFA as part of the UBET Stradbroke Handicap race day at Doomben Racecourse in Brisbane. Tabcorp also supports fundraising activities for PCFA in our wagering retail venues, and provides customer and staff awareness for the “Get Checked” campaign for Prostate Cancer Awareness month in September. TEAL PANTS Teal Pants is the harness racing industry initiative that supports the Women’s Cancer Foundation. The initiative sees female harness drivers across the country wear teal coloured pants to raise funds and awareness for the Foundation, which is dedicated to funding research and development of an ovarian cancer vaccine. Teal Pants operates in February and March in conjunction with Ovarian Cancer Awareness Month. This year we combined our Tabcorp and Tatts support and made donations to the Foundation for each time a female driver won a race in all Australian states and territories where we operate our TAB and UBET retail networks. Our TAB and UBET businesses donated a total of $37,650 to support the Foundation this year. Our donations were matched by the respective harness racing body. Play For Purpose was launched with the support of Tatts in November 2017, and is the first charity lottery of its kind in Australia. Play For Purpose enables participants to play for amazing prizes while supporting their favourite cause. More than 90 charities and sporting foundations across the country are on the platform. People can purchase a ticket online and a minimum of $15 from every $25 ticket sold goes directly to their chosen charity, and participants go into the draw for a chance to win $1 million worth of prizes. There are over 11,000 prizes to be won, giving people a 1 in 19 chance to win a prize while also supporting their chosen Australian charity. Play for Purpose is an innovative solution that rewards both supporters and charities. Play For Purpose utilises technology to provide a cost effective and transparent fundraising offer for Australian community organisations. The first Play For Purpose lottery game is scheduled to be drawn on 27 September 2018. 23 Tabcorp Annual Report 2018CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY to $10,000 per charity. Tabcorp also provides one annual volunteer leave day which enables team members to contribute their time to help a community group. Some of the main fundraising activities supported by Tabcare in FY18 included the OzHarvest CEO Cook Off, World’s Greatest Shave, Movember, Steve Waugh Foundation and the Baker Heart & Diabetes Institute. COMMUNITY STARLIGHT CHILDREN’S FOUNDATION The Lott has been one of the Starlight Children’s Foundation’s national charity partners since 2015. Fundraising activities and awareness campaigns on behalf of the Starlight Children’s Foundation are conducted across our approximately 4,000 lottery retail outlets and digital channels. Tabcorp donated a total of $110,500 in the second half of FY18, and through our engagement with our generous retail partners and customers, we hope to raise more than $150,000 for the charity this year. Funds raised will help brighten the hospital experience for more than 2,500 seriously ill children and their families. COMMUNITY HACK DAYS During FY18, Tabcorp’s Technology team developed and launched community hack days to encourage team members with technology-based skills to create solutions for our charity partners. The hack days enabled teams to collaborate, contribute their skills and use their annual volunteer leave day to help charities overcome technology problems or create new technology solutions. A hack day was undertaken in September 2017 in Melbourne to help Conservation Volunteers Australia, and another hack day was completed in October 2017 in Sydney for OzHarvest. TABCARE Tabcorp’s community and employee engagement program is called ‘Tabcare’. Through the program, Tabcorp encourages team members to donate their time and raise funds for their chosen local community charities or either of Tabcorp’s major community partners: OzHarvest or Conservation Volunteers Australia. Team members can fundraise for any charitable organisation of their choice, with Tabcorp matching funds raised up 24 Employee volunteering Number of volunteer leave days used 254 205 208 FY16 FY17 FY18(i) (i) Results include Tatts Group from 14 December 2017. Tabcorp Annual Report 2018 WORKPLACE INCLUSION AND DIVERSITY Tabcorp is committed to fostering an inclusive culture that reflects a diverse workplace, where team members openly share their unique perspectives, challenge the status quo and contribute their experience to achieve the best possible business outcome. Our focus on inclusion and diversity not only benefits employees but Tabcorp too, as research shows that diverse organisations outperform those that aren’t. Tabcorp recently refreshed its Inclusion and Diversity Policy. It articulates our commitment to creating a culture of inclusion, where our team members collaborate, everyone is treated with respect, and where everyone experiences a genuine sense of belonging. A new Board diversity target was introduced, to have at least 40% female Non Executive Directors by the end of FY23. We have also set a new management diversity target of at least 40% of females in senior leadership positions by the end of FY21. We regularly review and benchmark ourselves against relevant indicators to ensure we maintain our focus on inclusion and diversity, and to check that we are making progress. One such review was our annual gender pay gap analysis, which for the first time included the combined Tabcorp-Tatts Group. The review showed that across the combined Group there is no identified gender pay gap in like-for-like roles. We acknowledge there are some small pockets of the organisation where we have pay differences resulting from highly specialist capability and experience. Also, Tabcorp was recognised for the third consecutive year as an Employer of Choice for Gender Equality. Awarded by the Federal Government’s Workplace Gender Equality Agency (WGEA), the citation recognises our achievements in working towards a diverse workplace. Tabcorp is again the only gambling company and one of only 120 Australian organisations to receive this citation. We have come a long way since we launched Tabcorp’s Diversity Council in 2012 (now called the Inclusion and Diversity Committee), an executive management committee to lead inclusion and diversity throughout the organisation. Over this period we have developed and enhanced many initiatives, including: › › › › 13 weeks’ paid parental leave for primary carers and market- leading paid secondary carer’s leave of six weeks; a Women’s Mentoring Program, which more than 150 women have participated in. In 2018, twenty-nine women and ten mentors completed the joint Tabcorp-Racing Victoria Women’s Mentoring Program; fully flexible work practices; and a commitment to increasing the representation of women in our senior leadership group, which has seen us surpass previous gender diversity targets and resulted in lifting the percentage of women in senior leadership roles from 25% to 36%. DIVERSITY TARGETS: 40% FEMA LE NON EXECUTIVE DIRECTORS BY THE END OF FY23 40% OF FEMALES IN SENIOR LEADERSHIP ROLES BY THE END OF FY21 Total employee population At 30June 2018 43% 57% Female Male 36% females in senior leadership positions as at 30 June 2018 Tabcorp’s Inclusion and Diversity Policy and our annual report under the Workplace Gender Equality Act are available from the Corporate Governance section of Tabcorp’s website. 25 Tabcorp Annual Report 2018CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY WORKPLACE DEVELOPING OUR PEOPLE HEALTH, SAFETY AND WELLBEING Tabcorp is committed to providing a safe environment for employees and visitors, and actively promotes health, safety and wellbeing in the workplace. Our safety data indicates that we continue to manage workplace safety well at Tabcorp. Although there was a reported increase in lost time injuries in FY18, this was a consequence of six months’ contribution from Tatts. The underlying trend for Tabcorp (excluding Tatts) showed a reduction in FY18, with a lost time injury frequency rate of 0.9 which according to benchmarks is below industry norms. During the year Tabcorp supported various employee awareness programs including Safety Week, Men’s Health Week, Prostate Cancer Awareness Week, Harmony Day, Jobs at Home Day, RU OK Day and National Carers Week. Through regular employee engagement channels we are able to promote safety, wellness, flexible working, stress management, mindfulness, resilience, and nutrition. We hold annual employee expos at our main offices to also promote awareness of these and other benefits available to employees. Our people may also participate in mental health and first aid training, and are offered preventative influenza injections. Workplace safety Number of lost time injuries per million hours worked 2.3 1.5 0.9 FY16 FY17 FY18(i) (i) Results include Tatts Group from 14 December 2017. Investing in the development of our people is essential to making Tabcorp a great place to work. We strongly believe developing the skills and capability of employees improves individual and collective performance and has a direct impact on business outcomes. We also know that investing in the growth and development of our people correlates strongly with increased employee engagement and is a great way to inspire, motivate and retain our talent. Tabcorp empowers its people to take the reins of their development. Our people are provided with the tools, resources and support to grow their careers. Our Learn and Grow enterprise learning and development system and framework provides opportunities for employees and their leaders to work together to develop skills and gain new experiences to grow capability in support of organisational goals and employees’ career aspirations. All Tabcorp permanent and fixed term employees also have access to Lynda.com – the world’s largest online learning repository. Lynda is 26 a global best practice learning and development platform which delivers content taught by industry experts and complements our other learning initiatives. Lynda.com offers thousands of video courses and other content, removing physical barriers to continuous learning and enabling employees to self-serve and fast track their individual development goals. In addition, employees undertake a range of general and targeted classroom style courses including Effective Business Writing, High Performance Conversations, Mastering Expertship and Presenting with Impact. Tabcorp also held the third annual Tabcorp Sky Racing Academy in June 2018. This is a five-day program which brought together 23 emerging media professionals and presenters from our Sky Racing business and industry partners around Australia and New Zealand. It was a unique opportunity for them to learn from experienced broadcasters and develop their capability and careers. Tabcorp Annual Report 2018 GOVERNANCE FRAMEWORK REPORTING Tabcorp’s Corporate Responsibility Review 2017 was the first year that Tabcorp referenced the GRI Standards. A copy of the Review is available on the Company’s website under the Sustainability section. During FY18, Tabcorp lodged annual submissions for the Dow Jones Sustainability Index, FTSE4Good, CDP, ISS and Trucost to assess our environmental, social and governance practices, which are used by investors and stakeholders as a guide to identifying companies with leading practices in these areas. Tabcorp’s corporate governance framework is summarised in the diagram opposite. The framework has evolved to meet the changing needs of the combined Group resulting from the Combination, and continues to evolve to reflect contemporary market-leading practice. BOARD COMMITTEE RESTRUCTURE Having regard to the increased regulatory complexity, larger size and broader focus of the Group following the Combination, the Board restructured its standing Board Committees to ensure appropriate focus on the key business issues relevant to the combined Group. This committee structure was effective from 1 January 2018. Tabcorp’s Corporate Governance Statement 2018, Appendix 4G, and key policies and governance documents are available at tabcorp.com.au Chairman of the Board Board of Directors Audit Committee Risk and Compliance Committee People and Remuneration Committee Standing Board Committees MD & CEO Executive Leadership Team Management Committees including: › Executive Risk and Compliance Committee › Inclusion and Diversity Committee › Corporate Responsibility Committee Frameworks, policies, procedures and practices as approved by the Board and the Executive Leadership Team Other independent assurance › External Auditor › › Internal Audit Legal and other professional advisers (as necessary) 27 Tabcorp Annual Report 2018CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY RESPONSIBLE ENTERTAINMENT PROMOTING RESPONSIBLE GAMBLING In October 2017, Tabcorp again participated in the Responsible Gambling Awareness Weeks (RGAW) in Victoria, NSW and the Northern Territory, and the Gambling Harm Awareness Week (GHAW) in the ACT. Our support of these events aims to educate the community and raise awareness of responsible gambling. We continue to update our systems, procedures, processes and operating model and have implemented a range of enhancements to support responsible gambling. We have improved our predictive analytics risk surveillance system that uses artificial intelligence to monitor wagering behaviour for potential problem gambling activity. We also added weekly deposit limits for new wagering customers using our iOS app, and enhanced our responsible gambling online information resources. A new Responsible Marketing and Advertising Standards and Review 28 Process was implemented in our TAB business, and the Keno Standards were also updated. We further enhanced customer monitoring and supervision measures at on-course TAB locations across Victoria, New South Wales and ACT. This includes a focus on asking any customers who look under 25 years of age for identification. GREYHOUND ADOPTION RECOGNITION Our Sky Racing business was the major sponsor of the inaugural Greyhound Adoption Program (GAP) National Adoption Day, held in April 2018. The nation-wide campaign was aimed at improving awareness of greyhounds as pets and the importance of re-homing retired racing greyhounds, and saw 212 greyhounds adopted. In September 2017, Tabcorp once again received a score of 100% for promoting responsible gambling in the annual assessment for the Dow Jones Sustainability Index. This represented the eleventh consecutive year that Tabcorp had received this recognition, and acknowledges our long standing leadership position in this area. Also during the year, the Tatts Lotteries business received Level 4 Responsible Gambling Accreditation from the World Lottery Association (WLA). This certification recognises the Tatts Lotteries business as a leader in responsible gambling as assessed by the Responsible Gaming Independent Assessment Panel against the internationally recognised WLA Responsible Gaming Framework and WLA Responsible Gaming Principles. Tabcorp Annual Report 2018 ENVIRONMENT REDUCING OUR ENVIRONMENTAL IMPACT Tabcorp has for many years focused on reducing its impact on the environment, and we continue to promote employee awareness to recycle, reuse and reduce. One of the areas of focus has been the reduction in the amount of paper we consume. Although this amount increased in FY18 to 4.732 million A4 equivalent pages including six months’ contribution from Tatts, there was a continuing trend by Tabcorp (excluding Tatts) to reduce paper consumption. We also track our electricity, gas and fleet vehicle fuel consumptions and the resulting greenhouse gas emissions which will be reported in our annual Corporate Responsibility Review. The relocation of Tabcorp’s Melbourne office to the new Collins Square premises from August 2017 further reduced our environmental footprint. The premises at Collins Square has a minimum 5 Star Green rating. HELPING THE ENVIRONMENT Tabcorp has a long standing association with Conservation Volunteers Australia and supports team members to participate in environmental protection and wildlife conservation activities. In September, Wagering Technology team members in Victoria used their annual volunteer leave day to participate in the Conservation Volunteers Australia’s Eastern Barred Bandicoot recovery project on Threatened Species Day. Team members also participated in the annual Conservation Volunteers Australia Tree Planting Challenge to celebrate World Environment Day in June, which resulted in almost 2,000 native seedlings planted along the banks of the Yarra River. Once again Tabcorp participated in Earth Hour, an annual event of the World Wide Fund for Nature to promote global environmental awareness. Tabcorp supported the initiative and awareness of climate change by encouraging team members to switch off lights, computer monitors and other non-essential devices at work and at home. Paper consumption Million A4 equivalent pages 4.732 3.863 3.635 FY16 FY17 FY18(i) (i) Results include Tatts Group from 14 December 2017. 29 Tabcorp Annual Report 2018CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITY BOARD OF DIRECTORS Paula Dwyer David Attenborough Bruce Akhurst Harry Boon Elmer Funke Kupper Chairman and Non Executive Director from June 2011(i)(ii) Managing Director and Chief Executive Officer from June 2011 Non Executive Director from July 2017 Non Executive Director from December 2017 Non Executive Director from June 2012 (on leave of absence) Paula Dwyer is Chairman of Healthscope Limited, and a Director of Australia and New Zealand Banking Group Limited and Lion Pty Ltd. She is also a Member of the Kirin Holdings International Advisory Board and a Member of the Takeovers Panel. Ms Dwyer was formerly a Director of Leighton Holdings Limited, Suncorp Group Limited, Foster’s Group Limited and David Jones Limited, and is a former member of the ASIC External Advisory Panel and the Victorian Casino and Gaming Authority and of the Victorian Gaming Commission. Ms Dwyer had an executive career in finance holding senior positions in investment management, investment banking and chartered accounting with Ord Minnett (now JP Morgan) and PricewaterhouseCoopers. Ms Dwyer is Chairman of the Victorian Joint Venture Management Committee. She is also a member of the Tabcorp Audit Committee, Tabcorp Risk and Compliance Committee and Tabcorp People and Remuneration Committee. Ms Dwyer holds a Bachelor of Commerce. She is a Fellow of the Chartered Accountants Australia and New Zealand, Fellow of AICD, and is a Senior Fellow of the Financial Services Institute of Australasia. 30 David Attenborough joined Tabcorp in April 2010 as Managing Director – Wagering. He became Managing Director and Chief Executive Officer when Tabcorp’s demerger of its former casinos business was completed in June 2011. He is also a Director of the Australasian Gaming Council. Bruce Akhurst is the Executive Chairman of Adstream Holdings Pty Ltd and is a Director of private investment company Paul Ramsay Holdings Pty Ltd. He is also Chairman of the Peter MacCallum Cancer Foundation, and a Director of the State Library of Victoria, and a Council Member of RMIT University. Mr Attenborough was previously the Chief Executive Officer (South Africa) of Phumelela Gaming and Leisure Limited, the leading wagering operator in South Africa. His previous experience also includes the development of casino, bookmaking and gaming opportunities for British bookmaking company Ladbrokes (formerly part of the Hilton Group Plc). Mr Attenborough holds a Bachelor of Science (Honours) and a Master of Business Administration, and is a Member of AICD. He was appointed as the Managing Director and Chief Executive Officer following the Tabcorp-Tatts combination Mr Akhurst was the Chief Executive Officer of Sensis Pty Ltd from 2005 to 2012 and a Director and Chairman of FOXTEL. Mr Akhurst also spent seven years as Group Managing Director and Group General Counsel at Telstra Corporation Limited, and prior to that he was a Partner at Mallesons Stephen Jaques. Mr Akhurst is Chairman of the Tabcorp Risk and Compliance Committee and a member of the Tabcorp Audit Committee. Mr Akhurst holds a Bachelor of Economics (Honours) and a Bachelor of Laws, and is a Fellow of AICD. Prior to the demerger, Elmer Funke Kupper was Tabcorp’s Managing Director and Chief Executive Officer from September 2007 to June 2011, and previously he was Tabcorp’s Chief Executive Australian Business from February 2006. Mr Funke Kupper was Managing Director and Chief Executive Officer of ASX Limited from October 2011 to March 2016. His career includes several senior executive positions with Australia and New Zealand Banking Group Limited, including Group Head of Risk Management, Group Managing Director Asia Pacific and Managing Director Personal Banking and Wealth Management. Previously he was a senior management consultant with McKinsey & Company and AT Kearney. Mr Funke Kupper holds a Bachelor of Business Administration and a Master of Business Administration, and is a Member of AICD. Harry Boon joined the Tabcorp Board in December 2017 following the implementation of the combination between Tabcorp and Tatts Group Limited (Tatts). He was previously the Chairman of Tatts, and served as a Non Executive Director of Tatts from May 2005. Mr Boon is currently the Chairman of Asaleo Care Limited and is a former Director of Toll Holdings Limited from 2006 to 2015. Mr Boon was previously Chief Executive Officer and Managing Director of ASX listed company Ansell Limited until he retired in 2004, a position which capped a career spanning some 28 years with the Ansell Group. Mr Boon has held senior positions in Australia, Europe, the US and Canada, and has broad-based experience in global marketing and sales, manufacturing, and product development. Mr Boon is a member of the Tabcorp Audit Committee, Tabcorp Risk and Compliance Committee and Tabcorp People and Remuneration Committee. Mr Boon holds a Bachelor of Laws (Honours) and a Bachelor of Commerce. Tabcorp Annual Report 2018 Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski AO Non Executive Director from July 2012 Non Executive Director from July 2017 Non Executive Director from August 2011 Non Executive Director from June 2011(i)(iii) Steven Gregg is Chairman of Caltex Australia Limited and a Director of Challenger Limited and thoroughbred bloodstock company William Inglis & Son Limited. He is also a Trustee of the Australian Museum Trust and Chairman of Unisson Disability Limited. He is the former Chairman of Goodman Fielder Limited and former Chairman of Austock Group Limited, and he was a Member of the Grant Samuel non-executive Advisory Board. Mr Gregg had an executive career in investment banking and management consulting, including as Global Head of Investment Banking and CEO at ABN Amro Bank, and Partner and Senior Adviser to McKinsey & Company. Mr Gregg is a member of the Tabcorp Audit Committee and Tabcorp People and Remuneration Committee. Mr Gregg holds a Bachelor of Commerce. Vickki McFadden is Chairman of GPT Group, a Director of Newcrest Mining Limited and Myer Family Investments Pty Ltd, and President of the Takeovers Panel. She is also a Member of Chief Executive Women and a Member of the Advisory Board and Executive Committee of the UNSW Business School. Ms McFadden was Chairman of Eftpos Payments Australia Limited and Skilled Group Limited, and was previously a Non Executive Director of Leighton Holdings Limited. Prior to this, she was Managing Director, Investment Banking at Merrill Lynch (Australia) Pty Ltd. Ms McFadden is Chairman of the Tabcorp Audit Committee and a member of the Tabcorp Risk and Compliance Committee. Ms McFadden holds a Bachelor of Commerce and a Bachelor of Laws, and is a Member of AICD. Justin Milne is Chairman of MYOB Group Limited, Chairman of NetComm Wireless Limited and Chairman of Australian Broadcasting Corporation. He is also a Director of NBN Co Limited, Members Equity Bank Limited and SMS Management and Technology Limited. Mr Milne was formerly Chairman of pieNETWORKS Limited, a Director of Basketball Australia Limited and Chief Executive Officer of OzEmail and the Microsoft Network. Mr Milne had an executive career in telecommunications, marketing and media. From 2002 to 2010 he was Group Managing Director of Telstra’s broadband and media businesses, and headed up Telstra’s BigPond New Media businesses in China. Mr Milne is a member of the Tabcorp Risk and Compliance Committee. Mr Milne holds a Bachelor of Arts, and is a Fellow of AICD. Zygmunt Switkowski is Chairman of Suncorp Group Limited and Chairman of NBN Co Limited. He is also a Director of Healthscope Limited, and Chancellor of RMIT University. Dr Switkowski is a former Director of Oil Search Limited, former Chairman of the Australian Nuclear Science and Technology Organisation, and former Chairman of Opera Australia. Dr Switkowski was the Chief Executive Officer and Managing Director of Telstra Corporation Limited from 1999 to 2005, and is a former Chief Executive Officer of Optus Communications. Dr Switkowski is Chairman of the Tabcorp People and Remuneration Committee. Dr Switkowski holds a Bachelor of Science (Honours), and a PhD (Nuclear Physics). He is a Fellow of AICD, Australian Academy of Technological Sciences and Engineering, and Australian Academy of Science. (i) The demerger of the Group’s former casinos business, which occurred in June 2011, resulted in Tabcorp being a substantially different company. Therefore the Company’s view is that Directors’ tenure was reset at that time. (ii) Prior to the demerger was a Non Executive Director from August 2005. (iii) Prior to the demerger was a Non Executive Director from October 2006. D I R E C T O R S 31 Tabcorp Annual Report 2018 EXECUTIVE LEADERSHIP TEAM David Attenborough Merryl Dooley Sean Hughes Damien Johnston Clinton Lollback Chief People Officer Group General Counsel Chief Financial Officer Chief Risk Officer Merryl commenced with Tabcorp in October 1990 and has held numerous positions across a range of discipline areas including human resources, training and development, communications and sales. She became Executive General Manager – Human Resources in June 2011 following the implementation of the Tabcorp demerger, and then Executive General Manager - People, Culture & Communications in March 2016, prior to becoming Chief People Officer in December 2017 following the Tabcorp-Tatts combination. Merryl holds a Masters of Business Administration (Executive) and a Bachelor of Arts, and has attended the Senior Executive Program at the London Business School. She is a Member of AICD. Sean joined Tabcorp in July 2017. As Group General Counsel he leads Tabcorp’s Legal and Regulatory function. Prior to joining Tabcorp, he was Chief Risk and Legal Officer at UniSuper. He has also held executive leadership roles with the Financial Markets Authority in New Zealand (as Chief Executive Officer), Australian Securities and Investments Commission, National Australia Bank Limited and Australia and New Zealand Banking Group Limited. Sean holds a Bachelor of Laws (Honours), a Bachelor of Arts and a Master of Law (First). He is a Graduate Member of AICD. Damien joined Tabcorp in September 2003. He was Tabcorp’s Deputy Chief Financial Officer, being responsible for Tabcorp’s Corporate Finance function including Treasury and Investor Relations, and became Chief Financial Officer upon implementation of the Tabcorp demerger in June 2011. He previously had a 21 year career with BHP Billiton with key finance roles in both Australia and Asia. These included both operational finance and corporate roles. Damien holds a Bachelor of Commerce and is a Fellow of CPA Australia. Clinton joined Tabcorp in January 2016 in this newly created role to lead Tabcorp’s risk and compliance functions. Prior to joining Tabcorp, he was the Head of Operational Risk at Macquarie Group, a role he established and led for 10 years. Clinton has extensive risk management experience in the banking and finance industry, including roles with Westpac, JP Morgan, and Coopers & Lybrand. Clinton holds a Bachelor of Business and is a Member of the Institute of Chartered Accountants. Managing Director and Chief Executive Officer David joined Tabcorp in April 2010 as Managing Director – Wagering. He became Managing Director and Chief Executive Officer when Tabcorp’s demerger of its former casinos business was completed in June 2011. He has an extensive background in totalisator and fixed odds betting, racing and broadcasting. He was previously the Chief Executive Officer (South Africa) of Phumelela Gaming and Leisure Limited, the leading wagering operator in South Africa. His previous experience also includes the development of casino, bookmaking and gaming opportunities for British bookmaking company Ladbrokes (formerly part of the Hilton Group Plc). David is a Director of the Australasian Gaming Council. David holds a Bachelor of Science (Honours) and a Masters of Business Administration, and he is a Member of AICD. 32 Tabcorp Annual Report 2018 Frank Makryllos Mandy Ross Adam Rytenskild Ben Simons Sue van der Merwe Managing Director – Gaming Services Chief Information Officer Managing Director – Wagering and Media Chief Strategy Officer Managing Director – Lotteries and Keno Frank was Chief Operating Officer – Gaming at Tatts Group from early 2013 until commencing with Tabcorp following the Tabcorp-Tatts combination in December 2017. Frank is responsible for leading Tabcorp’s Gaming Services business which includes the brands MAX, TGS and eBET. Frank was previously Chief Executive Officer of Intralot Australia, and was the Chief Executive of Tatts Pokies. Frank holds a Masters of Business Administration and has completed several courses through the Harvard and London Business Schools. Mandy commenced with Tabcorp in December 2017 following the combination of Tabcorp and Tatts. At Tatts, she was Chief Information Officer from December 2014, and Head of Technology Transformation and Process Improvement from 2013. Mandy was previously Chief Technology Officer of start-up Literary Planet and Chief Information Officer of online travel organisation the Wotif Group. Mandy holds a Masters of Business Administration and Bachelor of Information Technology (Honours). E X E C U T I V E S Sue was Chief Operating Officer – Lotteries at Tatts Group and became Tabcorp’s Managing Director – Lotteries and Keno following the combination of Tabcorp and Tatts in December 2017. Sue has extensive experience in the lottery industry commencing her career in marketing lotto games in 1990 and progressing through various management roles at Tatts. Sue holds a Bachelor of Social Science, Marketing and Economics. Adam joined Tabcorp in 2000. He has held numerous senior management positions, including expanding Wagering’s Retail and Digital businesses through periods of increasing competition and significant change. In 2013 Adam established Tabcorp’s Gaming Services business and led the turnaround of Tabcorp’s Keno business. In August 2017 Adam was appointed Chief Operating Officer – Wagering and Media and in December 2017 became Managing Director – Wagering and Media. Adam has extensive experience leading complex multi-channel, multi-jurisdiction businesses with multiple partners and stakeholders. His career includes nine years with Mobil Oil prior to joining Tabcorp. He holds a Masters of Business Administration, has attended the Senior Executive Program at London Business School and the Executive Breakthrough Program with Egon Zehnder. He is a Member of AICD. Ben commenced with Tabcorp in July 2017 in the position of Chief Strategy Officer. He has oversight of corporate strategy and branding, business development, and the Office of the CEO, which includes corporate communications and government, investor and stakeholder relations. He was previously with Telstra where he was most recently Director of Telstra Air, Australia’s largest wifi hotspot network, and Director of Retail Product Strategy. Prior to Telstra, he was Principal of management consulting firm Bain and Company. Ben holds a Masters in Business Administration, a Bachelor of Economics, a Bachelor of Laws, and a Graduate Diploma in Applied Finance from the Securities Institute of Australia. 33 Tabcorp Annual Report 2018 DIRECTORS’ REPORT CONTENTS 1. Principal activities 2. Operating and financial review of the Group 3. Significant changes in the state of affairs 4. Significant events after the end of the financial year 5. Business strategies 6. Likely developments and expected results 7. Material business risks 8. Directors 9. Directorships of other listed companies 10. Directors’ interests in Tabcorp securities 11. Directors’ interests in contracts 12. Board and Committee meeting attendance 13. Indemnification and insurance of Directors and Officers 14. Company Secretary 15. Corporate governance 16. Environmental regulation and performance 17. Other matters 18. Auditors 19. Non-statutory audit and other services 20. Auditor’s independence declaration 21. Rounding of amounts 22. Remuneration Report 35 35 35 36 36 36 37 41 42 43 43 44 44 45 45 45 45 45 45 46 46 46 34 Tabcorp Annual Report 2018 The Directors of Tabcorp Holdings Limited (the Company) submit their report for the consolidated entity comprising the Company and its subsidiaries (the Group) and the Group’s interests in joint arrangements and associates in respect of the financial year ended 30 June 2018. 1. PRINCIPAL ACTIVITIES The principal activities of the Group during the financial year comprised the provision of gambling and entertainment services. The Group’s principal activities remain unchanged from the previous financial year, except as disclosed elsewhere in this report. 2. OPERATING AND FINANCIAL REVIEW OF THE GROUP The financial results of the Group for the financial year ended 30 June 2018 comprise its four businesses of Wagering and Media, Lotteries and Keno, Gaming Services and Sun Bets. The activities and financial performance of the Group and each of its operating businesses for the financial year are set out on pages 1 to 20. 3. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The following events, which may be considered to be significant changes in the state of affairs of the Group, have occurred since the commencement of the financial year on 1 July 2017. 3.1 Tabcorp-Tatts combination The combination with the Tatts Group was implemented in December 2017, at which time Tatts Group Limited became a wholly owned subsidiary of the Company. The combination brought together two highly complementary businesses and creates a world-class, diversified gambling entertainment group. Integration is progressing well with a dedicated project team comprising internal and external specialists resourced to execute on integration plans which are overseen by an integration steering committee and the Board. 3.2 Divestment of Odyssey Gaming Services business In December 2017, the Group completed the sale of its Odyssey Gaming Services business (Odyssey) to Australian National Hotels Pty Limited, a subsidiary of Federal Group. Tabcorp agreed to divest Odyssey as part of the process for securing authorisation for the Tabcorp-Tatts combination from the Australian Competition Tribunal. Odyssey provided electronic gaming machine monitoring services and repair and maintenance services in Queensland, and was part of the Group’s Gaming Services business. 3.3 Closure of Luxbet business Following the completion of a strategic review, the Group closed its Luxbet business in December 2017. Luxbet held a Northern Territory licence and provided racing, sport and novelty product bookmaking services by phone, internet and mobile devices. 3.4 Other significant changes in the state of affairs There were no significant changes in the state of affairs of the Group that occurred during the financial year other than as set out in this Directors’ Report. 35 Tabcorp Annual Report 2018DIRECTORS REPORTDIRECTORS REPORT DIRECTORS’ REPORT 4. SIGNIFICANT EVENTS AFTER THE END OF THE FINANCIAL YEAR On 19 July 2018, the Group announced that it had completed discussions with News UK and executed an agreement to exit the Sun Bets business, the UK and Ireland online wagering and gaming business operated since 2016. Sun Bets has now ceased trading and Tabcorp will make a payment to News UK of £39.5 million (approximately A$71 million) to exit the agreement. No other matters or circumstances have arisen since the end of the financial year, which are not otherwise dealt with in this report or in the Financial Report, that have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Refer also to note A6 to the Financial Report. 5. BUSINESS STRATEGIES The Group is one of Australia’s leading gambling entertainment companies and seeks to deliver sustainable superior returns to its shareholders through the delivery of financial, operational and leadership excellence. To achieve these outcomes, the Group continues to focus on a number of key priorities, which are set out on page 5 and discussed on pages 10 to 13. The priorities and strategies of the Group’s operating businesses are set out on pages 14 to 20. 6. LIKELY DEVELOPMENTS AND EXPECTED RESULTS Each year the Board undertakes a formal strategic planning process to provide guidance to management about the Group’s strategic direction. The Group plans to continue with its business strategies, as set out in this report and referenced above. The execution of these strategies is expected to result in improved financial performance over the coming financial years. The achievement of the expected results in future financial years is dependent on a range of factors, and may be adversely affected by any number of events, and are subject to, among other things, the material business risks described in section 7. The Directors have excluded from this report any further information on the likely developments in the operations of the Group and the expected results of those operations in future financial years, as the Directors have reasonable grounds to believe that to include such information will be likely to result in unreasonable prejudice to the Group. 36 Tabcorp Annual Report 2018 7. MATERIAL BUSINESS RISKS The Group has a structured and proactive approach to understanding and managing risk. The key focus of the risk management approach is to ensure alignment of strategy, processes, people, technology and knowledge, and evaluate and manage the uncertainties and opportunities faced by the Group. An overview of the Group’s risk management processes and internal control framework is disclosed in the Company’s Corporate Governance Statement available on Tabcorp’s website. Material business risks that could adversely affect the achievement of the financial prospects of the Group in future financial years are summarised below. These risks should not be taken to be a complete or exhaustive list of the risks and uncertainties that might potentially affect the Group. Many of the risks are outside the control of the Group. There can be no guarantee that the Group will achieve its stated objectives, that it will meet trading performance or financial results guidance that it may provide to the market, or that any forward looking statements contained in this report will be realised or otherwise eventuate. 7.1 Licences and other approvals The conduct of wagering, lotteries, Keno and the provision of gaming services are regulated by laws, licences, permits and other approvals from relevant state and territory governments. Any material non-compliance by the Group with the relevant regulations or licence terms may result in financial penalties, disciplinary action or the suspension or loss of certain licences, permits or approvals, which may have an adverse impact on the financial performance of the Group or result in the loss of an operating unit and corresponding revenues from that operating unit. In addition, the failure by a member of the Group to have any existing licence or authorisation renewed (or renewed on terms that are less favourable to the Group), may result in a loss of revenue and profit for the Group, which may adversely affect the Group’s financial performance and financial position. To mitigate these risks, the Group has a structured approach to managing compliance across its businesses, which is overseen by the Chief Risk Officer and the Board Risk and Compliance Committee. The Group also operates a diverse portfolio of businesses spread across a number of jurisdictions, business segments and customer categories which reduces the reliance on any one specific business or jurisdiction. In addition, the Group maintains long term gambling licences, and seeks new licences and to extend existing licences where possible. 7.2 Changes to the regulatory environment The activities of the Group are conducted in a highly regulated environment. The gambling activities that members of the Group conduct, and will conduct, and the level of competition they face, and will face, will depend to a significant extent on: › the licences, permits and other approvals granted to the Group and to third parties; and › government policy and the manner in which relevant governments exercise their broad powers in relation to the conduct of relevant businesses. Changes in legislation, regulation, taxation or government policy (or Court decisions concerning the constitutionality or interpretation of the same) may have an adverse impact on the Group’s operational and financial performance. As a leader in the Australian gambling industry, the Group takes a proactive approach to engaging with relevant regulators and governments, and from time to time lodges submissions in respect of changes to the regulatory and licensing environments and industry which may impact the Group and its stakeholders. In addition, the Group regularly reviews its operating business model and strategies to take account of changes to the regulatory and licensing environments to mitigate adverse consequences of these changes. 37 Tabcorp Annual Report 2018DIRECTORS' REPORT DIRECTORS’ REPORT 7.3 Racing and sports products The Group’s wagering and media businesses are reliant on racing industries and sporting bodies across Australia, and internationally, providing a program of events for the purposes of wagering, and obtaining and maintaining the necessary broadcast rights for race meetings and sporting events. A significant decline in the quality or number of horses, greyhounds, or sporting contests or the number of sporting and racing events, or the occurrence of an event which adversely impacts on the racing industry or sporting events, or which otherwise disrupts the scheduled racing or sporting program (such as adverse weather conditions, an outbreak of equine influenza or other animal sickness pandemics), would have a significant adverse effect on wagering and media revenue and may have an adverse effect on the operational and financial performance of the Group. The Group engages and works closely with racing bodies and industry stakeholders to optimise racing schedules and broadcasts to provide the best racing product available to customers and mitigate the potential for adverse impacts which may result from a decline in racing product. In addition, the Group has business continuity plans to help manage and respond to significant events which may impact upon the supply of racing product. 7.4 Race field fees, sports products fees and taxes Each state and territory of Australia has implemented race fields arrangements, under which each state or territory (or its racing industry) charges wagering operators product fees for use of that industry’s race fields information. Consequently, the Group is required to pay product fees to the relevant racing controlling body. Similar arrangements exist in relation to sports, and the Group is also required to pay product fees to the relevant sports controlling bodies. There is the potential that fees will increase, or new fees will be introduced, and such fees may have an adverse effect on the operational and financial performance of the Group. The Group has mitigation strategies to partly mitigate such impacts, including that members of the Group currently have contracts that the Group considers will allow them to offset some of the fees or obtain damages under contract. Members of the Group may in the future disagree with various racing industry bodies regarding the application of certain aspects of the race fields regimes or contracts that govern product fees. Such disagreements may lead to litigation or other dispute resolution processes, including negotiated settlement. Taxes and levies relating to the wagering, lotteries and gaming segments of the gambling industry are currently determined by relevant governments. A material increase in the taxes and levies payable by the Group in respect of its wagering, lotteries or gaming businesses may reduce margins and have an adverse impact on the financial performance of the Group. With effect from 1 July 2017 and 1 October 2018, respectively, the South Australian and Queensland Governments have introduced a 15% point of consumption tax applicable to wagering revenue on bets derived from customers in those states (Point of Consumption Tax). Other governments have also announced the introduction of a Point of Consumption Tax effective from 1 January 2019 at various rates: Victoria (8%); NSW (10%); Western Australia (15%) and the ACT (15%). It is possible that the introduction of Point of Consumption Taxes could adversely affect the financial performance of the Group. Tabcorp has engaged with a number of Australian state and territory governments regarding the introduction of Point of Consumption Taxes. Tabcorp supports a uniform approach to taxation where all wagering and betting operators can compete effectively. 7.5 Racing Queensland arrangements In 2017, Tabcorp and Racing Queensland Limited (RQL) entered into a commercial arrangement in relation to the combination with the Tatts Group, under which the parties made various commitments in favour of each other, including that RQL consent to the Scheme of Arrangement. From a financial perspective, among other items, Tabcorp guaranteed a minimum amount of fees that RQL will receive under its deed with UBET QLD in each calendar year from 2018 to 2020. Tabcorp currently expects that it will be required to make a payment to RQL in relation to the 2018 calendar year which is not material to the Group and, while necessarily uncertain, depending on the performance of the business in future or the occurrence of unexpected circumstances, further payments may need to be made that may be material. 38 Tabcorp Annual Report 2018 7.6 Competition In a broad sense, gambling activities compete with other consumer products for consumers’ discretionary expenditure and, in particular, with other forms of leisure and entertainment including cinema, restaurants, sporting events, the internet and pay television. If the Group does not adequately respond to the competition for consumers’ discretionary expenditure, including competing gambling offerings, there may be an adverse effect on the operational and financial performance of the Group. The Group’s wagering businesses currently compete with domestic bookmakers, and other interstate wagering operators who accept bets over the telephone or internet (such as corporate bookmakers based in the Northern Territory and betting exchanges). The internet and new forms of distribution have allowed new competitors to enter the Group’s traditional markets without those competitors being licensed in those jurisdictions. Further, Court decisions, a relaxation of relevant advertising laws (or the way in which they have been administered) and the increasing application of competition policy have allowed other wagering operators to gain greater freedom to compete nationally. Competition from the interstate and international operators may extend to the Group’s retail wagering network. The emergence of synthetic lottery operators, such as Lottoland (a corporate bookmaker licensed in the Northern Territory), has seen competition extend to the Group’s lotteries and Keno businesses. Despite recent and proposed changes to Northern Territory and Federal legislation, there is a risk that competition from operators such as Lottoland may extend to the Group’s lotteries and Keno retail networks. Similarly, if a national sports lottery, or similar product, were introduced, there is a risk that this could have a negative impact on the Group’s lotteries sales and have an adverse effect on the operational and financial performance of the Group’s lotteries and Keno businesses. To mitigate the risks of competition, the Group operates a diverse portfolio of businesses with operations spanning multiple jurisdictions and market segments, which reduces the reliance on any single business and customer category. In addition, the Group adopts a range of strategies to further mitigate this risk, including leveraging its exclusive retail network, enhancing its customer service and relationship management, introducing new products, and driving digital innovation and excellence across its multi-channel network. 7.7 Reliance on infrastructure and third party commercial arrangements The Group is reliant on key infrastructure for the operation of its businesses, including the satellites through which Sky Channel broadcasts. A significant malfunction or interruption to key business infrastructure may have an adverse impact on the financial performance of the Group. The Group manages such risks through business continuity plans, which are designed to mitigate potential adverse impacts should they arise. The Group is also reliant on a number of third party commercial arrangements for the operation of its businesses. Failure of, significant interruption to, or reduction in the quality of third party products and services upon which the Group relies for a sustained period of time may result in the Group being unable to provide certain services during that period or providing a less attractive service, which may have an adverse impact on the operating and/or financial performance of the Group. 39 Tabcorp Annual Report 2018DIRECTORS' REPORT DIRECTORS’ REPORT 7.8 Compliance risks Any failure by members of the Group to meet compliance requirements, standards, values and systems (including, for example, in relation to privacy laws, anti-bribery and corruption laws, and anti-money laundering/counter terrorism financing programs and laws) at operational levels may increase exposure to a compliance failure, potentially leading to the suspension or loss of applicable gambling licences, other civil or criminal penalties and brand damage and loss of future licence or business opportunities. The Group has a structured approach to managing compliance across its businesses, which is overseen by the Chief Risk Officer and the Board Risk and Compliance Committee. 7.9 Industry and economic conditions Given the performance of the Group depends to a large extent on the level of discretionary consumer spending, there is a risk that adverse changes to general economic or industry conditions (for example, softer gambling trends) may adversely affect the financial performance of the Group. 7.10 Computer systems and technology security risks The Group’s businesses rely on the successful operation of technology infrastructure. A prolonged failure of the computer systems and/or related infrastructure or technology security failure, such as a cyber-attack, could impact upon the Group’s technology systems and equipment, result in the loss or exposure of information assets, or personal customer data could be wrongfully appropriated, lost or disclosed, which may potentially adversely impact the reputation, operations or financial performance of the Group. Significant resources are allocated to managing the Group’s information technology portfolio, including specialist resources dedicated to information security and responding to cyber risks. The Group’s information security management systems that are in scope are certified against the ISO 27001 standard and all remainder systems are complaint to the standard. The Group continues to evolve and strengthen its practices to effectively manage technology security risks. 7.11 Combination with Tatts Group There are risks associated with the integration of the Tabcorp and Tatts businesses. These risks include that the Group’s integration or strategy implementation may take longer than expected or that the extraction of potential synergies or realisation of business improvements does not occur or may incur additional costs, which may impact the Group’s financial performance. Tabcorp continues to mitigate these risks through careful planning and execution and the involvement of internal staff and external experts and consultants, as required. The Group has undertaken a detailed review of the structure, operations, systems and activities of both the Tabcorp and Tatts businesses, and is well advanced with implementing changes to integrate the two businesses. An organisational review has been completed and changes have been implemented to bring together the best management and employee talent from each of Tatts and Tabcorp. Tabcorp is in the process of conducting an operational and functional review of the Tatts business. There is a risk that Tabcorp may discover potential instances of non-compliance although none have been discovered to date. Tabcorp is mitigating the risk of non-compliance by implementing a detailed integration project plan with key actions to proactively identify and (where needed) update processes to ensure effective and efficient controls are in place. Tabcorp has identified opportunities to improve the Tatts Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) program, systems and controls. Tabcorp is also continuing to enhance the Tabcorp AML/CTF program and is planning to combine the two programs during 2020 as part of integration. 7.12 Sun Bets Tabcorp entered into a remote sports betting and white label agreement in December 2015 with News Group Newspapers Limited (News UK), with operations commencing in August 2016 under the brand Sun Bets. Following a strategic review of the operating performance of Sun Bets announced during FY18, Tabcorp entered into negotiations with News UK, with a view to terminating the agreement before December 2019. On 19 July 2018, Tabcorp announced that it had executed an exit agreement with News UK. As a result, Sun Bets has ceased trading. Tabcorp could be exposed to future claims by customers, employees, regulators or other third parties in relation to the operation of the business prior to July 2018. Tabcorp has sought to manage this risk contractually though appropriate allocation of future potential risks between itself and News UK. 40 Tabcorp Annual Report 2018 8. DIRECTORS The names and details of the Company’s Directors in office during the financial year and until the date of this report (except as otherwise stated) are set out on pages 30 and 31 and below. Jane Hemstritch retired as a Non Executive Director of the Company at the conclusion of the Company’s Annual General Meeting on 27 October 2017. She served as a Director of the Company from June 2011 when the demerger of the Group’s former casinos business occurred, and prior to demerger was a Director from November 2008. At the time of her retirement, she was a Director of Telstra Corporation Limited and Lend Lease Group, and was a non-executive member of the Herbert Smith Freehills Global Council, Chairman of Victorian Opera Company Limited, and a Member of Chief Executive Women and the Council of the National Library of Australia. Mrs Hemstritch was formerly a Director of Santos Limited and the Commonwealth Bank of Australia. She was also Managing Director – Asia Pacific for Accenture Limited where she was a member of Accenture’s global executive leadership team and managed its business portfolio in Asia Pacific spanning twelve countries. Mrs Hemstritch was Chairman of the Tabcorp Audit, Risk and Compliance Committee and a member of the Tabcorp Nomination Committee. Mrs Hemstritch holds a Bachelor of Science (First Class Honours). She is a Fellow of the Chartered Accountants Australia and New Zealand, Fellow of the Institute of Chartered Accountants in England and Wales, and Fellow of the AICD. 41 Tabcorp Annual Report 2018DIRECTORS' REPORT DIRECTORS’ REPORT 9. DIRECTORSHIPS OF OTHER LISTED COMPANIES The following table shows, for each person who served as a Director during the financial year and up to the date of this report (unless otherwise stated), all directorships of companies that were listed on the ASX or other financial markets operating in Australia, other than Tabcorp, since 1 July 2015, and the period for which each directorship has been held. Name Current Directors Paula Dwyer David Attenborough Bruce Akhurst Harry Boon Elmer Funke Kupper Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Director Jane Hemstritch (iii) Listed entity Australia and New Zealand Banking Group Limited Healthscope Limited (i) Nil Nil Asaleo Care Limited Tatts Group Limited ASX Limited Caltex Australia Limited Challenger Limited GPT Group Newcrest Mining Limited Skilled Group Limited MYOB Group Limited NetComm Wireless Limited SMS Management and Technology Limited Healthscope Limited (i) Oil Search Limited Suncorp Group Limited (ii) Commonwealth Bank of Australia Lend Lease Group Santos Limited Telstra Corporation Limited Period directorship held April 2012 to present June 2014 to present May 2014 to present May 2005 to December 2017 October 2011 to March 2016 October 2015 to present October 2012 to present March 2018 to present October 2016 to present September 2005 to October 2015 March 2015 to present March 2012 to present August 2014 to present April 2016 to present November 2010 to December 2016 September 2005 to present October 2006 to March 2016 From September 2011 February 2010 to May 2016 From August 2016 (i) Relisted on ASX in July 2014. (ii) Includes the period as a Director of Suncorp-Metway Limited prior to the corporate restructure of the Suncorp Group. (iii) Retired as a Director of Tabcorp on 27 October 2017. The directorships disclosed above were applicable at that time. 42 Tabcorp Annual Report 2018 10. DIRECTORS’ INTERESTS IN TABCORP SECURITIES At the date of this report, the Directors had the following relevant interests in the securities of the Company, as notified to the ASX in accordance with section 205G(1) of the Corporations Act 2001: Name Current Directors Paula Dwyer David Attenborough Bruce Akhurst Harry Boon Elmer Funke Kupper Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Director Jane Hemstritch(i) Number of securities Ordinary shares Performance Rights 150,000 1,364,435 80,000 70,000 64,166 35,000 50,000 31,208 91,949 31,962 - 1,558,977 - - - - - - - - (i) Retired as a Director of Tabcorp on 27 October 2017. The interests disclosed above were applicable at that time. 11. DIRECTORS’ INTERESTS IN CONTRACTS Some Directors of the Company, or related entities of the Directors, conduct transactions with entities within the Group that occur within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those with which it is reasonable to expect the entity would have adopted if dealing with the Director or Director-related entity on normal commercial terms and conditions. The Board assesses the independence of Directors and, among other things, takes into account any related party dealings referable to a Director which are material and require disclosure under accounting standards, and whether any Director is, or is associated with, a supplier, professional adviser, consultant to or customer of the Group which is material. No such circumstances arose during the financial year. For more information refer to the Corporate Governance Statement available on Tabcorp’s website. 43 Tabcorp Annual Report 2018DIRECTORS' REPORT DIRECTORS’ REPORT 12. BOARD AND COMMITTEE MEETING ATTENDANCE During the financial year ended 30 June 2018, the Company held 12 meetings of the Board of Directors, of which ten were standard scheduled Board meetings and two Board meetings were held to discuss special business. Special Board meetings were often called at short notice to address significant emerging issues, such as the combination with Tatts. The Board Committee structure and membership were revised following the Tabcorp-Tatts combination, with changes effective from 1 January 2018. The attendance of the Directors at meetings of the Board and standing Board Committees during the year in review were: Standard Board Meetings Special Board Meetings Name Current Directors Paula Dwyer (i) David Attenborough(ii) Bruce Akhurst Harry Boon(iii) Elmer Funke Kupper(iv) Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Director Jane Hemstritch(v) A 10 10 10 4 - 10 10 10 10 1 B 10 10 10 5 - 10 10 10 10 3 A – Number of meetings attended. B – Maximum number of possible meetings available for attendance. A 2 2 2 - - 1 2 2 1 - B 2 2 2 - - 2 2 2 2 1 Committees until 31 December 2017 Audit, Risk and Compliance B A Nomination B A 3 3 3 - - 3 3 3 3 1 3 3 3 - - 3 3 3 3 2 1 1 1 - - 1 1 1 1 1 1 1 1 - - 1 1 1 1 1 Remuneration A 4 4 - - - 4 - - 4 - B 4 4 - - - 4 - - 4 - A 2 2 2 1 - 2 2 - - - (i) Paula Dwyer also attended meetings of the Victorian Joint Venture Management Committee as Chairman of this Committee. (ii) David Attenborough attends Board Committee meetings, but he is not a member of any Board Committee. Only Non-Executive Directors are members of Board Committees. (iii) Harry Boon commenced as a Non-Executive Director on 22 December 2017. (iv) Elmer Funke Kupper commenced a leave of absence from the Board on 21 March 2016, and has not attended any Board or Committee meetings during the financial year. (v) Jane Hemstritch retired from the Board on 27 October 2017. Committees from 1 January 2018 Risk and Compliance B A B A People and Remuneration Audit 2 2 2 2 - 2 2 - - - 1 2 2 1 - - 2 2 - - 2 2 2 2 - - 2 2 - - 2 2 - 1 - 2 - - 2 - B 2 2 - 2 - 2 - - 2 - In addition to the meetings above, a number of Directors also participated in meetings of Board Sub-Committees established for special purposes during the year. The terms of reference and details of the functions and memberships of the Committees of the Board are set out in the Company’s Corporate Governance Statement available on Tabcorp’s website. 13. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The Directors and Officers of the Group are indemnified against liabilities pursuant to agreements with the Group. Tabcorp has entered into insurance contracts with third party insurance providers, and in accordance with normal commercial practices, under the terms of the insurance contracts, the nature of the liabilities insured against and the amount of premiums paid are confidential. 44 Tabcorp Annual Report 2018 14. COMPANY SECRETARY Chris Murphy commenced as Acting Company Secretary on 23 March 2018 and will formally commence as Company Secretary following receipt of the necessary regulatory and ministerial approvals. Prior to joining Tabcorp, he was Assistant Company Secretary of Transurban Group and previously held company secretariat and/or legal roles at Cleanaway Limited, Alstom Limited and Melbourne Stadiums Limited. Chris holds a Bachelor of Laws (Honours), Bachelor of Commerce, a Graduate Diploma of Applied Corporate Governance and a Graduate Certificate in Applied Finance and Investment, and he is an Associate Member of the Governance Institute of Australia. Michael Scott was appointed as Company Secretary on 23 March 2018. He has been the deputy to the Company Secretary since joining the Group in September 2002. He holds a Graduate Diploma of Applied Corporate Governance and a Bachelor of Land Information (Cartography). Michael is a Fellow of the Governance Institute of Australia, Graduate Member of the AICD and Fellow of Leadership Victoria’s Williamson Community Leadership Program. Fiona Mead ceased as Company Secretary on 23 March 2018. 15. CORPORATE GOVERNANCE Tabcorp's Board of Directors recognises the importance of having proper and effective corporate governance arrangements and maintaining high standards of corporate behaviour and accountability. Tabcorp's Corporate Governance Statement is available on the Tabcorp website (www.tabcorp.com.au) under the Corporate Governance section, and sets out the Group's compliance with the ASX Corporate Governance Principles and Recommendations (3rd Edition) during the financial year ended 30 June 2018. 16. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group’s environmental obligations are regulated under both state and federal laws. The Group has a record of complying with, and in most cases exceeding, its environmental performance obligations. During the financial year ended 30 June 2018, no environmental breaches have been notified to the Group by any government agency. 17. OTHER MATTERS Tabcorp was notified in March 2016 that the Australian Federal Police (AFP) are investigating claims raised in media articles in relation to a payment concerning a Cambodian business opportunity. The Company explored a business opportunity in relation to the Cambodian sports betting market in 2009/2010. At that time, some Asian countries were considering deregulating sports betting. The Company chose not to pursue the opportunity. The Company is cooperating fully with the AFP. The AFP has not laid any charges in relation to this matter. 18. AUDITORS The Group’s external auditor is Ernst & Young. The Group’s internal audit function is fully resourced by Tabcorp, with specialist independent external support where necessary. More information relating to the audit functions can be found in the Company’s Corporate Governance Statement. 19. NON-STATUTORY AUDIT AND OTHER SERVICES Ernst & Young, the external auditor to the Company and the Group, provided non-statutory audit services to the Company during the financial year ended 30 June 2018. The Directors are satisfied that the provision of non-statutory audit services during this period was compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-statutory audit service provided means that auditor independence was not compromised. 45 Tabcorp Annual Report 2018DIRECTORS' REPORT DIRECTORS’ REPORT The Audit Committee regularly reviews the activities of the independent external auditor and reviews the auditor’s performance on an annual basis. The Chairman of the Audit Committee must approve all non-statutory audit and other work to be undertaken by the auditor (if any). Further details relating to the Audit Committee and the engagement of auditors are available in the Company’s Corporate Governance Statement available on the Tabcorp website. Ernst & Young, acting as the Company’s external auditor, received or are due to receive $723,000 in relation to the provision of non-statutory audit services to the Company. Amounts paid or payable by the Company for audit and non-statutory audit services are disclosed in note E6 to the Financial Report. 20. AUDITOR’S INDEPENDENCE DECLARATION Shown opposite is a copy of the auditor’s independence declaration provided under section 307C of the Corporations Act 2001 in relation to the audit for the financial year ended 30 June 2018. This auditor’s independence declaration forms part of this Directors’ Report. 21. ROUNDING OF AMOUNTS Dollar amounts in the Financial Report and the Directors’ Report have been rounded to the nearest hundred thousand unless specifically stated to be otherwise, in accordance with the Australian Securities and Investments Commission Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. 22. REMUNERATION REPORT The Remuneration Report for the financial year ended 30 June 2018 forms part of this Directors’ Report, and can be found on pages 47 to 76. This Directors’ Report has been signed in accordance with a resolution of Directors. Paula J Dwyer Chairman Melbourne 8 August 2018 46 T F A R D A member firmof Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards Legislation Ernst & Young8 Exhibition Street Melbourne VIC 3000 AustraliaGPO Box 67 Melbourne VIC 3001Tel: +61 3 9288 8000Fax: +61 3 8650 7777ey.com/auAUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF TABCORP HOLDINGS LIMITED As lead auditor for the audit of Tabcorp Holdings Limited for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a)no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b)no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Tabcorp Holdings Limited and the entities it controlled during the financial year. Ernst & Young David Shewring Partner 8 August 2018 Tabcorp Annual Report 2018 REMUNERATION REPORT CONTENTS Letter from the Chairman and the People and Remuneration Committee Chairman 48 1. Purpose 2. Key Management Personnel 3. Remuneration highlights for the year ended 30 June 2018 (a) The Combination (b) Performance outcomes for the year ended 30 June 2018 (c) Remuneration outcomes for the year ended 30 June 2018 4. Remuneration Governance 5. Non Executive Director Remuneration (a) Remuneration strategy and framework (b) Fees for the year ended 30 June 2018 and annualised synergy benefits (c) Non Executive Director aggregate fee limit (d) Non Executive Directors' shareholdings guidelines 6. Executive KMP Remuneration (a) Remuneration strategy and framework (b) Combined Group remuneration levels and remuneration mixes (c) Fixed remuneration (d) Short term incentive (STI) (e) Long term incentive (LTI) (f) Merger Completion Awards (g) Actual remuneration received by executive KMP (h) Policy prohibiting hedging (i) Executives’ Shareholdings Policy 7. Executive KMP Employment Contracts 8. Statutory Remuneration Disclosures (a) KMP statutory remuneration tables (b) Movements in Performance Rights held by executive KMP (c) Summary of Performance Rights as at 30 June 2018 (d) KMP shareholdings (e) Transactions and loans with KMP 50 50 51 51 51 53 54 54 54 55 56 56 56 56 58 60 60 65 70 71 71 72 72 73 73 75 75 76 76 R R E E P P O O R R T T R R E E M M U U N N E E R R A A T T I I O O N N Tabcorp Annual Report 2018 47 REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 LETTER FROM THE CHAIRMAN AND THE PEOPLE AND REMUNERATION COMMITTEE CHAIRMAN Dear Shareholder, On behalf of the Tabcorp Board of Directors, we present the 2018 Remuneration Report for which we will seek your approval at the Annual General Meeting to be held on 17 October 2018. During the year ended 30 June 2018, two key outcomes helped shape judgements by the Board around executive remuneration – one positive and one negative. The combination between Tabcorp and Tatts Group (Combination) has resulted in the creation of a world-class diversified gambling group with a national footprint and is expected to generate financial and strategic benefits of scale. After a journey of some years, the Combination was completed in December 2017 notwithstanding the many complexities and obstacles along the way. It reflected the considerable efforts of management and the Board and especially the leadership of the MD & CEO. The combination of two balance sheets and the creation of a near $10 billion entity by market capitalisation was expertly managed by our management team and the synergies expected from this transaction are emerging as planned. The Combination was a company-transforming highlight. In contrast, Sun Bets, our UK online wagering and gaming start-up business which we have operated since 2016 with News UK, did not meet our expectations. The performance of Sun Bets has been consistently below plans over the last two years and this adverse outcome has been reflected in executive remuneration in each year. Tabcorp has now exited that business. In anticipation of the critical organisational and personnel decisions that were to be made following the Combination, the Board restructured its standing Committees, creating a People and Remuneration Committee with an expanded Charter and invited the former Chairman of the Tatts Group, Mr Harry Boon, to join the Board. In making these important organisational and personnel decisions, the following principles were observed: • best practice was identified within Tabcorp and Tatts Group and then adopted across the combined Group; • key positions were filled by the most qualified executives; • all employees were treated consistently with the Tabcorp values; • the organisational structure was designed to promote clarity and accountability; and • the anticipated Combination synergies had to be delivered. 48 Tabcorp Annual Report 2018 The Board formally appointed Mr David Attenborough as the MD & CEO of the combined Group with a new employment contract. The Board also approved the appointment of a new Executive Leadership Team. All new positions in the combined enterprise were benchmarked and pay levels set consistent with the level of responsibility of the individual roles. This meant an increase in remuneration levels for individual executives but a reduction in total cost for the leadership of the combined Group. This was also the case for Board and Committee fees for the combined Group. The longstanding Tabcorp remuneration framework was not changed for the year ended 30 June 2018 but determination of incentive outcomes required consideration of the Combination around mid-year and the intent to treat executives in both organisations equitably. In setting incentives outcomes under the STI Plan for the year ended 30 June 2018, the Committee determined a reduced pool of 33% of target. This was mostly because many of the financial outcomes were adversely affected by significant, albeit one-off, charges such as the exit from Sun Bets, and fell short of the approved budget. This is the second year in succession where the STI pool has been sharply reduced and is also likely to coincide with a zero vesting of long term incentives (for the first time since 2012). Paradoxically, even as reduced incentives reflect a difficult period of transformation over the past three years, in the view of the Board the Company leadership has successfully positioned Tabcorp to perform strongly in the years ahead. For the next financial year, enhancements to the STI plan and the introduction of a second metric in the LTI plan (which will be tied to delivery of the Combination synergies) have been approved by the Board. Details will be provided in Tabcorp’s 2019 Remuneration Report. Paula J Dwyer Chairman Zygmunt E Switkowski People and Remuneration Committee Chairman 49 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 1. PURPOSE This Remuneration Report details the remuneration policy and arrangements for the Key Management Personnel (KMP) of the Group, comprising Tabcorp and its subsidiaries for the financial year ended 30 June 2018. KMP are those persons having the authority and responsibility for planning, directing and controlling the activities of Tabcorp and the Group, and comprises the Directors of Tabcorp and certain members of the Executive Leadership Team. The Remuneration Report is presented in accordance with the requirements of the Corporations Act 2001 (Cth) (Act) and its regulations and has been audited as required by section 308(3C) of the Act. 2. KEY MANAGEMENT PERSONNEL During the year ended 30 June 2018 there were changes to the Group’s KMP following the Combination. Mr Harry Boon (previously Chairman of the Tatts Group Board) joined the Tabcorp Board as a Non Executive Director and Mr Frank Makryllos and Ms Sue van der Merwe (previously senior executives of Tatts Group) joined the combined Group as executive KMP of Tabcorp. Previous Tabcorp executive KMP were also appointed into executive KMP roles within the combined Group. Table 1: List of KMP for the year ended 30 June 2018 Name Current Non Executive Directors Paula Dwyer Bruce Akhurst(i) Harry Boon Elmer Funke Kupper(ii) Steven Gregg Vickki McFadden(i) Justin Milne Zygmunt Switkowski Former Non Executive Director Jane Hemstritch Executive Director David Attenborough Current executive KMP Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former executive KMP Craig Nugent Position held Period in position if less than full year Chairman and Director (Non Executive) Director (Non Executive) Director (Non Executive) Director (Non Executive) Director (Non Executive) Director (Non Executive) Director (Non Executive) Director (Non Executive) From 18 July 2017 From 22 December 2017 From 18 July 2017 Director (Non Executive) Until 27 October 2017 Managing Director and Chief Executive Officer (MD & CEO) Chief Financial Officer Managing Director Gaming Services Chief Operating Officer Keno & Gaming Chief Operating Officer Wagering and Media Managing Director Wagering and Media Managing Director Lotteries and Keno From 22 Dec 2017 Until 22 Aug 2017 23 August 2017 to 21 December 2017 From 22 Dec 2017 From 22 Dec 2017 Chief Operating Officer Wagering and Media Until 22 August 2017 (i) Commenced as a Director and KMP on 18 July 2017 following the receipt of all necessary regulatory approvals. (ii) Mr Funke Kupper has been granted a leave of absence from the Board which was in effect for the full financial year ended 30 June 2018. Mr Funke Kupper does not receive any Tabcorp Board fees or other remuneration whilst on leave of absence. Details of Director qualifications, experience and other responsibilities are set out on page 30, 31 and 41. 50 Tabcorp Annual Report 2018 3. REMUNERATION HIGHLIGHTS FOR THE YEAR ENDED 30 JUNE 2018 (a) The Combination Following the Combination, Tabcorp became a significantly larger company, offering more diverse products across a broader national footprint in a more complex regulatory environment. Effective upon the Combination, the Board formally appointed a new combined Group Executive Leadership Team (including the MD & CEO). New remuneration levels were set for this appointed executive team (effective 22 December 2017), having regard to individual role responsibility and market benchmarks (set in line with the ASX 100 median but below the ASX 50 median). Certain Board Sub-Committees were also restructured to ensure focus on key business issues pertinent to the combined organisation and Non Executive Director fees were set in line with market benchmarks and responsibilities in a larger organisation. (b) Performance outcomes for the year ended 30 June 2018 • Successful completion of the Combination. Execution of the integration is well advanced with first wave of synergies savings delivered. • Underperformance of the Sun Bets business has negatively affected Tabcorp’s overall financial outcomes for the year. However, the exit of the Sun Bets business was negotiated and has ceased trading. 51 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (b) Performance outcomes for the year ended 30 June 2018 (continued) Table 2: Five-year group financial performance and remuneration outcomes Business performance NPAT(i) – $m EPS (basic) – c Closing share price(iii) – $ Dividends(iv) – CPS Overall Group STI pool MD & CEO Short Term Incentive award % of target % of maximum Average executive KMP (excluding the MD & CEO) Short Term Incentive award % of target % of maximum Long Term Incentive vesting (all executive KMP) % of maximum (i) NPAT (Net Profit After Tax). FY14 129.9 17.2 3.36 16.0 105% 105% 42% 105% 42% 0% FY15 334.5 (ii) 42.4 (ii) 4.55 50.0 125% 113% 45% 91% 36% 88% FY16 169.7 20.4 4.57 24.0 90% 90% 36% 99% 40% FY17 FY18 (20.8) (2.5) 4.37 25.0 30% 0% 0% 17% 8% 28.7 1.9 4.46 21.0 33% 33% 17% 33% 17% 100% 100% 80%(v) (ii) Includes $163.2m of income tax benefits relating to the Victorian wagering and gaming licences payment and the NSW Trackside payment and associated interest income. This was excluded from short term incentive awards in the relevant year. (iii) Closing share price is as at 30 June of the respective financial year. Opening share price as at 1 July 2013 was $3.05. (iv) Includes interim, final and special dividends. FY15 includes a special dividend of 30 cents per share declared in February 2015. CPS is defined as cents per share fully franked. (v) 80% of the 2014 (FY15) Performance Rights under the LTI offer vested on 16 September 2017. Diagram 1: Tabcorp Total Shareholder Return (i) Total Shareholder Return has been indexed to 100 as at 1 July 2013. Source: Bloomberg financial data 250 200 150 100 Jul 13 (i) Excludes the value of franking credits. Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Tabcorp ASX100(ii) (ii) "ASX 100" refers to the value of the S&P/ASX 100 Accumulation stock price index with dividends re-invested over time. 52 Tabcorp Annual Report 2018 (c) Remuneration outcomes for the year ended 30 June 2018 Remuneration saving of $5m when comparing the aggregate sum of the Executive Leadership Team’s (excluding the MD & CEO) maximum remuneration opportunities in the combined Group to the aggregate sum of the Executive Leadership Team’s (excluding the MD & CEO) maximum remuneration opportunities across Tabcorp and Tatts Group prior to the Combination. Total annualised fee saving of $410,000 when comparing the aggregate sum of Non Executive Directors’ fees set in the Combined organisation to the aggregate sum of fees set across Tabcorp and Tatts Group prior to the Combination. Short Term Incentive awards for executive KMP were on average 33% of their target opportunities (17% of their maximum opportunities). 80% of Long Term Incentive Performance Rights vested under the 2014 (FY15) LTI offer. Remuneration levels were set for the new combined Group Executive Leadership Team, effective 22 December 2017. No further remuneration increases will apply for executive KMP in the next financial year, as part of the annual remuneration review process. There will be no changes to target and maximum incentive opportunities in the next financial year. Proposed changes from 1 July 2018 During the year ended 30 June 2018, the People and Remuneration Committee reviewed the Tabcorp and Tatts Group remuneration frameworks, the Group’s short and long-term remuneration strategies, market practice and shareholder and proxy advisor feedback. Following this review, the Board approved a consolidated Group remuneration framework (effective from 1 July 2018) which is underpinned by the following principles: Ensuring reward is linked to Group performance and shareholder value creation Ensuring reward is linked to short and long-term sustained performance Ensuring reward is linked to individual performance and behaviours in line with the Group culture Market competitive and flexible Linked to the achievement of strategic imperatives Reward is directly linked to the Group’s performance (and achievement of the Corporate Plan objectives) and, ultimately, the creation of value for shareholders. Performance assessment and reward spans across short, medium and long-term horizons ensuring risk mitigation, sustained long-term business performance and retention of key talent. Identifies and differentiates reward based on individual performance levels and behaviours (ensuring individual accountability and collective responsibility) linked to the overall culture of “doing the right thing”. Sufficiently market competitive to attract and retain key talent and flexible to ensure that Tabcorp can be competitive across all roles and industries. Overtly linked to key strategic business imperatives to ensure that they are a focus for all participants. Utilising these principles, the new framework encompasses: • amendments to the STI plan which include introducing a weighting of 60% towards Group performance (including financial) and a 40% weighting towards individual performance targets for all STI participants and the removal of Divisional Multipliers (encouraging and recognising Combination integration effort as well as the achievement of Group strategic objectives); and • introduction of a second three-year LTI measure (in addition to relative total shareholder return), being Combination Synergy (to be introduced from the next LTI offer). The Board considers Combination Synergy to be a relevant and strategically important measure for Tabcorp over the next few years. The People and Remuneration Committee will review this measure again next year with the intention of introducing a return-based LTI measure at the appropriate time. The new remuneration framework and its operation will be disclosed in detail in Tabcorp’s 2019 Remuneration Report. There will also be no fixed remuneration increases applied to executive KMP and the MD & CEO in the next financial year, as part of the annual remuneration review process. 53 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 4. REMUNERATION GOVERNANCE Following the Combination, a restructure of the Committees of the Board occurred (effective 1 January 2018) to ensure appropriate focus on key business issues pertinent to the combined organisation. The Remuneration Committee’s role and responsibilities were broadened to include all people-related matters and the committee was renamed the People and Remuneration Committee. The People and Remuneration Committee comprises four independent Non Executive Directors and assists the Board in fulfilling its responsibilities with respect to remuneration, as outlined below, by: Establishing and reviewing Group remuneration policies and practices Establishing and overseeing an appropriate remuneration framework (including incentives) Reviewing Non Executive Director remuneration Reviewing MD & CEO remuneration Reviewing and approving executive remuneration levels and incentive outcomes Ensuring remuneration is free from bias Establishing and reviewing competitive, reasonable and equitable remuneration policies and practices across the Group aligned to business strategy and performance. Reviewing and recommending an appropriate remuneration framework (including incentives) to the Board, that will drive the achievement of strategic imperatives. Annually reviewing and recommending to the Board appropriate remuneration arrangements for Non Executive Directors. Reviewing and recommending to the Board appropriate remuneration arrangements for the MD & CEO, including incentive outcomes. Agreeing remuneration levels and incentive outcomes for executives. Ensuring no biases in remuneration through annual pay gap reviews and action planning. In exercising its responsibilities, the People and Remuneration Committee regularly assesses the appropriateness of the nature and amount of remuneration of Non Executive Directors and executive KMP. This is done by reference to role complexity, size of role and relevant market conditions and benchmarks to ensure fairness of reward and the retention of a high quality and high performing Board and executive team. To assist with this, the People and Remuneration Committee may receive independent advice on matters such as remuneration strategies, mix and structure, as appropriate. During the year ended 30 June 2018 and to the date of this report, no remuneration consultant provided a remuneration recommendation in respect of any KMP. The People and Remuneration Committee is governed by its Charter, which is available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 5. NON EXECUTIVE DIRECTOR REMUNERATION (a) Remuneration strategy and framework Tabcorp’s Board and Board Committee fees are set considering the Non Executive Directors’ skills, qualifications and experience and the responsibilities and workload imposed upon them. Fees are also set having regard to market benchmarks to ensure the Board is able to attract, motivate and retain top performing, highly skilled and qualified Non Executive Directors. In order to maintain independence and impartiality, Non Executive Directors are not eligible to receive any performance or incentive-related payments. Board fees are not paid to the MD & CEO or to executives for directorships of any subsidiaries. 54 Tabcorp Annual Report 2018 (b) Fees for the year ended 30 June 2018 and annualised synergy benefits Non Executive Directors receive a base Board fee and a fee for each Board Committee that they chair or are a member of. The Board Chairman receives a single fixed fee which is inclusive of services on all standing Board Committees. Superannuation contributions are paid in addition to all fees and Non Executive Directors are not eligible to receive any other retirement benefits. Following the Combination, a restructure of the Committees of the Board occurred (effective 1 January 2018) to ensure appropriate focus on the key business issues pertinent to the combined organisation. The Audit, Risk and Compliance Committee was split into the Audit Committee and the Risk and Compliance Committee. As noted previously, the Remuneration Committee’s remit was broadened to include all people-related matters and was renamed the People and Remuneration Committee. Furthermore, the Nomination Committee (of which each Non Executive Director was a member) was discontinued and all matters previously dealt with by the Nomination Committee are now overseen by the Board. Following the Combination, new Non Executive Director fees were set (effective 1 January 2018). These new fees were set having regard to the size of the newly combined organisation, the increased complexity and regulatory responsibility imposed on Non Executive Directors, the restructure of the Board Committees and market benchmarks (to ensure fees continue to be fair and competitive). Table 3 details Non Executive Director fixed annual fees (excluding superannuation) prior to and following the Combination. Table 3: Non Executive Director fees (excluding superannuation) Pre-Combination (1 July 2017 to 31 December 2017) Board Chairman (i) Member Audit, Risk & Compliance Committee(ii) Chairman Remuneration Committee(ii) Nomination Committee(ii) Member Chairman Member Chairman Member Tatts Group $ per annum $431,050 $168,950 $31,963 $10,046 $31,963 $10,046 Not applicable Not applicable Tabcorp $ per annum $430,000 $150,000 $40,000 $20,000 $35,000 $17,500 $7,500 $7,500 Post Combination (1 January 2018 to 30 June 2018) Board Audit Committee(iii) Risk and Compliance Committee(iii) People and Remuneration Committee(iii) Tabcorp $ per annum $590,000 $190,000 $50,000 $22,000 $45,000 $20,000 $45,000 $20,000 Chairman(i) Member Chairman Member Chairman Member Chairman Member (i) The fee paid to the Board Chairman is inclusive of services on all standing Board Committees. (ii) Ceased to operate effective 31 December 2017. (iii) Established effective 1 January 2018. Certain Non Executive Directors received additional fees for membership of other Board Sub-Committees. During the year ended 30 June 2018, legal, compliance and due diligence Sub-Committees of the Board were in operation. Table 14 details fees paid to Non Executive Directors who were members of these Sub-Committees. Observer fees, equivalent to the applicable Board and Committee fees (for attending Board and Committee meetings and induction whilst awaiting regulatory approval) were also provided to certain Non Executive Directors during the year ended 30 June 2018. Mr Akhurst and Ms McFadden each received observer fees up until 17 July 2017 whilst awaiting regulatory approvals (which were received on 18 July 2017). The actual aggregate sum of fees paid to Non Executive Directors for the year ended 30 June 2017 across both Tatts Group and Tabcorp pre-Combination was approximately $3.3m. Estimated Non Executive Director fees payable on an annualised basis in the combined Group is estimated at $2.4m (inclusive of superannuation). 55 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (c) Non Executive Director aggregate fee limit The current maximum aggregate amount of fees that can be paid to Non Executive Directors per year for their services (including superannuation contributions) is set at $2.5 million (Non Executive Director Aggregate Fee Limit), as approved by shareholders at the Annual General Meeting held on 25 October 2016. In August 2016, Tabcorp announced the appointment of Mr Akhurst and Ms McFadden as Non Executive Directors (subject to regulatory approval). In July 2017, both Mr Akhurst and Ms McFadden received regulatory approvals and began receiving the standard Board fees. Following the Combination, Mr Boon was also appointed as a Tabcorp Non Executive Director (effective 22 December 2017). In addition, Mr Funke Kupper has been on leave of absence for the full financial year and has not received any Board fees. Considering this, the Board reviewed the Non Executive Director Aggregate Fee Limit in the context of the actual Non Executive Director fees paid for the year ended 30 June 2018 and the fees set for the year ending 30 June 2019. As a result of this review and to ensure that the Board is structured optimally to deliver on its obligations, a proposal to increase the Non Executive Director Aggregate Fee Limit by $0.5m to $3.0m will be presented to shareholders for approval at the 2018 Tabcorp Annual General Meeting. More detail will be provided in the 2018 Notice of Annual General Meeting. Non Executive Directors are entitled to be reimbursed for all business-related expenses, including travel, which may be incurred as part of their duties as Non Executive Directors. Section 8 provides more detail regarding Non Executive Director fees and other remuneration in respect of the year ended 30 June 2018. (d) Non Executive Directors’ shareholdings guidelines In accordance with the Tabcorp Directors’ Shareholdings Policy, Non Executive Directors are encouraged to acquire and hold a minimum shareholding in Tabcorp approximately equivalent to one times the annual Non Executive Director base fee. The Chairman of the Board is encouraged to hold the equivalent of two times the annual Non Executive Director base fee in Tabcorp shares. A copy of the Tabcorp Directors’ Shareholdings Policy is available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 6. EXECUTIVE KMP REMUNERATION (a) Remuneration strategy and framework Tabcorp’s executive remuneration strategy is to ensure that reward is directly and appropriately linked to Group performance and long-term shareholder value creation and to align the interests of executive KMP to shareholder interests through equity. All components of the executive KMP’s remuneration package are performance-linked with a material portion being at-risk as well as in the form of equity. Tabcorp’s remuneration strategy is also to ensure that the Group attracts, retains and motivates a highly qualified and experienced executive team with the necessary skills and competence to lead the Group in achieving its strategic and financial objectives. To this end, the People and Remuneration Committee regularly reviews the Group’s remuneration structures and levels, and benchmarks Tabcorp’s remuneration packages against comparable companies to ensure that they are aligned to the Group’s strategy whilst being competitive. Diagram 2 details Tabcorp’s executive remuneration philosophy, principles and framework. 56 Tabcorp Annual Report 2018 Diagram 2: Remuneration philosophy, principles and framework Remuneration philosophy Attract, motivate and retain high calibre individuals across the organisation through a market-competitive, performance-linked and shareholder aligned remuneration framework Remuneration principles Reward for the creation of long term shareholder value. Appropriately recognise and reward superior performance. Ensure remuneration structures and levels are market competitive. Operate a remuneration framework that fosters the Group’s Ways of Working. Create long term shareholder value Drive Group and individual performance Ensure market competitiveness Reward the right behaviours Fixed remuneration Short Term Incentive (STI) Long Term Incentive (LTI) Executive KMP remuneration framework Set in recognition of the responsibilities of the role. Applies to employees at a level where they can influence business unit and Group performance. Applies to the most senior employees who can directly influence Group performance and shareholder value creation. Cash Cash + Restricted Shares Performance Rights Individual Group and individual Group Performance requirements Adjustments annually to take into consideration individual performance levels which are aligned to business objectives. Dependent on the achievement of financial, strategic, customer, operational and people targets which are aligned to the long term Corporate Plan. Directly linked to Group measures which create shareholder value. Timeframe 1 year 1 year performance 2 years restriction 3 years 57 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (b) Combined Group remuneration levels and remuneration mixes MD & CEO On Combination, the previous Tabcorp and Tatts Group MD & CEO roles were combined into a single MD & CEO role, with greater responsibility in a more diverse and geographically broader business operating in a more complex regulatory environment. Mr Attenborough (the previous Tabcorp MD & CEO) was formally appointed to the Tabcorp Group MD & CEO role with a new remuneration package. In determining his new combined Group remuneration package, the Board considered the responsibilities of the new role as well as market benchmarks. Table 4 details the pre-Combination Tabcorp and Tatts Group MD & CEO remuneration packages and the new combined Group MD & CEO remuneration package. Table 4: MD & CEO remuneration packages Tatts Group MD & CEO (maximum) Tabcorp MD & CEO (target)(i)(ii) Total Combined Group MD & CEO (target)(i)(ii) Remuneration component Fixed remuneration Short Term Incentive Long Term Incentive Total Remuneration $ per annum as at 21 December 2017 $ per annum as at 21 December 2017 1,250,000 1,250,000 1,250,000 3,750,000 2,050,000 2,050,000 - 4,100,000 $ per annum $ per annum as at 22 December 2017 2,000,000 1,500,000 1,500,000 5,000,000 3,300,000 3,300,000 1,250,000 7,850,000 (i) The target STI value represents the value that may be earned if target performance levels are achieved. The MD & CEO has the potential to earn two times this value if stretch performance targets are met. (ii) The target LTI value represents the current face value of the LTI opportunity where target performance levels are achieved. The MD & CEO has the opportunity to earn two times this value if stretch performance (outperformance) levels are achieved. The MD & CEO’s remuneration mix (at target) is depicted in Diagram 3. Diagram 3: MD & CEO remuneration mix (at target) 60% is at risk (subject to performance conditions) 45% is in the form of shareholder aligned equity 30% 40% MD & CEO 15% 15% 58 Fixed remuneration Set at a level that is commensurate with the incumbent’s skills, experience and responsibilities and is market competitive. Target STI – cash Dependent on the achievement of Group and individual performance targets over the financial year. Target STI – Restricted Shares Dependent on the achievement of Group and individual performance targets over the financial year. Shares are restricted for 2 years and subject to service-based condition. Target LTI – Performance Rights Dependent on the achievement of long term sustained shareholder value creation. * At maximum variable remuneration levels, the reward mix changes to 25% (fixed remuneration), 18.75% (Target STI – cash), 18.75% (Target STI – Restricted Shares) and 37.5% (Target LTI – Performance Rights). Tabcorp Annual Report 2018 Executive KMP (excluding the MD & CEO) When formally appointing the new Executive Leadership Team into the combined Group and setting their remuneration levels, the Board considered the complexity, size and scope of the combined Group and each business unit. The Board also considered market benchmarks. The Board set new remuneration levels at below the median of the ASX 50 companies and in line with the median of the ASX 100 companies. Table 5 details the new executive KMP remuneration packages. Table 5: Executive KMP (excluding the MD & CEO) remuneration as at 30 June 2018 Executive KMP Damien Johnston Frank Makryllos(i) Adam Rytenskild Sue van der Merwe(i) Fixed Remuneration $ per annum 900,000 700,000 900,000 700,000 (ii) STI (target opportunity) $ per annum 450,000 350,000 450,000 350,000 (ii) LTI (target opportunity) $ per annum 450,000 350,000 450,000 350,000 (ii) Total remuneration (target opportunity) $ per annum 1,800,000 1,400,000 1,800,000 1,400,000 % at risk 50% 50% 50% 50% (i) Ms van der Merwe and Mr Makryllos were appointed as executive KMP on 22 December 2017 following the Combination. (ii) The target STI and LTI values represent the amount that could be earned where target performance levels have been met. The Executive Leadership Team has the ability to earn two times these values where stretch (outperformance) levels have been achieved. Based on the Executive Leadership Team’s (excluding the MD & CEO) at maximum STI and LTI opportunity levels, the aggregate sum of the combined Group Executive Leadership Team remuneration packages represents a saving of $5m (when compared to pre-Combination remuneration across Tabcorp and Tatts Group). The executive KMP (excluding the MD & CEO) remuneration mix (at target) is depicted in Diagram 4. Diagram 4: Executive KMP remuneration mix (at target) 50% is at risk (subject to performance conditions) 31.25% is in the form of shareholder aligned equity 25% Executive KMP 50% 6.25% 18.75% Fixed remuneration Set at a level that is commensurate with the incumbent’s skills, experience and responsibilities and is market competitive. Target STI – cash Dependent on the achievement of Group and individual performance targets over the financial year. Target STI – Restricted Shares Dependent on the achievement of Group and individual performance targets over the financial year. Shares are restricted for 2 years and subject to service-based condition. Target LTI – Performance Rights Dependent on the achievement of long term sustained shareholder value creation. * At maximum variable remuneration levels, the reward mix changes to 33% (fixed remuneration), 16.5% (Target STI – cash), 16.5% (Target STI – Restricted Shares) and 33% (Target LTI – Performance Rights). 59 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (c) Fixed remuneration What is fixed remuneration? How is it set? How is it benchmarked? How often is it benchmarked? Where are fixed remuneration levels targeted? (d) Short term incentive (STI) Why operate an STI? In what form is the STI awarded? Why use Restricted Shares? How is the STI pool calculated? Is there a cap on the size of the actual STI pool? What happens after the actual STI pool is set? 60 Cash salary, statutory superannuation contributions and other employee-elected salary sacrificed benefits (e.g. additional superannuation contributions). Set with reference to the executive’s knowledge, experience and skills, the magnitude of the responsibilities and complexities associated with the role and market benchmarks. Following the Combination, Tabcorp became a significantly larger organisation. Tabcorp benchmarks fixed remuneration to the ASX 100 with a particular focus on the ASX 50. Tabcorp also benchmarks to organisations that it identifies as potential sources of executive talent and those operating in similarly complex regulated environments. Annually and upon appointment of an executive into a new role. This is done to ensure that fixed remuneration is fair, equitable and competitive. Market median. However, a lower or higher fixed remuneration level may be set depending on the complexity of the role and the executive’s skill set and experience, performance levels and the Group’s retention requirements (especially where the role is very specialised, in high demand or the executive is considered high potential). Fixed remuneration is always considered in the context of the total remuneration package to ensure that the entire remuneration package is fair and competitive. To incentivise participants to achieve annual Group, business unit and individual performance targets (linked to the long-term strategic Corporate Plan). STI is paid in cash (50% for the MD & CEO and 75% for other executive KMP) and Restricted Shares (50% for the MD & CEO and 25% for other executive KMP) which are restricted for two years and subject to service-based conditions. Participants have full entitlement to dividends and voting rights during the two-year restriction period. Restricted Shares are used to retain key talent (they are, by default, forfeited on resignation), align executive KMP to shareholder interests (through the value of reward being subject to share price movements) and reduce organisation risk (through clawback provisions). At the end of the financial year, a target STI pool (at a Group level) is calculated. At the same time, the People and Remuneration Committee assess the Group’s NPAT before non-recurring items performance against pre-defined targets and determine the final actual Group STI pool (i.e. they adjust the target STI pool up or down depending on Group performance). The People and Remuneration Committee may consider other financial (e.g. balance sheet metrics) and non-financial (e.g. risk and compliance) performance outcomes in determining the actual STI pool for the financial year. The Board considers NPAT before non-recurring items to be appropriate as it aligns to the Group’s remuneration philosophy of creating shareholder value, it is directly linked to the Group’s financial performance and is within management’s scope of influence. The final actual STI pool can range from zero (where NPAT before non-recurring items performance has been below expectations) to 125% of the target STI pool (for exceptional NPAT before non-recurring items performance). Generally, where the Group has achieved its target financial performance an actual STI pool of 100% would be set. Where the actual STI pool is set at zero, no STI awards are provided for the year to any participants. Once the actual STI pool is set, business unit performance is assessed. Each business unit is provided with a portion of the actual STI pool depending on financial performance levels for the financial year. The business unit STI pool as a percentage of the target business unit STI pool is termed the Divisional Multiplier (DM). Tabcorp Annual Report 2018 Is individual performance considered? Does the IPM have a maximum? How is an individual’s STI calculated? Are STI awards capped for executive KMP? What are the executive KMP target and maximum STI opportunities as at 30 June 2018? Executive KMP have comprehensive performance scorecards which contain carefully defined targets spanning financial, strategic, customer, organisation and people dimensions. At the end of the financial year, the Board assesses the MD & CEO’s performance against his scorecard and the People and Remuneration Committee and the MD & CEO assess individual executive KMP performance outcomes against their scorecards. Each executive KMP is provided with an Individual Performance Multiplier (IPM) depending on performance outcomes over the financial year. For more details regarding measures, see Table 6. The IPM can range from zero (for below expectations performance) to a maximum of two (for exceptional performance). Where the IPM is zero, the participant will not receive an STI award for the financial year. An individual’s STI outcome is calculated as the DM multiplied by the IPM. STI awards are therefore linked to Group performance (through the size of the STI pool), business unit performance (through the DM) and individual performance (through the IPM). STI awards are capped at two times the executive KMP’s target opportunity. To receive the maximum STI award, Group, business unit and individual performance levels must be exceptional. As such, receiving a maximum STI award is rare and no executive KMP has received a maximum STI award in the last 5 years. Target Maximum MD & CEO (% of Fixed Remuneration) 75% (37.5% Cash, 37.5% Restricted Shares) 150% (75% Cash, 75% Restricted Shares) Executive KMP (excluding the MD & CEO) (% of Fixed Remuneration) 50% (37.5% Cash, 12.5% Restricted Shares) 100% (75% Cash, 25% Restricted Shares) What happens on a cessation of employment? Can Restricted Shares be clawed back? Accounting treatment All Restricted Shares will be forfeited immediately upon cessation of employment during the 2-year restriction period. Where the participant ceases employment for reasons outside of their control (e.g. death or disability), Restricted Shares would generally be released to the participant. However, the People and Remuneration Committee has discretion to keep Restricted Shares on foot (in full or on a pro rata basis). Restricted Shares are subject to clawback if the Board considers this to be appropriate having regard to any information which has come to light after the delivery of the Restricted Shares to participants, including but not limited to misconduct or any material misstatement or omission in Tabcorp’s prior financial statements. The financial impact of the STI (excluding any Restricted Shares) is expensed in the relevant financial year and is reflected in the remuneration disclosures for executive KMP. Restricted Shares are expensed on a straight-line basis over the current and future two years. Will there be changes to the STI from 1 July 2018? Opportunities: There will be no changes to executive KMP STI opportunities for the next financial year. Operation: Following a comprehensive review of the STI plan, the Board elected to make changes. From 1 July 2018, the STI Scorecard will be weighted 60% towards Group performance (including financial) and 40% towards individual performance. Divisional multipliers will also no longer apply. More detail regarding the changes will be presented in the 2019 Remuneration Report. STI key points Financial gateways ensure Group financial performance is required to generate any STI awards. The balanced scorecard ensures a balanced assessment of performance (financial and clearly defined and measurable non-financial). Delivered in cash and Restricted Shares (which includes forfeiture and clawback provisions). 61 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (d) Short term incentive (STI)(continued) STI performance measures and outcomes for the year ended 30 June 2018 For the year ended 30 June 2018, STI measures and targets were derived from the Board approved long-term strategic Corporate Plan which comprised financial and non-financial objectives. These objectives were subsequently included in the balanced scorecards for the executive KMP. For clarity, metrics regarding the completion of the Combination are not included in the STI scorecard. Instead, the completion of the Combination was recognised through the Merger Completion Award detailed in section 6(f). A list of STI measures and a summary of key achievements is set out in Table 6. Table 6: STI measures and summary of achievements for the year ended 30 June 2018 Scorecard category Key performance objective Financial Deliver earnings growth Manage capital efficiency Manage costs Strategic Drive successful 100 days-post integration and create platform for delivery of synergies and growth Execute the domestic strategy Execute the international strategy Enhance reputation and leadership profile Continue to deliver business growth and transformation Impact on incentives Balanced scorecard measures and performance for the year ended 30 June 2018 Negative › The Group’s reported revenues and NPAT results were below target, adversely impacted by significant items which related to the Combination, the exit of Sun Bets and Luxbet closure; › Net operating expenditure was below budget, resulting in an operating expenditure to revenue ratio that was favourable to target; and › Full year ordinary dividends were 21.0 cents per share fully franked, in line with policy. Positive › The Combination was completed successfully with the integration of Tabcorp and Tatts Group well advanced. The first wave of cost and revenue synergies has been delivered; › A successful refinancing of US$1.4bn in US private debt market on long tenures was completed; › Strategic initiatives to drive growth in the core businesses including investments in the digital customer experience and digitalisation of the retail network were delivered. These included digital assets upgraded, digital commissions driving alignment with wagering venues and supporting digital growth, commercialisation of digital vision by licensing Sky Racing to CrownBet and continued roll-out of digital point of sale in lotteries retail network; › New licences implemented (Victorian Lotteries Licence and Centralised Monitoring System for gaming machines in NSW); › Reshaped the portfolio with the exit of Sun Bets and Luxbet following a strategic review; and › Products delivered including the Powerball game change, new TAB Multiplier and Keno Mega Millions in Queensland. 62 Tabcorp Annual Report 2018 Scorecard category Key performance objective Customers & Growth Execute on brand strategy Deliver superior customer experience Impact on incentives Balanced scorecard measures and performance for the year ended 30 June 2018 Neutral › TAB digital wagering turnover growth was 16.3%; › Total TAB turnover growth was 2.5%, down 1.2% on target; › Active TAB account customers grew by 10.1%, driven by 27% growth in new customer acquisitions and retention; › 2.9 million registered lottery players; › Digital share of total lottery sales grew to 17.7%; and › During the year Keno accelerated digital expansion. Digital now accounts for 3.8% of Keno sales, with 58,000 plus account holders. Positive › Embedding of the risk and compliance framework continued in line with the overall risk and compliance strategy with focus on ensuring consistency across the newly combined Group; › Strong systems performance over key events, including the Spring Racing Carnival; and › No material regulatory breaches occurred during the year. Organisation Embed risk and compliance framework Ensure adherence to framework (training, process and reporting) No material risk or compliance breaches Meet major event operational performance targets People & Leadership Health and Safety Positive › Superior health and safety performance (combined Group LTIFR of 2.3); Employee engagement Diversity People integration for the combined business › Senior leadership cohort for the combined Group selected and appointed; › Gender pay gap analysis revealed no like-for-like gender pay gaps; › WGEA citation as a workplace of choice for diversity received for the third year in a row; and › Work has commenced to establish the culture and engagement baseline for the Group. Based on the performance levels achieved against STI measures for the year ended 30 June 2018, the actual STI pool was set at 33% of the target STI pool and STI awards were granted to executive KMP as detailed in Table 7. 63 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (d) Short term incentive (STI) (continued) Table 7: STI outcomes for executive KMP for the year ended 30 June 2018 Executive KMP David Attenborough Damien Johnston Frank Makryllos(iv) Adam Rytenskild Sue van der Merwe(iv) Financial year 2018 2017 2018 2017 2018 2018 2017 2018 Cash portion (i) $ 247,500 - 111,375 - 45,330 111,375 115,650 45,330 (ii) Actual STI Achieved Deferred portion $ 247,500 - 37,125 - 15,110 37,125 38,550 15,110 (iii) Total $ 495,000 - 148,500 - 60,440 148,500 154,200 60,440 Actual STI achieved as a % of target STI 33% 0% 33% 0% 33% 33% 50% 33% STI forgone as a % of target STI 67% 100% 67% 100% 67% 67% 50% 67% Actual STI achieved as a % of maximum STI 17% 0% 17% 0% 17% 17% 25% 17% (i) The cash portion of the FY18 STI will be paid in August 2018. The portion of the STI delivered in cash is 50% for the MD & CEO and 75% for all other executive KMP. (ii) The Restricted Shares pertaining to the STI for the year ended 30 June 2018 will be granted after the end of the year. The value of each Restricted Share is based on the market value of Tabcorp shares at the grant date. The portion of the STI deferred into Restricted Shares is 50% for the MD & CEO and 25% for all other executive KMP. Restricted Shares are subject to a two year service condition from the grant date. (iii) This reflects the total value of the STI granted as at 30 June 2018. The minimum STI value possible is zero. (iv) Mr Makryllos and Ms van der Merwe were appointed as executive KMP on 22 December 2017 following the Combination. Their STI represents the short term incentive paid to them in relation to their period as Tabcorp KMP. ‘Actual STI achieved as a % of target STI’, ‘STI forgone as a % of target STI’ and ‘Actual STI achieved as a % of maximum STI’ for these executive KMP are expressed as a percentage of a pro rata STI target. 64 Tabcorp Annual Report 2018 (e) Long term incentive (LTI) Why operate an LTI? What was the target and outperformance LTI opportunity at 30 June 2018? How is LTI delivered? On what basis are Performance Rights allocated? How long is the performance period? What is the performance measure? Which companies were included in the relative TSR peer group? To drive long term business performance and shareholder value creation, align senior management to shareholder interests (through equity) and to retain high performing and skilled senior managers. MD & CEO % of Fixed Remuneration 75% 150% Executive KMP (excl. the MD & CEO) % of Fixed Remuneration 50% 100% Target Outperformance Participants in the LTI plan are allocated a maximum number of Performance Rights (based on the Outperformance Opportunity) at the beginning of the performance period. Each Performance Right provides the right to receive one Tabcorp share, subject to meeting performance conditions, at no cost to the participant. Performance Rights do not attract dividends or voting rights, and lapse if performance conditions are not met at the end of the performance period. Based on a face value allocation methodology. To determine the number of Performance Rights allocated, the Outperformance Opportunity (see above) is divided by the five-day volume weighted average price of Tabcorp shares traded on the ASX up to but not including the grant date. Three years. For the year ended 30 June 2018, the performance measure was relative total shareholder return (relative TSR). Relative TSR measures the return received by shareholders (capital returns, dividends and share price movement) over a specific period relative to a peer group of companies. Tabcorp engages an independent external consultant to calculate relative TSR. The Board considered relative TSR to be an appropriate performance measure as it aligns directly to shareholder value creation (in turn aligning to the Group’s remuneration philosophy). For the year ended 30 June 2018, the peer group used for assessing Tabcorp’s relative TSR performance was the S&P/ASX 100 index excluding property trusts, infrastructure groups and mining companies (represented by the S&P Global Industry Classification Standards (GICS) of Metals & Mining, Oil and Gas, Transportation, Infrastructure, Utilities and Real Estate Investment Trusts). Tabcorp considers this to be an appropriate peer group as it contains organisations of smaller, equal and larger size operating in industries with similar profiles to that of Tabcorp. 65 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (e) Long term incentive (LTI) (continued) What were the relative TSR performance hurdles? Tabcorp’s relative TSR ranking Below 50th percentile At 50th percentile(i) At or above the 75th percentile (i) Percentage of Performance Rights that will vest 0% 50% 100% Value of LTI reward Zero Target Opportunity (see Diagrams 3 and 4) Outperformance Opportunity (see Diagrams 3 and 4) (i) Straight line vesting occurs between the 50th and 75th percentile performance levels (i.e. for every percentile increase above the 50th percentile, an extra 2% of the Performance Rights vest). This testing schedule and vesting criteria are common practice adopted by ASX 100 companies and is consistent with Tabcorp’s remuneration philosophy (refer to Diagram 2). If Performance Rights vest, Tabcorp will issue or transfer ordinary shares to the participant, with full voting and dividend rights corresponding to the rights of all other holders of ordinary shares. There is no retesting. Performance Rights that have not vested after testing will lapse. Performance Rights issued under the LTI are expensed on a straight-line basis over a three-year period, commencing from the grant date. Under Accounting Standards, Tabcorp is required to recognise an expense irrespective of whether the Performance Right ultimately vests to the recipient. A reversal of the expense is only recognised in the event the Performance Rights lapse due to cessation of employment within the three-year period. All unvested Performance Rights will lapse immediately upon cessation of employment. However, where cessation of employment is as a result of an event beyond the control of the LTI participant (e.g. death, permanent disablement or other Board-determined appropriate reason), a pro rata number of Performance Rights (based on the portion of the performance period that has elapsed) will remain on foot and be subject to the original terms and conditions (including performance requirements) as if the participant has not ceased employment. The Board has discretion to lapse all of the Performance Rights or to allow partial or full vesting into Tabcorp shares. In the event of a takeover offer for the Company or any other transaction resulting in a change in control of the Group or a subsidiary company, the Board is required to determine, in its absolute discretion, the appropriate treatment regarding any unvested Performance Rights held by participants employed in the relevant company. Is there any retesting of performance? Accounting treatment What happens on a cessation of employment? What happens in the event of a change in control of the Group? 66 Tabcorp Annual Report 2018 Can Performance Rights be clawed back? Are there changes to the LTI from 1 July 2018? Performance Rights are subject to clawback if the Board considers this to be appropriate having regard to any information which has come to light after the grant of the Performance Rights to participants, including but not limited to misconduct or any material misstatement or omission in Tabcorp’s prior financial statements. In the year ended 30 June 2018, the People and Remuneration Committee reviewed the remuneration framework including the LTI. Taking into consideration the Group’s strategy, the Combination, market practice and shareholder feedback, the Board approved changes to the LTI. From 1 July 2018 and with effect from the next LTI offer (intended to be October 2018), Performance Rights will be subject to two performance measures (instead of one) as detailed below: • Relative TSR (75% weighting) – the Board considers TSR to be a relevant LTI measure which aligns to the Group’s remuneration philosophy of rewarding executives for the creation of shareholder value and is in line with market practice. • Combination Synergy (25% weighting) – the Board considers the achievement of targeted synergies following the Combination to be critical to Tabcorp’s strategy over the next few years. Incentivising the Executive Leadership Team to achieve these synergies is an important part of the remuneration strategy. More information regarding the use of this measure within the LTI will be presented in the 2019 Remuneration Report. All measures will continue to be assessed over a three-year period. The Board will continue to assess the relevance of the LTI measures with the intention of introducing a return-based measure at an appropriate time. As with previous practice, the LTI offer for the year ending 30 June 2019 for the MD & CEO will be presented to shareholders at the Tabcorp 2018 Annual General Meeting for approval. LTI delivered in the form of Performance Rights (no dividends payable prior to vesting). Performance Rights allocated based on a face value allocation methodology (i.e. share price). Will only vest in full if top quartile shareholder returns are realised. Subject to clawback provisions. From 1 July 2018, new LTI offers will include two performance measures – relative TSR and Combination Synergy. LTI key points 67 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (e) Long term incentive (LTI) (continued) LTI awards granted for the year ended 30 June 2018 Table 8: Performance Rights granted during the year ended 30 June 2018 Executive KMP Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former Executive Craig Nugent Total Grant date (i) Number 27 October 2017 573,394 27 October 2017 - 27 October 2017 - - 160,213 - 206,422 - - 940,029 Fair value per Performance Right $ Fair value at grant date $ (ii) Vesting date(iii) 2.37 2.37 - 2.37 - - 1,358,944 15 September 2020 379,705 - 489,220 - - 2,227,869 15 September 2020 - 15 September 2020 - - (i) Vesting of the 2017 LTI allocation of Performance Rights is subject to a three-year relative TSR hurdle. The value of these Performance Rights is amortised over the next three years. (ii) Represents the maximum value of the grants to each executive KMP for accounting purposes. The minimum possible total value of the grant is nil. For details of the valuation of the Performance Rights, including models and assumptions used, refer to note E1 of the Tabcorp Financial Report. (iii) The 2017 LTI allocation of Performance Rights includes a three-year performance period being 15 September 2017 to 15 September 2020. The exercise price per Performance Right is nil. LTI awards tested in the year ended 30 June 2018 In the year ended 30 June 2018, there was one test date on 16 September 2017 for the 2014 LTI allocation of Performance Rights. The three-year TSR result placed Tabcorp at the 65th percentile of the peer group, and accordingly 80 percent of the Performance Rights vested. The remaining 20 percent of the Performance Rights lapsed. 68 Tabcorp Annual Report 2018 Table 9: Performance Rights vested and lapsed and shares issued during the year ended 30 June 2018 KMP Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former Executive Craig Nugent Total Number of Performance Rights vested Value of Performance Rights exercised (i) $ Number of Performance Rights lapsed (ii) Number of shares issued Amount paid per share $ 415,300 1,819,014 103,825 415,300 153,659 - 78,828 - - 647,787 673,026 - 345,267 - - 2,837,307 38,415 - 19,708 - - 161,948 153,659 - 78,828 - - 647,787 Nil Nil - Nil - - (i) Represents the value of Performance Rights exercised during the year. The value is calculated based on the market value of Tabcorp shares at the date of exercise. (ii) Performance Rights that lapsed were granted on 28 October 2014 under the 2014 (FY15) LTI offer. During the year ended 30 June 2018 (following the Combination), the People and Remuneration Committee considered whether any adjustments to LTI offers currently on foot would be necessary to ensure management were not advantaged or disadvantaged as a result of the Combination and the potential impact on these offers. After careful consideration and analysis, the People and Remuneration Committee determined not to make any adjustments to LTI Offers or calculations as a result of the Combination. 69 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (f) Merger Completion Awards The Combination has been a significant milestone for Tabcorp and it is anticipated that it will deliver material benefits for shareholders. Achieving the Combination has been a strategically complex process conducted over an extended period. A significant number of employees across the Group were involved in preparing for the Combination, legal negotiations, negotiations with regulators and in finalising the transaction. In recognition of this challenging and strategically significant accomplishment, the Board elected to provide select employees (including the MD & CEO and the pre-Combination Tabcorp executive KMP) with Merger Completion Awards. These awards were provided in January 2018 and, in line with the Group’s remuneration philosophy and principles, was provided to the MD & CEO and the pre-Combination Tabcorp executive KMP in the form of cash and Restricted Shares (restricted for two years and subject to service conditions). For the MD & CEO, 50% was delivered in cash and 50% was deferred into Restricted Shares. For the other relevant Tabcorp executive KMP, 75% was delivered in cash and 25% was deferred into Restricted Shares. Table 10 details the Merger Completion Awards delivered to relevant executive KMP. Table 10: Merger Completion Awards Executive KMP David Attenborough Damien Johnston Adam Rytenskild Cash portion $ 315,069 132,052 170,138 Actual Merger Completion Awards (i) Restricted portion $ 315,069 44,017 56,712 Total $ 630,137 176,069 226,850 Merger Completion Awards as a percentage of Fixed Remuneration (as at 30 June 2018) 31.5% 19.6% 25.2% (i) The deferred component was delivered in the form of Restricted Shares which are subject to a two-year service condition from the grant date. The value of each Restricted Share is based on the market value of Tabcorp shares at the grant date. This reflects the total face value of the Restricted Shares at grant. The minimum possible value is nil. 70 Tabcorp Annual Report 2018 (g) Actual remuneration received by executive KMP The table below provides a non-statutory voluntary disclosure of the total executive KMP remuneration received during the year ended 30 June 2018. Some of the figures in the table have not been prepared in accordance with the Australian Accounting Standards. These disclosures are different to those in Table 13 (which provides a breakdown of the executive KMP remuneration in accordance with statutory requirements and the Australian Accounting Standards). We believe this information will help shareholders understand the cash and other benefits actually received by executive KMP from the various components of their remuneration during the year ended 30 June 2018. Table 11: Actual value of remuneration received by executive KMP during the year ended 30 June 2018 Executive KMP David Attenborough Damien Johnston Frank Makryllos(vi) Adam Rytenskild Sue van der Merwe(vi) Total (i) Salary and fees $ 1,623,687 781,731 356,130 839,934 337,762 3,939,244 (ii) STI cash bonus $ - - - 115,650 - 115,650 Merger Completion Award (cash) $ 315,069 132,052 - 170,138 - 617,259 (iii) Superannuation $ 19,170 20,049 10,024 20,049 28,392 97,684 (iv) Value of STI Restricted Shares that became unrestricted $ 345,458 74,509 - 42,712 - 462,679 (v) Value of LTI vested $ 1,819,014 673,026 - 345,267 - 2,837,307 Total $ 4,122,398 1,681,367 366,154 1,533,750 366,154 8,069,823 (i) Comprises salary and salary sacrificed benefits (including salary sacrificed superannuation and motor vehicle novated leases where applicable). (ii) Cash bonus reflects the portion of the FY17 STI which was paid in August 2017. (iii) Merger Completion Award (cash) reflects the portion of the Merger Completion Award that was paid to executive KMP in cash, being 50% for the MD & CEO and 75% for other executive KMP (see section 6(f) for more details). The remaining portion of the Merger Completion Award was provided as Restricted Shares, subject to a two-year service condition. (iv) Value of the deferred component of the FY15 STI (provided in the form of Restricted Shares) which were released during the year ended 30 June 2018, and calculated based on the market value of Tabcorp shares at the date the restrictions ceased to apply (being 17 August 2017). (v) Value of shares issued during the year ended 30 June 2018 on the vesting of the FY15 LTI Performance Rights, and calculated based on the market value of Tabcorp shares at the date of vesting (being 16 September 2017). (vi) Commenced employment and as KMP on 22 December 2017, following the Combination. Remuneration values represent the period as a Tabcorp KMP. (h) Policy prohibiting hedging Participants in the Group’s incentive plans (STI and LTI) are restricted from hedging the value of Restricted Shares and unvested Performance Rights, and must not enter into a derivative arrangement in respect of the equity instruments granted under these plans. Breaches of the restriction will result in equity instruments being forfeited. These prohibitions are included in Tabcorp’s Securities Trading Policy, available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section and in the terms and conditions of the incentive plans. Equity instruments granted under the incentive plans can only be registered in the name of the participant, are identified as non tradable on the share register, and cannot be traded or transferred to another party until vested or until any trading restriction period has expired (where applicable). 71 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (i) Executives’ Shareholdings Policy The Executives’ Shareholdings Policy (applicable to all executive KMP including the MD & CEO) aims to ensure that there is an adequate level of alignment between executives, the Group and shareholders, through equity ownership. Under the Policy, the MD & CEO is required to hold the equivalent of a minimum of two times his annual Fixed Remuneration in Tabcorp shares. Other executive KMP are required to hold the equivalent of a minimum of one times their annual Fixed Remuneration in Tabcorp shares. The minimum shareholding must be achieved within five years from the executive KMP’s appointment, or by 14 December 2022 (whichever is later). Refer to section 8(d) for details of KMP shareholdings. A copy of the Tabcorp Executives’ Shareholdings Policy is available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 7. EXECUTIVE KMP EMPLOYMENT CONTRACTS Table 12: Executive KMP contracts and notice periods Name David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Position Managing Director and Chief Executive Officer Chief Financial Officer Managing Director Gaming Services Managing Director Wagering and Media Managing Director Lotteries and Keno Contract duration Open ended Open ended Open ended Open ended Open ended Minimum notice period (months) Tabcorp 12 9 9 9 9 Executive 6 6 6 6 6 On cessation of employment, STI and LTI awards lapse or vest in accordance with the relevant plan rules. Refer to sections 6(d) and 6(e) for further details. 72 Tabcorp Annual Report 2018 8. STATUTORY REMUNERATION DISCLOSURES (a) KMP statutory remuneration tables Table 13: Executive KMP remuneration for the year ended 30 June 2018 Short term Financial year Salary (i) & fees $ Cash bonus $ (ii) Merger Completion Award (cash) $ Long term Accrued leave benefits $ Post employment Super- annuation $ Charge for share based allocations(iii) Merger Completion Award (Restricted Shares) $ Performance Rights $ Restricted Shares $ Performance related % (iv) Total $ 2018 1,623,687 1,205,384 2017 247,500 - 315,069 - 175,004 79,812 19,170 19,616 252,297 305,376 126,027 - 1,269,983 4,028,737 1,235,714 2,845,902 2018 2017 2018 2018 2017 2018 781,731 662,980 356,130 839,934 594,384 337,762 111,375 - 45,330 111,375 115,650 45,330 96,391 2018 2017 681,429 2018 4,035,635 3,144,177 2017 - - 560,910 115,650 132,052 - - 170,138 - - - - 617,259 - 105,096 54,004 14,533 140,769 37,511 7,558 9,596 14,528 452,556 185,855 20,049 19,616 10,024 20,049 19,616 28,392 2,833 19,616 100,517 78,464 39,015 57,693 4,901 58,655 65,014 4,901 5,312 52,700 365,081 480,783 17,607 - - 22,686 - - 367,428 1,574,353 1,174,221 379,928 430,918 - 1,705,913 342,307 1,095,846 263,671 423,943 - - - 166,320 - 47,292 320,525 161,424 1,088,798 2,027,010 8,325,288 2,199,838 6,204,767 55% 54% 42% 37% 12% 41% 41% 12% 33% 34% KMP Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos(v) Adam Rytenskild Sue van der Merwe(v) Former Executive Craig Nugent(vi) Total (i) Comprises salary and salary sacrificed benefits (including salary sacrificed superannuation and motor vehicle novated leases where applicable). (ii) Cash bonus reflects the cash portion of the STI achieved in the relevant financial year, being 50% for the MD & CEO and 75% for other executive KMP. The remaining portion of the STI, being 50% for the MD & CEO and 25% for other executive KMP, is deferred into Restricted Shares and is reflected in the Restricted Shares column in accordance with Accounting Standards. (iii) Represents the fair value of share based payments expensed by Tabcorp. Includes the restricted portion of the Merger Completion Award that was expensed by Tabcorp during the current year. (iv) Represents the sum of cash bonus (from STI and Merger Completion Awards), Restricted Shares (from STI and Merger Completion Awards) and LTI Performance Rights as a percentage of total remuneration, excluding termination payments. (v) Commenced employment as a KMP on 22 December 2017. (vi) Ceased as a KMP on 22 August 2017. 73 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (a) KMP statutory remuneration tables (continued) Table 14: Non Executive Director remuneration for the year ended 30 June 2018 KMP Current Non Executive Directors Paula Dwyer(i) Bruce Akhurst(ii) Harry Boon(iii) Elmer Funke Kupper(iv) Steven Gregg(v) Vickki McFadden(vi) Justin Milne(vii) Zygmunt Switkowski Former Non Executive Director Jane Hemstritch(viii) Total Financial year Short term Post employment Superannuation $ Fees $ 2018 2017 2018 2017 2018 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 510,000 429,167 226,000 158,125 130,643 - - 248,500 249,792 231,458 152,292 202,500 193,750 223,750 210,833 68,333 214,166 1,841,184 1,608,125 48,450 40,771 21,470 15,022 12,411 - - 23,608 23,730 21,989 14,468 19,238 18,406 21,256 20,029 6,492 20,346 174,914 152,772 Total $ 558,450 469,938 247,470 173,147 143,054 - - 272,108 273,522 253,447 166,760 221,738 212,156 245,006 230,862 74,825 234,512 2,016,098 1,760,897 (i) In addition Ms Dwyer received a fee of $35,000 (plus superannuation at 9.5%) for undertaking the role of Chairman of the Victorian Joint Venture Management Committee throughout the year. This fee was borne by the Victorian Joint Venture, which is jointly controlled by Tabcorp. (ii) Appointed as an Observer on 1 September 2016, and commenced as a Director and KMP on 18 July 2017 following the receipt of all necessary regulatory approvals. Total remuneration in the prior year reflects observer fees. Includes additional fees of $8,750 (plus superannuation at 9.5%) received during the year for membership of other Board Sub-Committees. (iii) Commenced as a Director and KMP on 22 December 2017, following the implementation of the Combination. (iv) Mr Funke Kupper does not receive Tabcorp Board fees whilst on leave of absence. (v) Includes additional fees of $35,000 (plus superannuation at 9.5%) received during the year for membership of other Board Sub-Committees. (vi) Appointed as an Observer on 1 September 2016, and commenced as a Director and KMP on 18 July 2017 following the receipt of all necessary regulatory approvals. Total remuneration in the prior year reflects observer fees. Includes additional fees of $9,375 (plus superannuation at 9.5%) received during the year for membership of other Board Sub-Committees. (vii) Includes additional fees of $8,750 (plus superannuation at 9.5%) received during the year for membership of other Board Sub-Committees. (viii) Ceased as a Director and KMP on 27 October 2017. Fees for the year ended 30 June 2018 reflect the period as KMP up until employment ceased. Includes additional fees of $2,500 (plus superannuation at 9.5%) received during the year for membership of other Board Sub-Committees. 74 Tabcorp Annual Report 2018 (b) Movements in Performance Rights held by executive KMP Table 15: KMP interests in Performance Rights for the year ended 30 June 2018 (number) KMP Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former Executive Craig Nugent Total Balance at start of year Balance at KMP commencement (i) Granted as remuneration Vested Lapsed cessation (ii) Balance at KMP Balance at end of year (iii) 1,504,708 477,201 n/a 341,364 n/a 415,338 2,738,611 n/a n/a - n/a - n/a - 573,394 (415,300) (103,825) 160,213 - 206,422 - (153,659) - (78,828) - (38,415) - (19,708) - n/a n/a n/a n/a n/a 1,558,977 445,340 - 449,250 - - 940,029 - (647,787) - (161,948) 415,338 415,338 n/a 2,453,567 (i) Reflects Performance Rights held at 22 December 2017 for Mr Makryllos and Ms van der Merwe. (ii) Reflects Performance Rights held at 22 August 2017 for Mr Nugent. (iii) The number of Performance Rights vested and exercisable at year end was nil. (c) Summary of Performance Rights as at 30 June 2018 Table 16: Current LTI Performance Rights allocations on foot Grant year 2015 2016 2017 Grant date 29 October 2015 25 October 2016 27 October 2017 Allocation to MD & CEO, senior management MD & CEO, senior management MD & CEO, senior management Test and expiry date 22 September 2018 14 September 2019 15 September 2020 75 Tabcorp Annual Report 2018REMUNERATION REPORTREMUNERATION REPORT REMUNERATION REPORT (AUDITED) For the financial year ended 30 June 2018 (d) KMP shareholdings Table 17: KMP interests in shares of Tabcorp (number of shares) for the year ended 30 June 2018 The following table sets out the number of shares held by KMP and their related parties, directly, indirectly or beneficially, during the year ended 30 June 2018. KMP Non Executive Directors Paula Dwyer Bruce Akhurst Harry Boon Elmer Funke Kupper Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Non Executive Director Jane Hemstritch Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former Executive Craig Nugent Total Balance at start of year Balance at KMP commencement (i) Granted as remuneration (ii) On vesting of Performance Rights Net change Balance at KMP other (iii) cessation (iv) Balance at end of year 100,000 n/a n/a 64,166 15,000 n/a 31,208 91,949 31,962 889,627 360,214 n/a 185,857 n/a 164,911 1,934,894 n/a 39,108 70,000 n/a n/a 30,000 n/a n/a n/a n/a n/a 39,483 n/a 76,343 n/a 254,934 - - - - - - - - - - - - - - - - - - 59,508 415,300 8,313 - 20,018 - - 87,839 153,659 - 78,828 - - 647,787 50,000 40,892 - - 20,000 20,000 - - - - - - - - n/a n/a n/a n/a n/a n/a n/a n/a 150,000 80,000 70,000 64,166 35,000 50,000 31,208 91,949 31,962 n/a n/a n/a n/a n/a n/a 1,364,435 522,186 39,483 284,703 76,343 - 130,892 164,911 196,873 n/a 2,859,473 (i) Reflects shareholding as at 18 July 2017 for Bruce Akhurst and Vickki McFadden, and as at 22 December 2017 for Harry Boon, Frank Makryllos and Sue van der Merwe. (ii) Includes Restricted Shares issued during the year ended 30 June 2018 as the deferred component of the FY17 STI and the Merger Completion Award. (iii) Includes voluntary on-market transactions. (iv) Reflects shareholding as at 27 October 2017 for Jane Hemstritch and 22 August 2017 for Craig Nugent. (e) Transactions and loans with KMP No KMP (including their related parties) have entered into material commercial relationships or transactions with the Company or a subsidiary during the year ended 30 June 2018 other than as disclosed in this Remuneration Report. All KMP related party relationships are at arm’s length and on normal commercial terms and none of the KMP were, or are, involved in any procurement or other decision-making regarding organisations with which they have an association. No KMP (including their related parties) has entered into a loan made, guaranteed or secured, directly or indirectly, by the Company or a subsidiary during the reporting period. 76 Tabcorp Annual Report 2018 FINANCIAL REPORT CONTENTS Income statement Balance sheet Cash flow statement Statement of changes in equity Notes to the financial statements About this report Section A – Group performance Section B – Capital and risk management Section C – Operating assets and liabilities Section D – Group structure Section E – Other disclosures Directors’ declaration Independent auditor’s report 78 79 80 81 82 82 83 89 99 108 118 126 127 R R E E P P O O R R T T F F I I N N A A N N C C I I A A L L Tabcorp Annual Report 2018 77 INCOME STATEMENT For the year ended 30 June 2018 Revenue Other income Commissions and fees Government taxes and levies Employment costs Depreciation and amortisation Impairment Communications and technology costs Advertising and promotions Property costs Other expenses Transaction costs – combination with Tatts Group Profit before income tax expense and net finance costs Finance income Finance costs Profit before income tax expense Income tax expense Net profit/(loss) after tax Other comprehensive income Items that may be reclassified to profit or loss Change in fair value of cash flow hedges taken to equity Exchange differences on translation of foreign operations Income tax relating to these items Items that will not be reclassified to profit or loss Actuarial gains on retirement benefit obligation Income tax relating to these items Other comprehensive income for the year, net of income tax Total comprehensive income for the year Earnings per share: Basic earnings per share Diluted earnings per share Dividends per share: Declared and paid during the year Determined in respect of the year The accompanying notes form an integral part of this income statement. 78 Note A4 A4 D4 A4 A5 A2 A2 A3 A3 2018 $m 3,828.7 2.1 (1,254.7) (1,076.5) (354.5) (248.6) (39.4) (108.6) (127.0) (77.0) (254.5) (48.6) 241.4 2.0 (129.9) 113.5 (84.8) 28.7 (46.4) (1.0) 13.7 1.1 (0.1) (32.7) (4.0) 2018 cents 1.9 1.9 23.5 21.0 2017 $m 2,234.1 (24.1) (921.4) (314.1) (224.0) (183.3) (27.5) (86.3) (73.3) (54.7) (196.3) (27.5) 101.6 1.6 (78.3) 24.9 (45.7) (20.8) 10.3 (2.0) (3.1) 1.4 (0.4) 6.2 (14.6) 2017 cents (2.5) (2.5) 24.5 25.0 Tabcorp Annual Report 2018 BALANCE SHEET As at 30 June 2018 Current assets Cash and cash equivalents Receivables Prepayments Current tax assets Derivative financial instruments Assets held for sale Other Total current assets Non current assets Receivables Investment in an associate Available for sale financial assets Licences Other intangible assets Property, plant and equipment Prepayments Held to maturity investments Derivative financial instruments Other Total non current assets TOTAL ASSETS Current liabilities Payables Interest bearing liabilities Provisions Derivative financial instruments Liabilities directly associated with assets held for sale Other Total current liabilities Non current liabilities Payables Interest bearing liabilities Deferred tax liabilities Provisions Derivative financial instruments Other Total non current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Accumulated losses Reserves TOTAL EQUITY The accompanying notes form an integral part of this balance sheet. Note C5 C6 B4 D5 C6 D6 B3 C1 C2 C4 B3 B4 C7 B2 C8 B4 D5 C7 B2 A5 C8 B4 2018 $m 368.2 98.1 44.9 21.1 49.6 - 85.8 667.7 7.0 22.7 20.8 2,361.1 9,142.0 488.2 29.9 55.0 123.0 23.4 12,273.1 12,940.8 1,019.9 132.9 92.4 48.1 - 67.3 1,360.6 261.8 3,371.8 596.1 78.9 21.8 11.2 4,341.6 5,702.2 7,238.6 8,529.1 (566.2) (724.3) 7,238.6 2017 $m 114.3 54.5 22.8 5.4 296.2 13.1 50.3 556.6 12.5 - - 637.5 2,058.1 339.4 33.0 - 80.3 23.5 3,184.3 3,740.9 361.8 974.3 36.4 32.4 2.6 8.9 1,416.4 - 684.0 60.5 63.0 30.6 3.0 841.1 2,257.5 1,483.4 2,444.5 (270.3) (690.8) 1,483.4 79 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT CASH FLOW STATEMENT For the year ended 30 June 2018 Cash flows from operating activities Net cash receipts in the course of operations Payments to suppliers, service providers and employees Payment of government levies, betting taxes and GST Finance income received Finance costs paid Income tax paid Net cash flows from operating activities Cash flows from investing activities Payments relating to cash-settled equity swap Proceeds relating to cash-settled equity swap Payment for business acquisition, net of cash acquired Net proceeds from business divestment Payment for property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment and intangibles Loan repayments received from customers Net cash flows used in investing activities Cash flows from financing activities Net cash flows from revolving bank facilities Proceeds from borrowings Repayment of borrowings Settlement of dividends payable by business acquired Dividends paid Payment of transaction costs for share issue Payments for on-market share purchase Net cash flows from/(used in) financing activities Net increase/(decrease) in cash held Effects of exchange rate changes on cash Cash at beginning of year Cash at end of year The accompanying notes form an integral part of this cash flow statement. 80 Note C5 D4 C5 2018 $m 4,058.8 (2,417.0) (923.3) 1.4 (150.0) (122.4) 447.5 (325.1) 625.3 (193.4) 13.2 (291.7) 1.0 5.4 (165.3) 35.0 5,350.0 (4,873.8) (235.0) (313.8) (1.7) (4.8) (44.1) 238.1 0.3 114.3 352.7 2017 $m 2,270.5 (1,685.3) (226.1) 1.6 (76.7) (61.5) 222.5 (331.4) 13.9 (113.2) - (197.4) 1.9 1.8 (624.4) 584.9 - - - (194.5) - - 390.4 (11.5) (0.2) 126.0 114.3 Tabcorp Annual Report 2018 STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2018 2018 Balance at beginning of year Profit for the year Other comprehensive income Total comprehensive income Dividends paid Dividend reinvestment plan Transfers Restricted shares issued Share based payments expense Consideration for business combination Transaction costs on business combination Net outlay to purchase shares Balance at end of year 2017 Balance at beginning of year Loss for the year Other comprehensive income Total comprehensive income Dividends paid Dividend reinvestment plan Transfers Restricted shares issued Performance Rights exercised Share based payments expense Balance at end of year Issued capital Issued capital Reserves Number of ordinary shares m Ordinary shares $m Treasury shares $m Accumulated losses $m Hedging $m Demerger $m Other $m Total equity $m 835.3 - - - - 2.5 - - - 1,175.2 - - 2,013.0 831.5 - - - - 1.9 - 0.3 1.6 - 835.3 2,445.1 - - - - 11.7 3.0 - - 6,075.7 (1.7) (4.6) 8,529.2 (0.6) - - - - - - (0.2) 0.7 - - - (0.1) (270.3) 28.7 1.0 29.7 (325.6) - - - - - - - (566.2) (24.2) - (32.7) (32.7) - - - - - - - - (56.9) (669.9) - - - - - - - - - - - (669.9) Total issued capital 8,529.1 Total reserves (724.3) 2,431.2 - - - - 9.7 2.8 1.4 - - 2,445.1 (0.6) - - - - - - (1.4) - 1.4 (0.6) (46.3) (20.8) 1.0 (19.8) (204.2) - - - - - (270.3) (31.4) - 7.2 7.2 - - - - - - (24.2) (669.9) - - - - - - - - - (669.9) Total issued capital 2,444.5 Total reserves (690.8) 3.3 - (1.0) (1.0) - - (3.0) - 3.2 - - - 2.5 5.1 - (2.0) (2.0) - - (2.8) - - 3.0 3.3 1,483.4 28.7 (32.7) (4.0) (325.6) 11.7 - (0.2) 3.9 6,075.7 (1.7) (4.6) 7,238.6 1,688.1 (20.8) 6.2 (14.6) (204.2) 9.7 - - - 4.4 1,483.4 Ordinary shares are issued and fully paid. They carry one vote per share and hold rights to dividends. Issued capital is recognised at the fair value of the consideration received. When issued capital is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from total issued capital. Any transaction costs directly attributable to the issue of ordinary shares are recognised directly in equity, net of tax, as a reduction of the share proceeds received. Treasury shares represent the unvested portion of Restricted Shares issued to executives as an incentive, on appointment or for retention, which is recognised as a reduction in issued capital. The amount which has been credited to the employee equity benefit reserve is transferred to issued capital to the extent the relevant Performance Rights vest or have been treated as vested. Nature of reserves Hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. Demerger reserve arose on the demerger of The Star Entertainment Group (previously the Echo Entertainment Group) in 2011. It represents the difference between the fair value of The Star Entertainment Group shares (being the distribution liability arising on demerger), the amount allocated as a capital reduction and any transfers to retained earnings. Other reserves contain the employee equity benefit reserve and the foreign currency translation reserve. The accompanying notes form an integral part of this statement of changes in equity. 81 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2018 ABOUT THIS REPORT Tabcorp Holdings Limited (the Company) is a company limited by shares which are traded on the Australian Securities Exchange. The Company is incorporated and domiciled in Australia, and is a for-profit entity. The Financial Report of the Company for the year ended 30 June 2018 comprises the Company and its subsidiaries (the Group) and the Group’s interest in joint arrangements and associates. The Financial Report was authorised for issue by the Board of Directors on 8 August 2018. The Financial Report is a general purpose financial report which: • has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards as issued by the Australian Accounting Standards Board and other mandatory financial reporting requirements in Australia; • complies with International Financial Reporting Standards as issued by the International Accounting Standards Board; • is presented in Australian dollars with dollar amounts rounded to the nearest hundred thousand unless specifically stated to be otherwise, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191; and • is prepared on the historical cost basis, except for derivative financial instruments and available for sale financial assets that have been measured at fair value. The accounting policies have been applied consistently throughout the Group for the purposes of this Financial Report. Note disclosures have been grouped into five sections. The notes within each section detail the accounting policies applied, together with any key judgements and estimates used. The purpose of this format is to provide users with a clear understanding of the key drivers of the Group’s financial performance and financial position. A Group performance B Capital and risk management C Operating assets and liabilities D Group structure E Other disclosures A1 Segment information A2 Earnings per share A3 Dividends A4 Revenue and expenses A5 Income tax A6 Subsequent events 83 85 85 86 87 88 B1 Capital management 89 C1 Licences B2 Interest bearing liabilities 90 C2 Other intangible assets B3 Financial assets 91 C3 Impairment testing B4 Derivative financial instruments B5 Fair value measurement B6 Financial instruments – risk management 92 94 C4 Property, plant and equipment C5 Notes to the cash flow statement 95 C6 Receivables C7 Payables C8 Provisions D1 Subsidiaries 108 E1 Employee share plans 118 D2 Deed of cross guarantee D3 Parent entity disclosures D4 Business combinations 111 113 114 D5 Disposal group held for sale 117 D6 Investment in an associate 117 E2 Pensions and other post employment benefit plans E3 Commitments E4 Contingencies 120 122 122 E5 Related party disclosures 123 E6 Auditor’s remuneration 123 E7 Other accounting policies 124 99 100 101 103 104 105 106 106 Significant accounting estimates and assumptions The carrying amount of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of these assets and liabilities recognised in the financial statements are described in the following notes: A5 – Income tax B3 – Financial assets B4 – Derivative financial instruments C1 – Licences C2 – Other intangible assets C3 – Impairment testing C8 – Provisions D4 – Business combinations E4 – Contingencies 82 Tabcorp Annual Report 2018 SECTION A – GROUP PERFORMANCE A1 Segment information Operating segments reflect the business level at which financial information is provided to the Managing Director and Chief Executive Officer (Chief Operating Decision Maker), for decision making regarding resource allocation and performance assessment. The measure of segment profit used excludes significant items not considered integral to the ongoing performance of the segment. Intersegment pricing is determined on commercial terms and conditions. The Group has four operating segments at year end. Sun Bets was identified as an operating segment during the current year as it is no longer in an establishment phase. In the Group’s 31 December 2017 half year financial report, Tatts Group had been identified as a single segment due to the proximity of the acquisition to the period end and the Group’s operating segments have since been reassessed. Tabcorp Group Wagering and Media Lotteries and Keno Gaming Services Sun Bets Provision of totalisator and fixed odds betting and retail wagering networks, and global racing media business Operation of lotteries and Keno pursuant to licences and approvals in certain Australian states and territories Gaming machine monitoring operations in New South Wales, Queensland and the Northern Territory and venue services nationwide Provision of online wagering, sports bookmaking and casino products in the United Kingdom and Ireland Segment revenue $m Segment profit before interest and tax $m 2018 2017 2018 2017 2,186.1 1,390.7 1,873.0 261.7 199.7 228.0 249.7 7.4 212.7 143.9 65.6 49.5 47.9 Wagering and Media Lotteries and Keno Gaming Services Sun Bets (38.2) 83 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2018 A1 Segment information (continued) 2018 Revenue – external customers Revenue – intersegment Segment revenue Segment profit/(loss) before interest and tax Depreciation and amortisation Capital expenditure (i) 2017 Segment revenue – external customers Segment profit before interest and tax Depreciation and amortisation Capital expenditure(i) Wagering and Media $m Lotteries and Keno $m Gaming Services $m Sun Bets $m 2,186.1 - 2,186.1 261.7 135.2 93.7 1,873.0 228.0 122.0 125.3 1,389.8 0.9 1,390.7 199.7 55.9 17.4 212.7 49.5 22.5 22.6 244.5 5.2 249.7 65.6 56.2 67.8 143.9 47.9 34.2 63.1 7.4 - 7.4 (38.2) 1.3 10.7 - - - - Total $m 3,827.8 6.1 3,833.9 488.8 248.6 189.6 2,229.6 325.4 178.7 211.0 (i) Capital expenditure excludes the acquisition of licences and assets acquired via business combinations (refer note D4). Reconciliation of segment revenue, profit, depreciation and amortisation Segment total (per above) Intersegment revenue elimination Unallocated items: – finance income – finance costs (i) – significant items: – net gain/(loss) on cash-settled equity swap – Sun Bets onerous contract expense and impairment (refer note A4) and related costs – settlement and other costs relating to the AUSTRAC civil proceedings and AFP Cambodia investigation – costs relating to combination with Tatts Group(ii) – establishment and start-up of Sun Bets – other (iii) – other Total per income statement Revenue Profit 2018 $m 3,833.9 (6.1) 2017 $m 2,229.6 - - - - - - - - - 0.9 3,828.7 - - - - - - 4.5 - - 2,234.1 2018 $m 488.8 - 2.0 (129.9) 6.6 (92.7) - (143.3) - (17.0) (1.0) 113.5 2017 $m 325.4 - 1.6 (78.3) (23.9) (27.5) (71.7) (31.4) (50.7) (18.6) - 24.9 Depreciation & amortisation 2017 $m 2018 $m 248.6 - 178.7 - - - - - - - - - - 248.6 - - - - - - 4.6 - - 183.3 (i) Includes financing costs relating to the combination with Tatts Group and the cash-settled equity swap of $9.3 million (2017: $8.2 million). (ii) Includes transaction costs per note D4 of $48.6 million (2017: $27.5 million), implementation costs of $62.9 million (2017: $3.9 million), impairments of $17.6 million and surplus lease space provision of $14.2 million. (iii) Significant items – other comprises: costs relating to Luxbet closure of $17.0 million. Significant items – other in the prior year comprised: costs relating to the Intecq acquisition of $5.9 million and the Melbourne premises relocation of $12.7 million. 84 Tabcorp Annual Report 2018 Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific criteria must also be met before revenue is recognised: Wagering revenue is recognised as the residual value after deducting the return to customers from wagering turnover. Fixed odds betting revenue is recognised as the net win or loss on an event. The amounts bet on an event are recognised as a liability until the outcome of the event is determined, at which time the revenue is brought to account. Open betting positions are carried at fair value and gains and losses arising on these positions are recognised in revenue. The Group operates loyalty programmes enabling customers to accumulate award credits for wagering spend. A portion of the spend, equal to the fair value of the award credits earned, is treated as deferred revenue. Revenue from the award credits is recognised when the award is redeemed or expires. Media revenue includes subscription income and advertising revenue, and is recognised once the service has been rendered. Subscriptions received relating to future periods are treated as deferred revenue. Lotteries revenue is recognised as the gross subscriptions received for lotteries less prizes payable when the official draw for each game is completed. Subscriptions received during the year for games which will be drawn in the next financial period, are deferred and recognised as revenue in the next financial period. Revenue from lottery card subscriptions is recognised over the life of the subscription. Management fees recognised in relation to the Master Agent Agreement associated with the operation of SA Lotteries are recognised in sales revenue. Keno revenue is recognised as the residual value after deducting the return to customers from Keno turnover. Gaming services revenue is recognised once the service has been rendered or the goods have been delivered to the buyer. A2 Earnings per share Earnings used in calculation of earnings per share (EPS) Weighted average number of ordinary shares used in calculating basic EPS Effect of dilution from Performance Rights(i) Weighted average number of ordinary shares used in calculating diluted EPS (ii) 2018 $m 28.7 2017 $m (20.8) 2018 Number (m) 1,480.0 3.2 1,483.2 2017 Number (m) 834.7 - 834.7 (i) In the prior year the dilutive impact of Performance Rights has not been taken into consideration as they were antidilutive and would result in the dilutive loss per share being less than the basic loss per share. (ii) Impacted by the issue of shares as consideration for business combination in December 2017. The number of ordinary shares on issue at 30 June 2018 was 2,013.0 million Basic EPS is calculated as net profit after tax divided by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is calculated on the same basis as basic EPS except that it reflects the impact of any potential commitments the Group has to issue shares in the future, for example shares to be issued upon vesting of Performance Rights. A3 Dividends Fully franked dividends declared and paid during the year: Prior year final dividend Interim dividend Fully franked dividends determined in respect of the year: Interim dividend Final dividend 2018 cents per share 2017 cents per share 12.5 11.0 23.5 11.0 10.0 21.0 12.0 12.5 24.5 12.5 12.5 25.0 Fully franked dividends declared after balance date to be recognised in subsequent year: Final dividend 10.0 12.5 Franking credits available at the 30% company tax rate after allowing for tax payable or receivable 2018 $m 104.4 221.2 325.6 221.2 201.3 422.5 201.3 73.9 2017 $m 99.8 104.4 204.2 104.4 104.4 208.8 104.4 103.7 85 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2018 A4 Revenue and expenses (a) Revenue includes: Interest revenue (b) Other income Net gain/(loss) on cash-settled equity swap Net loss on disposal of non current assets Net loss on disposal of subsidiaries Fair value gains on financial assets at fair value through profit or loss Other (c) Employment costs include: Defined contribution plan expense (d) Operating lease rentals Minimum lease payments (e) Finance costs Interest costs Other (f) Impairment(i) Leasehold improvements Plant and equipment Other intangible assets – software Other intangible assets – other (g) Other expenses include: Onerous contract expense(ii) Settlement in relation to the AUSTRAC civil proceedings 2018 $m 3.8 6.6 (1.3) (9.3) 5.3 0.8 2.1 24.8 52.0 112.7 17.2 129.9 2.3 9.2 23.8 4.1 39.4 82.5 - 82.5 2017 $m 1.1 (23.9) (1.7) - - 1.5 (24.1) 16.7 39.0 70.3 8.0 78.3 0.2 4.5 22.8 - 27.5 - 45.0 45.0 (i) Includes the write down of the business assets relating to Luxbet closure (in the current year) and Sun Bets exit in July 2018 (in the current and prior year). (ii) Comprises expense in relation to contractual obligations for Sun Bets. Interest revenue earned from customers in the ordinary course of operations is disclosed within revenue. Contributions to defined contribution plans are recognised in the income statement as they become payable. Operating lease rentals are recognised in the income statement on a straight line basis over the lease term. Lease incentives received are recognised as a liability and are released to the income statement on a straight line basis over the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Finance income is recognised using the effective interest rate method. Finance costs are recognised as an expense when incurred. 86 Tabcorp Annual Report 2018 A5 Income tax (a) The major components of income tax expense are: Current tax Adjustments in respect of current income tax of previous years Deferred tax Income tax reconciliation: Profit before income tax expense Income tax payable at the 30% company tax rate Tax effect of adjustments in calculating taxable income: – amortisation of licences – non-deductible expenses – unbooked deferred tax assets – research and development claims – other Effect of differing international tax rates Income tax expense 2018 $m (101.5) 12.7 4.0 (84.8) 113.5 (34.0) (11.9) (9.8) (23.0) 2.7 4.5 (13.3) (84.8) 2017 $m (59.8) 11.5 2.6 (45.7) 24.9 (7.5) (11.7) (23.7) (7.1) 8.0 0.7 (4.4) (45.7) 87 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2018 A5 Income tax (continued) (b) Deferred tax assets/(liabilities) NSW Trackside concessions Fair value of cash flow hedges Property, plant and equipment Provisions Cash-settled equity swap Accrued expenses NSW retail exclusivity Other Licences Other intangible assets Unclaimed dividends Research and development Net deferred tax assets/(liabilities) Balance at 1 July 2016 $m 14.2 13.5 16.5 12.3 - 8.6 3.0 4.2 (99.5) (8.5) (4.8) (20.3) (60.8) Recognised in income statement $m (3.2) - (0.8) 1.9 7.1 (2.4) (1.5) (5.1) 1.4 7.6 0.3 (2.7) 2.6 Acquisitions via business combinations $m - - - 1.1 - (0.1) - 1.2 - (1.0) - - 1.2 Recognised directly in equity $m - (3.1) - - - - - (0.4) - - - - (3.5) Balance at 30 June 2017 $m 11.0 10.4 15.7 15.3 7.1 6.1 1.5 (0.1) (98.1) (1.9) (4.5) (23.0) (60.5) Recognised in income statement $m (3.2) - (1.5) 6.3 (7.1) 0.9 (1.5) 1.7 9.0 2.8 0.1 (3.5) 4.0 Acquisitions via business combinations $m - (2.4) 2.7 16.5 - 1.3 - 14.1 (534.0) (44.9) (4.4) (2.1) (553.2) Recognised directly in equity $m - 13.7 - - - - - (0.1) - - - - 13.6 Balance at 30 June 2018 $m 7.8 21.7 16.9 38.1 - 8.3 - 15.6 (623.1) (44.0) (8.8) (28.6) (596.1) A deferred tax asset in relation to tax losses arising in the UK of $30.8 million has not been recognised at 30 June 2018 (2017: $7.8 million). These losses are available for offsetting against future taxable profits in the UK. Income tax comprises current and deferred income tax. Income tax is recognised in the income statement except when it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the period and any adjustment to tax payable in respect of previous years. Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes. The temporary differences for goodwill and the initial recognition of an asset or liability in a transaction which is not a business combination and that affect neither accounting nor taxable profit at the time of the transaction are not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. A6 Subsequent events In July 2018, the Group announced it had executed an agreement with News UK to exit the Sun Bets business, which has now ceased trading. The exit payment has been reflected in the current year (refer to note A4). Other than the events disclosed elsewhere in this report, no other matters or circumstances have arisen since the end of the financial year, that may significantly affect the Group’s operations, the results of those operations or the state of affairs of the Group. 88 Tabcorp Annual Report 2018 SECTION B – CAPITAL AND RISK MANAGEMENT B1 Capital management The Group’s objectives when managing capital are to ensure the Group continues as a going concern while providing optimal returns to 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 or issue new shares. The Group has a target of an investment grade credit rating. Gearing is managed primarily through the ratio of gross debt to earnings before interest, tax, depreciation, amortisation and impairment (EBITDA). At 30 June the Group’s gearing ratio was: Gross debt (US private placement debt at the Australian dollar principal repayable under cross currency swaps) EBITDA (before significant items) (i) Gearing ratio (i) 2018 includes allowance for 12 months contribution from Tatts Group. 2018 $m 3,308.3 954.0 3.5 2017 $m 1,585.5 504.1 3.1 89 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2018 B2 Interest bearing liabilities The Group borrows money from financial institutions and debt investors in the form of bank loans, foreign currency denominated notes and bonds. The following table details the debt position of the Group at 30 June: Facility Bank overdraft Details Floating interest rate revolving bilateral overdraft facility. Bank loans – unsecured Floating interest rate revolving facility. Subject to financial undertakings as to gearing and interest cover. US private placement Fixed interest rate US dollar debt. At 30 June 2018 aggregate US dollar principal of $1,640.0 million (2017: $220.0 million). Cross currency swaps are in place for all US dollar debt. Under these swaps the aggregate Australian dollar amount payable at maturity is $2,008.5 million (2017: $210.5 million). Facility limit $m 100.0 633.3 633.3 633.4 1,900.0 575.0 250.0 400.0 150.0 400.0 1,775.0 USD 87.0 USD 170.0 USD 133.0 USD 105.0 USD 450.0 USD 520.0 USD 175.0 AUD 97.3 AUD 97.3 Maturity Feb-19 Dec-20 Dec-21 Dec-22 n/a n/a n/a n/a n/a Apr-19 Dec-20 Apr-22 Jun-26 Jun-28 Jun-30 Jun-33 Jun-35 Jun-36 2018 $m 15.5 630.7 257.8 - 888.5 - - - - - - 117.4 236.1 179.3 141.1 604.6 698.7 235.1 96.7 96.7 2,405.7 Tatts Bonds Floating rate interest 90 day BBSW +3.1% paid quarterly in arrears. 192.0 Jul-19 195.0 2017 $m - - - - - 574.8 - 399.5 9.8 388.8 1,372.9 112.9 - 172.5 - - - - - - 285.4 - Current Non current 90 3,504.7 1,658.3 132.9 3,371.8 3,504.7 974.3 684.0 1,658.3 Tabcorp Annual Report 2018 B2.1 Changes in liabilities arising from financing activities: Interest bearing liabilities Current Non current Cross currency interest rate swaps Current assets Non current assets Current liabilities Non current liabilities Balance at 1 July 2017 $m Cash flows $m Acquisitions via business combinations $m Foreign exchange movement $m Changes in fair values $m Other $m Balance at 30 June 2018 $m (974.3) (684.0) 845.8 (1,357.0) - (1,272.1) 2.6 77.2 (2.1) - (1,580.6) - - - - (511.2) 2.4 55.0 - - (1,214.7) (4.4) (69.1) - - - - (73.5) - - 35.5 (10.4) (7.4) (0.4) 17.3 - 10.4 - - - - 10.4 (132.9) (3,371.8) 40.5 121.8 (9.5) (0.4) (3,352.3) Interest bearing liabilities are recognised initially at fair value net of transaction costs, and subsequent to initial recognition are recognised at amortised cost which is calculated using the effective interest rate method. Foreign currency liabilities are carried at amortised cost and are translated at the exchange rates ruling at reporting date. Gains and losses are recognised in the income statement when the liabilities are derecognised in addition to the amortisation process. B3 Financial assets (a) Available for sale financial assets Unlisted investments – managed fund (b) Held to maturity investments Investment – term deposits 2018 $m 20.8 55.0 2017 $m - - Available for sale financial assets include equity investments and debt securities. Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in market conditions. After initial measurement, available for sale financial assets are subsequently carried at fair value (refer to note B5). Changes in the fair value are recognised in other comprehensive income and accumulated in a reserve within equity. Held to maturity investments are measured at amortised cost. 91 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2018 B4 Derivative financial instruments The Group holds the following derivative financial instruments, all at fair value based on level 2 observable inputs (refer to note B5): Current assets Cross currency swaps Cash-settled equity swap Equity derivative Non current assets Cross currency swaps Interest rate swaps Current liabilities Interest rate swaps Cross currency swaps Open betting positions Non current liabilities Cross currency swaps Interest rate swaps 2018 $m 40.5 - 9.1 49.6 121.8 1.2 123.0 172.6 22.4 9.5 16.2 48.1 0.4 21.4 21.8 69.9 2017 $m 2.6 293.6 - 296.2 77.2 3.1 80.3 376.5 19.8 2.1 10.5 32.4 - 30.6 30.6 63.0 Derivative financial instruments are recognised initially at cost, and subsequently are stated at fair value (refer to note B5). The method of recognising any remeasurement gain or loss depends on the nature of the item being hedged. For the purposes of hedge accounting, hedges are classified as either cash flow or fair value hedges. Cash flow hedges are used to hedge the exposure to variability in cash flows attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction. Hedge effectiveness is measured by comparing the change in the fair value of the hedged item and the hedging instrument respectively each quarter. Any difference represents ineffectiveness. The effective portion of any gain or loss on the hedging instrument is recognised directly in equity, with any ineffective portion recognised in the income statement. For hedged items relating to financial assets or liabilities, amounts recognised in equity are reclassified into the income statement when the hedged transaction affects the income statement (i.e. when interest income or expense is recognised). When the hedged item is the cost of a non-financial asset or liability, the amounts recognised in equity are transferred into the initial cost or other carrying amount of the non-financial asset or liability. When a hedging instrument expires or is sold, terminated or exercised, or the designation of the hedge relationship is revoked but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement. Fair value hedges are used to hedge the variability of changes in the fair value of a recognised asset or liability or an unrecognised firm commitment. Any gain or loss on the derivative is recognised directly in the income statement. Equity derivative is a financial asset at fair value through profit or loss. Gains or losses arising from changes in the fair value (refer note B5) are recognised directly in the income statement within other income. 92 Tabcorp Annual Report 2018 B4.1 Interest rate swaps These swaps are used to mitigate the risk of variability in cash flows due to movements in the reference interest rate of the designated debt. The notional principal amounts and periods of expiry of these interest rate swap contracts are: Less than one year One to five years More than five years Notional principal Fixed interest rate range p.a. Variable interest rate range p.a. Notional principal 2018 $m 258.5 667.0 722.1 1,647.6 2017 $m - 775.5 - 775.5 1.9% – 7.3% 1.9% – 2.1% 1.9% – 7.3% 1.7% – 2.3% Net settlement receipts and payments are recognised as an adjustment to interest expense on an accruals basis over the term of the swaps, such that the overall interest expense on borrowings reflects the average cost of funds achieved by entering into the swap agreements. B4.2 Cross currency swaps These swaps are used to reduce the exposure to the variability of movements in the forward USD exchange rate in relation to the USD private placement debt. The principal amounts and periods of expiry of the cross currency swap contracts are: One to five years More than five years Notional principal Fixed interest rate range p.a. Variable interest rate range p.a. 2018 2017 Pay principal AUD m 382.0 1,626.5 2,008.5 Receive principal USD m 390.0 1,250.0 1,640.0 Pay principal AUD m 210.5 - 210.5 Receive principal USD m 220.0 - 220.0 4.2% – 5.6% 5.3% – 6.1% 4.6% – 5.2% 4.6% – 5.2% The terms and conditions in relation to the interest rate and maturity of the cross currency swaps are similar to the terms and conditions of the underlying hedged US private placement debt. B4.3 Cash-settled equity swap During the prior year the Group entered into a cash-settled equity swap with an investment bank in respect of circa 147 million shares in Tatts Group representing approximately 10% of Tatts Group shares on issue. The swap had an average reference price of $4.34 per Tatts Group share and provided the Group with the entitlement to receive payments equivalent to any cash dividends paid by Tatts Group in respect of 147 million shares. The swap was unwound on 9 February 2018. 93 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2018 B5 Fair value measurement The fair value of financial assets and financial liabilities are estimated for recognition, measurement and disclosure purposes at each balance date. Various methods are available to estimate the fair value of a financial instrument, and comprise: Level 1 – calculated using quoted prices in active markets. Level 2 – estimated using inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 – estimated using inputs for the asset or liability that are not based on observable market data. The carrying amount of financial assets or liabilities recognised in the financial statements are deemed to be the fair value unless stated below: Financial assets Investment in an associate Financial liabilities US private placement Tatts Bonds The fair value of the Group’s financial instruments are estimated as follows: Investment in an associate Fair value is determined using quoted market price (level 1 in fair value hierarchy). US private placement Carrying amount Fair value 2018 $m 22.7 22.7 2,212.4 195.6 2,408.0 2017 $m - - 286.0 - 286.0 2018 $m 33.0 33.0 2,440.3 196.2 2,636.5 2017 $m - - 305.4 - 305.4 Fair value is calculated using discounted future cash flow techniques, where estimated cash flows and estimated discount rates are based on market data at balance date, in combination with restatement to foreign exchange rates at balance date (level 2 in fair value hierarchy). Tatts Bonds Fair value is determined using independent market quotations (level 1 in fair value hierarchy). Cross currency and interest rate swaps Fair value is calculated using discounted future cash flow techniques, where estimated cash flows and estimated discount rates are based on market data at balance date (level 2 in fair value hierarchy). Cash-settled equity swap Fair value was calculated with reference to market data at initiation of the swap and at balance date (level 2 in fair value hierarchy), combined with the value of the collateral paid to the counterparty. 94 Tabcorp Annual Report 2018 Available for sale financial assets Fair value is reference to market prices prevailing at balance date (level 2 in fair value hierarchy). Equity derivative Fair value is calculated using the Black Scholes Discrete model (level 2 in fair value hierarchy). There have been no significant transfers between level 1 and level 2 during the financial year ended 30 June 2018. B6 Financial instruments – risk management The Group’s principal financial instruments, other than derivatives, comprise cash, short term deposits, held to maturity investments, available for sale financial assets and interest bearing liabilities. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group also has various other financial assets and liabilities which arise directly from its operations. The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities, principally interest rate swaps and cross currency swaps. The Group does not hold or issue derivative financial instruments for trading purposes. The main risks arising from the Group’s financial instruments are discussed in section B6.1 to B6.4. B6.1 Interest rate risk The Group has a policy of controlling exposure to interest rate fluctuations by the use of fixed and variable rate debt and interest rate swaps or caps. It has entered into interest rate swap arrangements to hedge underlying debt obligations and allow floating rate borrowings to be swapped to fixed rate borrowings. Under these arrangements, the Group pays fixed interest rates and receive the bank bill swap rate (BBSW) calculated on the notional principal amount of the contracts. At 30 June after taking into account the effect of interest rate swaps, approximately 83.1% (2017: 48.9%) of the Group’s borrowings are at a fixed rate of interest. The following assets and liabilities are exposed to floating interest rate risk: Cash assets Short term deposits Held to maturity investments Overdraft – unsecured Bank loans – unsecured Tatts Bonds Interest rate swaps – notional principal amounts Cross currency swaps – notional principal amounts Cash-settled equity swap – applicable notional amount (i) (i) The cash-settled equity swap included an applicable notional amount with the swap counterparty that was exposed to fluctuations in BBSW. 2018 $m 190.4 111.0 55.0 356.4 (15.5) (888.5) (195.0) (1,647.6) (2,008.5) - (4,755.1) 2017 $m 18.0 80.8 - 98.8 - (1,372.9) - (775.5) (210.5) (318.5) (2,677.4) 95 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2018 B6 Financial instruments – risk management (continued) B6.1 Interest rate risk (continued) Sensitivity analysis – interest rates – AUD and USD The Group’s sensitivity to reasonably possible changes in interest rates on the affected financial assets and financial liabilities in existence at year end is shown below. With all other variables held constant, post tax profit and other comprehensive income would have been affected as follows: AUD + 1.00% (100 basis points) (2017: + 1.00%) - 1.00% (100 basis points) (2017: - 1.00%) USD + 0.20% (20 basis points) (2017: + 0.20%) - 0.20% (20 basis points) (2017: - 0.20%) Post tax profit higher/(lower) 2018 $m (3.7) 3.7 - - 2017 $m (4.7) 4.7 - - Other comprehensive income higher/(lower) 2017 2018 $m $m 135.2 (163.7) (70.7) 40.0 18.0 (18.7) (1.1) 1.1 The movements in profit are due to higher/lower interest costs from variable rate debt and investments. The movement in other comprehensive income is due to an increase/decrease in the fair value of financial instruments designated as cash flow hedges. Significant assumptions used in the analysis include: • reasonably possible movements were determined based on the Group’s current credit rating and mix of debt, relationships with financial institutions and the level of debt that is expected to be renewed, as well as a review of the last two years’ historical movements and economic forecasters’ expectations; • price sensitivity of derivatives is based on a reasonably possible movement of spot rates at balance date; and • net exposure at balance date is representative of what the Group was and is expecting to be exposed to in the next twelve months. B6.2 Foreign currency risk The Group’s primary currency exposure is to US dollars as a result of issuing US private placement debt. In order to hedge this exposure, the Group has entered into cross currency swaps to fix the exchange rate on the USD debt until maturity. The Group agrees to pay a fixed USD amount in exchange for an agreed AUD amount with swap counterparties, and to re-exchange this again at maturity. These swaps are designated to hedge the principal and interest obligations of the US private placement debt. Sensitivity analysis foreign exchange The following analysis is based on the Group’s foreign currency risk exposures in existence at balance date and demonstrates the Group’s sensitivity to reasonably possible changes in the AUD/USD exchange rate. With all other variables held constant, post tax profit and other comprehensive income would have been affected as follows: AUD/USD + 10 cents (2017: + 10 cents) AUD/USD - 10 cents (2017: - 10 cents) 96 Post tax profit higher/(lower) 2018 $m - - 2017 $m - - Other comprehensive income higher/(lower) 2018 $m (22.3) 23.8 2017 $m (2.2) 2.8 Tabcorp Annual Report 2018 The movement in other comprehensive income is due to an increase/decrease in the fair value of financial instruments designated as cash flow hedges. Management believe the balance date risk exposures are representative of the risk exposure inherent in the financial instruments. Significant assumptions used in the foreign currency exposure sensitivity analysis include: • reasonably possible movements were determined based on a review of the last two years’ historical movements and economic forecasters’ expectations; • movement of 10 cents was calculated by taking the USD spot rate as at balance date, moving this spot rate by 10 cents and then re-converting the USD into AUD with the ‘new spot rate’. This methodology reflects the translation methodology undertaken by the Group; • price sensitivity of derivatives is based on a reasonably possible movement of spot rates at balance dates; and • net exposure at balance date is representative of what the Group was and is expecting to be exposed to in the next twelve months. The translation of the results of the Group’s foreign subsidiaries into the Group presentation currency has not been included in the above sensitivity analysis as it represents translation risk rather than transaction risk. B6.3 Credit risk The Group’s credit risk arises in relation to cash and cash equivalents, receivables, held to maturity investments, financial liabilities and liabilities under financial guarantees. Credit risk on financial assets which have been recognised on the balance sheet, is the carrying amount less any allowance for non recovery. Credit risk is managed by: • adherence to a strict cash management policy; • use of a risk assessment process for customers requesting credit using credit checks, bank opinions and trade references; • conducting all investment and financial instrument activity with approved counterparties with investment grade credit ratings; and • reviewing compliance with counterparty exposure limits on a continuous basis, and spreading the aggregate value of transactions amongst the approved counterparties. Credit risk associated with financial liabilities arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The Group’s maximum credit risk exposure in respect of derivative contracts is detailed in the liquidity risk table in note B6.4. Credit risk includes liabilities under financial guarantees. For financial guarantee contract liabilities the fair value at initial recognition is determined using a probability weighted discounted cash flow approach. The fair value of financial guarantee contract liabilities has been assessed as nil (2017: nil), as the possibility of an outflow occurring is considered remote. Details of the financial guarantee contracts at balance date are outlined below: Deed of cross guarantee The Company has entered into a deed of cross guarantee as outlined in note D2. Guarantees and indemnities Entities in the Group are called upon to give in the ordinary course of business, guarantees and indemnities in respect of the performance of their contractual and financial obligations. The maximum amount of these guarantees and indemnities is $37.7 million (2017: $23.8 million). 97 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2018 B6 Financial instruments – risk management (continued) B6.4 Liquidity risk Liquidity risk arises from the financial liabilities of the Group and the Group’s subsequent ability to meet its obligations to repay its financial liabilities as and when they fall due. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and notes. To help reduce liquidity risk, the Group targets a minimum level of cash and cash equivalents to be maintained, and has sufficient undrawn funds available. The Group’s policy is that not more than 33% of debt facilities should mature in any financial year within the next four years. At 30 June 2018, 2% (2017: 62%) of debt facilities will mature in less than one year. At the prior balance date, a legally binding commitment letter was in place with a number of domestic and international banks which provided sufficient capacity for the refinancing of those bank loans which had maturity dates within one year. These loans were refinanced by new bank facilities following the combination with Tatts Group in the current financial year and the maturity of debt facilities reverted to within policy. Due to the measures in place for managing liquidity and access to capital markets, this risk is not considered significant. The contractual cash flows including principal and estimated interest payments of financial liabilities in existence at year end are as follows: Non-derivative financial instruments Financial liabilities Payables Bank loans – unsecured US private placement Tatts Bonds Net inflow/(outflow) Derivative financial instruments Financial assets Interest rate swaps – receive AUD floating Cross currency swaps – receive USD fixed Cash-settled equity swap Financial liabilities Interest rate swaps – pay AUD fixed Cross currency swaps – pay AUD floating Open betting positions Net inflow/(outflow) < 1 year $m 1,019.9 51.4 200.9 11.5 (1,283.7) 31.4 190.8 - 222.2 52.1 184.7 16.2 253.0 (30.8) 2018 1– 5 years $m - 995.1 713.3 192.1 (1,900.5) 88.0 665.7 - 753.7 125.6 655.4 - 781.0 (27.3) > 5 years $m - - 2,475.8 - (2,475.8) 70.4 2,143.8 - 2,214.2 92.9 2,152.3 - 2,245.2 (31.0) < 1 year $m 361.8 1,043.9 14.2 - (1,419.9) 13.6 14.2 289.6 317.4 33.7 11.5 10.5 55.7 261.7 2017 1–5 years $m - 433.7 249.3 - (683.0) 34.4 249.3 - 283.7 74.5 241.4 - 315.9 (32.2) > 5 years $m - - - - - - - - - - - - - - For floating rate instruments, the amount disclosed is determined by reference to the interest rate at the last repricing date. For foreign currency receipts and payments, the amount disclosed is determined by reference to the USD/AUD rate at balance date. 98 Tabcorp Annual Report 2018 SECTION C – OPERATING ASSETS AND LIABILITIES C1 Licences 2018 Carrying amount at beginning of year Acquisition through business combination (refer note D4) Amortisation Carrying amount at end of year Cost Accumulated amortisation and impairment 2017 Carrying amount at beginning of year Amortisation Carrying amount at end of year Cost Accumulated amortisation and impairment Amortisation policy – straight line basis over useful life (years): Licence expiration date: – Victoria – Queensland – New South Wales – Australian Capital Territory – Northern Territory – South Australia Wagering licences $m Gaming machine monitoring licence $m Keno licences $m Lotteries licences $m 557.2 202.2 (40.2) 719.2 978.4 (259.2) 719.2 596.1 (38.9) 557.2 776.2 (219.0) 557.2 12 – 93 2024 2098 2097 2064(i) 2100 - 200.3 (7.0) 193.3 200.3 (7.0) 193.3 - - - - - - 80.3 - (5.9) 74.4 128.0 (53.6) 74.4 86.3 (6.0) 80.3 128.0 (47.7) 80.3 - 1,397.6 (23.4) 1,374.2 1,397.6 (23.4) 1,374.2 - - - - - - 15 10 – 34 10 – 55 2032 2022 2047 2050 2028(ii) 2072 2050 2032 2052 (i) ACT sports bookmaking licence was granted for an initial term of 15 years with further rolling extensions to a total term of 50 years. (ii) The new Victorian lottery licence commenced on 1 July 2018 upon expiry of the previous licence on 30 June 2018. Licences that are acquired by the Group are stated at cost less accumulated amortisation. Total $m 637.5 1,800.1 (76.5) 2,361.1 2,704.3 (343.2) 2,361.1 682.4 (44.9) 637.5 904.2 (266.7) 637.5 99 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2018 C2 Other intangible assets 2018 Carrying amount at beginning of year Additions: – acquired – internally developed Acquisitions via business combinations Amortisation Impairment Disposals Carrying amount at end of year Cost Accumulated amortisation and impairment Includes capital works in progress of: 2017 Carrying amount at beginning of year Additions: – acquired – internally developed Acquisitions via business combinations Amortisation Impairment Disposals Transferred to assets held for sale Carrying amount at end of year Cost Accumulated amortisation and impairment Includes capital works in progress of: Amortisation policy – straight line basis over useful life (years): Expiration date: – New South Wales retail exclusivity 100 Goodwill $m NSW Trackside concessions $m Customer related assets $m Brand names $m Media content and broadcast rights $m Other $m Software $m 1,512.6 138.7 - - 6,743.4 - (0.8) (5.6) 8,249.6 8,955.3 (705.7) 8,249.6 1,431.8 - - 80.8 - - - - 1,512.6 2,217.5 (704.9) 1,512.6 - - - (1.7) - - 137.0 150.0 (13.0) 137.0 140.5 - - - (1.8) - - - 138.7 150.0 (11.3) 138.7 87 2097 9.6 - - 149.5 (6.2) (3.3) - 149.6 167.3 (17.7) 149.6 4.1 - - 8.2 (1.0) - - (1.7) 9.6 17.8 (8.2) 9.6 110.0 - - 108.1 - - - 218.1 218.1 - 218.1 110.0 - - - - - - - 110.0 110.0 - 110.0 30.6 - - - - - - 30.6 30.6 - 30.6 30.6 - - - - - - - 30.6 30.6 - 30.6 44.2 - - - (2.7) - - 41.5 54.6 (13.1) 41.5 43.6 - - 4.5 (2.6) - - (1.3) 44.2 54.6 (10.4) 44.2 212.4 25.3 88.9 82.5 (69.6) (23.8) (0.1) 315.6 673.6 (358.0) 315.6 61.1 184.7 30.3 64.5 9.5 (53.5) (22.8) (0.2) (0.1) 212.4 530.8 (318.4) 212.4 38.8 5 – 20 Indefinite Indefinite 12 – 20 2 – 10 2033 Total $m 2,058.1 25.3 88.9 7,083.5 (80.2) (27.9) (5.7) 9,142.0 10,249.5 (1,107.5) 9,142.0 61.1 1,945.3 30.3 64.5 103.0 (58.9) (22.8) (0.2) (3.1) 2,058.1 3,111.3 (1,053.2) 2,058.1 38.8 Tabcorp Annual Report 2018 Goodwill arising in a business combination represents the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed. All business combinations are accounted for by applying the acquisition method. Any contingent consideration is recognised at fair value at the acquisition date. Negative goodwill arising on an acquisition is recognised directly in the income statement. Goodwill is not amortised, and is stated at cost less any accumulated impairment losses. Any impairment losses recognised against goodwill cannot be reversed. Brand names, media content and broadcast rights with indefinite useful lives are not amortised as the Board of Directors believe that the life of these intangibles to the Group will not materially diminish over time, and the residual value at the end of that life would be such that the amortisation charge, if any, would not be material. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. The cost of internally developed software includes the cost of materials, direct labour and an appropriate proportion of overheads. Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. C3 Impairment testing Goodwill and indefinite life intangible assets are tested for impairment annually, or whenever there is an indicator of impairment. Carrying amount of goodwill and other intangible assets with indefinite useful lives allocated to each cash generating unit (CGU) or segment: Goodwill Wagering and Media Lotteries and Keno Gaming Services Other intangible assets with indefinite useful lives NSW Wagering Sky Racing Sky Sports Radio ACTTAB Lotteries 2018 $m 2,638.7 5,304.4 306.5 8,249.6 98.8 30.8 6.5 4.5 108.1 248.7 2017 $m 1,277.8 154.0 80.8 1,512.6 98.8 30.8 6.5 4.5 - 140.6 101 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2018 C3 Impairment testing (continued) The recoverable amount of each CGU is determined based on fair value less costs of disposal, calculated using discounted cash flows. The cash flow forecasts are principally based upon management approved business plans for a four year period and extrapolated using growth rates ranging from 2.0% to 3.5% (2017: 2.0% to 2.5%). These cash flows are then discounted using a relevant long term post tax discount rate, ranging between 7.5% and 8.4% (2017: 9.2% and 9.7%). This is considered to be level 3 in the fair value hierarchy, based on non market observable inputs (refer to note B5 for explanation of the valuation hierarchy). Key assumptions on which management has based its cash flow projections: • State tax regimes, including point of consumption tax, and the regulatory environment in which the Group currently operates remain largely unchanged, other than announced. • Exclusive retail wagering licences held are assumed to be retained. The wagering business competes with bookmakers and other interstate and international wagering operators who accept bets over the phone and the internet. There is a possibility that competition from the interstate and international operators may extend further to the Group’s retail wagering network in the future. • Race fields arrangements implemented in each State and Territory of Australia remain largely unchanged. • Growth rates used to extrapolate cash flows are either in line with or do not exceed the long term average growth rate for the industry in which the CGU operates. • Discount rates applied are based on the post tax weighted average cost of capital applicable to the relevant CGU. • Terminal growth rate used is in line with the forecast long term underlying growth rate in Consumer Price Index. The key estimates and assumptions used to determine the fair value less costs of disposal of a CGU are based on management’s current expectations after considering past experience and external information, and are considered to be reasonably achievable. However, significant changes in any of these key estimates and assumptions may result in a CGU’s carrying value exceeding its recoverable value requiring an impairment charge to be recognised at a future date. At each balance date, in addition to goodwill and intangible assets with indefinite useful lives, all non-current assets are reviewed for impairment if events or changes in circumstances indicate they may be impaired. When an indicator of impairment exists, the Group makes a formal assessment of recoverable amount. An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the greater of fair value less costs of disposal and value in use. It is determined for an individual asset, unless the asset’s recoverable value cannot be estimated as it does not generate cash inflows that are largely independent of those from other assets or groups of assets. In this case, the recoverable amount is determined for the CGU, being assets grouped at the lowest levels for which there are separately identifiable cash flows. Goodwill and intangible assets with indefinite useful lives (brand names, broadcast rights and media content) acquired through business combinations have been allocated to each CGU or group of CGUs expected to benefit from the business combination’s synergies for impairment testing. 102 Tabcorp Annual Report 2018 C4 Property, plant and equipment 2018 Carrying amount at beginning of year Additions Acquisitions via business combinations Disposals Depreciation Impairment Carrying amount at end of year Cost Accumulated depreciation and impairment Includes capital works in progress of: 2017 Carrying amount at beginning of year Additions Acquisitions via business combinations Disposals Depreciation Impairment Transferred to assets held for sale Carrying amount at end of year Cost Accumulated depreciation and impairment Includes capital works in progress of: Depreciation policy – straight line basis over useful life (years): Freehold land $m Buildings $m Leasehold improvements $m Plant and equipment $m 5.3 - 55.4 - - - 60.7 60.7 - 60.7 5.3 - - - - - - 5.3 5.3 - 5.3 12.1 1.0 18.7 - (2.2) - 29.6 42.8 (13.2) 29.6 0.2 13.4 0.4 - - (1.7) - - 12.1 26.9 (14.8) 12.1 0.3 7 – 40 57.7 17.2 26.9 (1.3) (14.9) (2.3) 83.3 140.8 (57.5) 83.3 0.5 37.2 28.7 1.5 (0.7) (8.6) (0.2) (0.2) 57.7 106.1 (48.4) 57.7 31.5 7 – 13 264.3 57.2 80.7 (3.6) (74.8) (9.2) 314.6 816.4 (501.8) 314.6 24.6 255.8 87.1 2.6 (2.7) (69.2) (4.5) (4.8) 264.3 727.9 (463.6) 264.3 15.9 3 – 10 Total $m 339.4 75.4 181.7 (4.9) (91.9) (11.5) 488.2 1,060.7 (572.5) 488.2 25.3 311.7 116.2 4.1 (3.4) (79.5) (4.7) (5.0) 339.4 866.2 (526.8) 339.4 47.7 Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. For operating leases where the lease incentive is in the form of a fitout contribution by the landlord, an asset is recognised and amortised on a straight line basis over the lease term. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed annually and adjusted prospectively, if appropriate. 103 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2018 C5 Notes to the cash flow statement (a) Cash and cash equivalents comprise: Cash on hand and in banks Short term deposits Bank overdrafts 2018 $m 257.2 111.0 368.2 (15.5) 352.7 2017 $m 33.5 80.8 114.3 - 114.3 For the purpose of the cash flow statement, cash comprises cash and short term deposits with an original maturity of three months or less, and bank overdrafts (refer to note B2). Significant restrictions The Group operates under various state based licences which have regulatory requirements in place that restrict the Group’s use of certain cash balances. The carrying amount of these cash balances included within the consolidated financial statements is $263.7 million (2017: $26.9 million). (b) Reconciliation of net profit/(loss) after tax to net cash flows from operating activities Net profit/(loss) after tax Add items classified as investing/financing activities: – net loss on disposal of non current assets – net (gain)/loss on cash-settled equity swap – net loss on sale of business Add non cash income and expense items: – depreciation and amortisation – impairment – share based payments expense – other Net cash provided by operating activities before changes in assets and liabilities Changes in assets and liabilities: (Increase)/decrease in: – debtors – current tax assets – other assets (Decrease)/increase in: – payables – provisions – deferred tax liabilities – current tax liabilities – other liabilities Net cash flows from operating activities 104 2018 $m 28.7 1.3 (6.6) 9.3 248.6 39.4 3.9 8.3 332.9 (4.7) (37.0) (1.6) 148.6 19.1 (3.3) - (6.5) 447.5 2017 $m (20.8) 1.7 23.9 - 183.3 27.5 4.4 7.2 227.2 (4.7) (5.4) (42.9) 23.3 44.4 (5.3) (9.2) (4.9) 222.5 Tabcorp Annual Report 2018 C6 Receivables Current Trade debtors Allowance for doubtful debts Sundry debtors Other Non current Trade debtors Other Ageing analysis of trade debtors Not past due, 0 – 30 days Past due, not impaired, > 30 days Past due, impaired, > 30 days 2018 $m 58.5 (3.0) 55.5 41.5 1.1 98.1 3.0 4.0 7.0 45.5 13.0 3.0 61.5 2017 $m 35.6 (1.7) 33.9 18.9 1.7 54.5 3.8 8.7 12.5 30.7 7.0 1.7 39.4 Other balances within receivables are not past due and are expected to be received when due. Trade debtors are recognised and carried at original invoice amount less an allowance for any uncollectible amount. Other receivables reflect fixed term loans and generate fixed or variable interest for the Group, and are initially recognised at amortised cost. The carrying amount may be affected by changes in the credit risk of counterparties. An allowance for doubtful debts or impairment is made when there is objective evidence that collection of the full amount is no longer probable. Factors considered when determining if an impairment exists include ageing and timing of expected receipts, management’s experienced judgement and facts in the individual situation. Bad debts are written off when identified. 105 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2018 C7 Payables Current Payables Non current Payables Non current payables include prizes payable to the lottery major prize winners and instalments payable for the Queensland wagering licence. Non current payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. C8 Provisions Current Employee benefits Premises Restructuring costs Other Non current Employee benefits Premises Other Movement in provisions other than employee benefits during the year are set out below: Carrying amount at beginning of year Provisions via business combinations Provisions made during year Provisions used during year Carrying amount at end of year 106 2018 $m 2017 $m 1,019.9 361.8 261.8 - 2018 $m 60.9 9.8 14.2 7.5 92.4 7.0 65.9 6.0 78.9 Premises $m 67.4 2.8 15.4 (9.9) 75.7 Restructuring costs $m 0.6 - 14.2 (0.6) 14.2 2017 $m 27.3 8.5 0.6 - 36.4 4.1 58.9 - 63.0 Other $m - 7.0 7.2 (0.7) 13.5 Tabcorp Annual Report 2018 Premises provisions comprise: • lease rental and lease incentives amortised on a straight-line basis over the term of the lease; • make good provisions for leasehold properties requiring remedial work at the end of the lease arrangement; and • surplus lease space provisions. Restructuring costs relate to cost saving restructures and initiatives following the combination with Tatts Group. A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount can be reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recorded as a finance cost. Employee benefits (short term) are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided and the obligation can be estimated reliably. Employee benefits (long term) – the Group’s net obligation is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is discounted to determine its present value. Remeasurements are recognised in the income statement in the period in which they arise. This excludes pension plans. 107 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2018 SECTION D – GROUP STRUCTURE D1 Subsidiaries The ultimate parent entity within the Group is Tabcorp Holdings Limited. The consolidated financial statements incorporate the assets, liabilities and results of Tabcorp Holdings Limited and the following controlled entities, that were held in both current and prior period unless otherwise stated: 100% owned Australian subsidiaries in a deed of cross guarantee with Tabcorp Holdings Limited (refer to note D2) Tabcorp Wagering Assets (Vic) Pty Ltd Tasradio Pty Ltd (i)(ii) Tabcorp Wagering Participant (Vic) Pty Ltd Maxgaming Holdings Pty Ltd (i)(ii) Tabcorp Gaming Solutions (NSW) Pty Ltd (i) Tabcorp International No.4 Pty Ltd Tab Limited Tabcorp Services Pty Ltd Tabcorp Finance Pty Ltd (vi) Sky Channel Pty Ltd 2KY Broadcasters Pty Ltd Tabcorp Training Pty Ltd Tabcorp International Pty Ltd Tatts Group Limited (i)(ii) Ubet Qld Limited (i)(ii) Ubet NT Pty Ltd (i)(ii) Ubet Radio Pty Ltd (i)(ii) Ubet SA Pty Ltd (i)(ii) Ubet Tas Pty Ltd (i)(ii) Maxgaming NSW Pty Ltd (i)(ii) Maxgaming Qld Pty Ltd (i)(ii) Reaftin Pty Ltd (i)(ii) Bytecraft Systems Pty Ltd (i)(ii) Bytecraft Systems (NSW) Pty Ltd (i)(ii) Tattersall’s Holdings Pty Ltd (i)(ii) Tattersall’s Sweeps Pty Ltd (i)(ii) George Adams Pty Ltd (i)(ii) Tatts NT Lotteries Pty Ltd (i)(ii) New South Wales Lotteries Corporation Pty Limited (i)(ii) Golden Casket Lottery Corporation Limited (i)(ii) Tatts Lotteries SA Pty Ltd (i)(ii) TattsTech Pty Ltd (i)(ii) 50-50 Software Pty Ltd (i)(ii) Tabcorp Assets Pty Ltd Tabcorp Participant Pty Ltd Luxbet Pty Ltd Tabcorp Wagering Holdings Pty Ltd Tabcorp ACT Pty Ltd Tabcorp Gaming Holdings Pty Ltd Keno (Qld) Pty Ltd TAHAL Pty Ltd (i) Keno (NSW) Pty Ltd (i) Tabcorp Gaming Solutions Pty Ltd Intecq Limited (i) eBET Gaming Systems Pty Limited (i) Tabcorp Investments No.5 Pty Ltd (i) Tabcorp Investments No.6 Pty Ltd (i) Tabcorp Wagering (Vic) Pty Ltd 100% owned Australian subsidiaries Tabcorp Manager Pty Ltd Tabcorp Gaming Solutions (ACT) Pty Ltd Clubline Systems Pty Limited Tabcorp Wagering Manager (Vic) Pty Ltd Club Gaming Systems (Holdings) Pty Ltd Tabcorp Investments Pty Ltd Tabcorp Investments No.2 Pty Ltd Tabcorp Investments No.9 Pty Ltd Tabcorp Investments No.10 Pty Ltd Tabcorp International No.5 Pty Ltd Tabcorp International No.6 Pty Ltd Tabcorp Investments No. 11 Pty Ltd (v) OneTab Australia Pty Ltd OneTab Holdings Pty Ltd Showboat Australia Pty Ltd Sky Australia International Racing Pty Ltd Sky Channel Marketing Pty Ltd COPL Pty Ltd Advento Pty Ltd eBET Services Pty Limited eBET Systems Pty Limited Industry Data Online Pty Ltd Inov8 Mobile Pty Limited Maxi Gaming Pty Limited Bounty Pty Limited (iv) Bounty Systems Pty Limited (iv) Odyssey Gaming Limited (iv) Tabcorp Gaming Solutions (Qld) Pty Ltd Tabcorp Employee Share Administration Pty Ltd Odyssey Gaming Services Limited (iv) 108 Tabcorp Annual Report 2018 Tatts Online Pty Ltd(ii) Tattersall’s Gaming Pty Ltd(ii) Tattersall’s Club Keno Pty Ltd(ii) tatts.com Pty Ltd(ii) Tattersall’s Australia Pty Ltd(ii) Wintech Investments Pty Ltd(ii) Tattersall’s Gaming Systems (NSW) Pty Ltd(ii) Thelott Enterprises Pty Ltd(ii) Tatts Employment Co (NSW) Pty Ltd(ii) Tatts Employment Share Plan Pty Ltd(ii) 100% owned Australian subsidiaries (continued) Ubet Enterprises Pty Ltd(ii) TAB Queensland Pty Ltd(ii) Agility Interactive Pty Ltd(ii) Maxgaming Vic Pty Ltd(ii) EGM Tech Pty Ltd(ii) 50% owned Australian joint venture entities Gaming Solutions Pty Limited (iii) International subsidiaries Name Tabcorp Canada Limited Luxbet Europe Limited Luxbet Europe Services Limited Premier Gateway International Limited Premier Gateway Services Limited Tabcorp Europe Holdings Limited Tabcorp Europe Limited Bytecraft Systems (NZ) Limited (ii) Tattersall’s Investments (South Africa) (Pty) Limited (ii) Tabcorp UK Limited Talarius Holdings Limited (ii) Sky Racing World Holdco, LLC Sky Racing World, LLC Tabusa, LLC Country of incorporation Canada Isle of Man Isle of Man Isle of Man Isle of Man Isle of Man Isle of Man New Zealand South Africa United Kingdom United Kingdom United States of America United States of America United States of America (i) Companies were added to the deed of cross guarantee with Tabcorp Holdings Limited during the current year. (ii) Companies were acquired by the Group during the current year. (iii) Principal activity is the marketing of ticket based technologies for gaming machines. The entity had not yet commenced operations at 30 June 2018. (iv) Companies divested during the current year. (v) Companies incorporated during the current year. (vi) Company changed its name from Tabcorp Investments No. 4 Pty Ltd during the current year. % equity interest 100 100 100 50 50 100 100 100 100 100 100 100 100 100 109 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2018 D1 Subsidiaries (continued) Subsidiaries are entities controlled by the Company. The Group controls an entity if and only if the Group has: • power over the entity; • exposure, or rights, to variable returns from its involvement with the entity; and • the ability to use its power over the entity to affect its returns. The financial statements of subsidiaries are included in the consolidated financial report from the date control commences until the date control ceases. On consolidation, the assets and liabilities of foreign operations are translated into Australian dollars at the rate of the exchange prevailing at balance date, and their income statements are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognised in other comprehensive income. Elimination of intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are undertaken in preparing the consolidated financial statements. All investments are initially recognised at cost, being the fair value of the consideration given, and if acquired prior to 1 July 2009 included acquisition charges associated with the investment. Subsequently investments are carried at cost less any impairment losses. A joint arrangement is an arrangement over which the Group has joint control with other parties and is bound by a contractual arrangement. A joint arrangement is classified as either a joint operation or a joint venture depending upon the rights and obligations of the parties to the arrangement. • A joint operation is where the parties have rights to the assets and obligations for the liabilities, relating to the arrangement. The Group recognises in relation to its interest in a joint operation its assets, including its share of assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue including its share of revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly. • A joint venture is where the parties have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since acquisition date. 110 Tabcorp Annual Report 2018 D2 Deed of cross guarantee The parties to the deed of cross guarantee, as identified in note D1, each guarantee the debts of the others. By entering into the deed, the subsidiaries are relieved from the requirements of preparation, audit and lodgement of a financial report and a Directors’ report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. Together with Tabcorp Holdings Limited, the entities represent a ‘Closed Group’ for the purposes of the Instrument. The consolidated income statement and balance sheet of all entities included in the Closed Group are set out below. Income statement Revenue Expenses Profit before income tax expense and net finance costs Finance income Finance costs Profit before income tax expense Income tax expense Net profit/(loss) after tax Other comprehensive income Change in fair value of cash flow hedges taken to equity that may be reclassified to profit or loss Income tax on items that may be reclassified to profit or loss Items that will not be reclassified to profit or loss Income tax on items that will not be reclassified to profit or loss Other comprehensive income for the year, net of income tax Total comprehensive income for the year Net profit/(loss) after tax Accumulated losses at beginning of year Retained earnings/(accumulated losses) of entities added to deed of cross guarantee Other comprehensive income Dividends paid Accumulated losses at end of year 2018 $m 3,705.7 (3,394.8) 310.9 1.9 (129.9) 182.9 (74.1) 108.8 (46.4) 13.7 0.4 (0.1) (32.4) 76.4 108.8 (188.7) (100.7) 0.3 (325.6) (505.9) 2017 $m 2,037.2 (1,941.8) 95.4 1.5 (78.3) 18.6 (34.0) (15.4) 10.3 (3.1) 1.4 (0.4) 8.2 (7.2) (15.4) (170.7) 200.6 1.0 (204.2) (188.7) 111 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2018 D2 Deed of cross guarantee (continued) Balance sheet Cash and cash equivalents Receivables Prepayments Current tax assets Derivative financial instruments Other Total current assets Receivables Investment in controlled entities Available for sale financial assets Licences Other intangible assets Property, plant and equipment Prepayments Held to maturity investments Derivative financial instruments Other Total non current assets TOTAL ASSETS Payables Interest bearing liabilities Provisions Derivative financial instruments Other Total current liabilities Payables Interest bearing liabilities Deferred tax liabilities Provisions Derivative financial instruments Other Total non current liabilities TOTAL LIABILITIES NET ASSETS Issued capital Accumulated losses Reserves TOTAL EQUITY 112 2018 $m 350.4 95.6 42.8 21.0 40.6 81.7 632.1 7.0 101.3 20.8 2,361.1 9,047.9 488.2 29.9 55.0 123.0 14.0 12,248.2 12,880.3 916.3 132.9 89.2 47.7 66.9 1,253.0 261.4 3,371.8 589.4 78.9 21.8 2.0 4,325.3 5,578.3 7,302.0 8,529.1 (505.9) (721.2) 7,302.0 2017 $m 95.3 34.7 21.5 6.1 296.2 38.4 492.2 4.5 376.3 - 593.4 1,905.4 278.4 33.0 - 80.3 9.1 3,280.4 3,772.6 328.6 974.3 34.3 32.4 3.7 1,373.3 - 684.0 54.1 60.9 30.6 2.2 831.8 2,205.1 1,567.5 2,444.5 (188.7) (688.3) 1,567.5 Tabcorp Annual Report 2018 D3 Parent entity disclosures Result of the parent entity Profit for the year Other comprehensive income Total comprehensive income for the year Financial position of the parent entity Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Issued capital Retained earnings Demerger reserve Other reserves Total equity Contingent liabilities Refer to note E4. Capital expenditure Tabcorp Holdings 2018 $m 146.8 0.3 147.1 25.6 8,147.5 19.6 30.7 8,529.1 251.8 (669.9) 5.8 8,116.8 2017 $m 141.6 1.0 142.6 47.8 2,248.6 24.8 38.1 2,444.5 430.3 (669.9) 5.6 2,210.5 The parent entity did not have any capital expenditure commitments for the acquisition of property, plant and equipment contracted but not provided for at 30 June 2018 or 30 June 2017. Parent entity guarantees in respect of debts of its subsidiaries The parent entity has entered into a deed of cross guarantee with the effect that the Company guarantees debts in respect of its subsidiaries. Further details of the deed of cross guarantee and the subsidiaries subject to the deed, are set out in note D2. Tax consolidation Tabcorp Holdings Limited (the Head Company) and its 100% owned Australian tax resident subsidiaries have formed an income tax consolidation group, and are therefore taxed as a single entity. Members of the tax consolidation group entered into a tax sharing arrangement that provides for the allocation of income tax liabilities between the entities should the Head Company default on its tax payment obligations. At balance date, the possibility of default is remote. Members of the tax consolidation group have entered into a tax funding agreement which requires each member of the tax consolidation group to make a tax equivalent payment to or from the Head Company, based on the current tax liability or current tax asset of the member. These amounts are recognised as either an increase or decrease in the subsidiaries’ intercompany accounts with the Head Company. Deferred taxes are recognised separately by each member of the tax consolidation group. 113 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2018 D4 Business combinations D4.1 Acquisition of Tatts Group Limited In December 2017, the Group purchased 100% of the ordinary shares of Tatts Group Limited (Tatts Group), through a scheme of arrangement between Tatts Group and its members. Tatts Group is a leading Australian lottery, wagering and gaming company with a diversified network of retail and direct channels across Australia. The acquisition creates a leading, diversified portfolio of gambling entertainment businesses. (a) Identifiable assets acquired and liabilities assumed The fair values of the identifiable assets and liabilities of Tatts Group as at the date of the acquisition were: Cash and cash equivalents Receivables Prepayments Derivative financial instruments Other assets Investment in an associate Available for sale financial assets Held to maturity investments Property, plant and equipment Licences Other intangible assets Payables Interest bearing liabilities Current tax liabilities Deferred tax liabilities Provisions – dividends Provisions – other Other liabilities Net identifiable assets acquired Goodwill arising on acquisition(i) Purchase consideration transferred $m 195.9 37.0 27.4 73.6 58.9 22.8 20.5 55.0 181.7 1,800.1 340.1 (897.9) (1,272.1) (21.3) (553.2) (235.0) (45.5) (66.4) (278.4) 6,743.4 6,465.0 (i) Goodwill recognised is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Tatts Group with those of the Group. The goodwill is not deductible for tax purposes. At the acquisition date, the fair value and gross contractual amounts due from trade debtors was $21.6 million. This amount was fully expected to be collectible at the acquisition date. 114 Tabcorp Annual Report 2018 (b) Purchase consideration Consideration for the acquisition was 0.8 new shares of the Company and $0.425 cash per Tatts Group share less the amount of any Tatts Group special dividend paid per share. Tatts Group shareholders received a special dividend of $0.16 per share, reducing the cash consideration payable by the Company from $0.425 to $0.265 per Tatts Group share. The Company issued 1,175 million shares at a fair value based on the listed share price of the Company at acquisition of $5.17 per share as part of the purchase consideration. Cash Shares issued Total purchase consideration The cash outflow on acquisition was: – Net cash acquired – Cash paid Net cash outflow (c) Acquisition costs Transaction costs of $48.6 million have been expensed and are disclosed as ‘Transaction costs – combination with Tatts Group’ in the income statement and comprise: Consultancy and legal costs Debt related costs Other expenses Total transaction costs 2018 $m 31.2 17.1 0.3 48.6 $m 389.3 6,075.7 6,465.0 195.9 (389.3) (193.4) 2017 $m 27.5 - - 27.5 Costs attributable to the issuance of shares of $1.7 million have been charged directly to equity as a reduction in issued capital. (d) Revenue and profit contribution Since the date of acquisition, Tatts Group has contributed $1,560.0 million revenue and $120.2 million profit after income tax expense. If the acquisition had taken place at the beginning of the period, the Tabcorp Group’s revenue and profit after income tax expense would have been $5,117.2 million and $149.2 million respectively. The profit excludes transaction costs, gain on the cash-settled equity swap, and the impact of the Odyssey Gaming Services business divested during the year. 115 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2018 D4 Business combinations (continued) D4.2 Acquisition of Intecq Limited in the prior year In December 2016 the Group purchased 100% of the ordinary shares of Intecq Limited (Intecq), a leading Australian gaming systems company, providing integrated gaming technology solutions, gaming management systems and monitoring services to gaming venues and other businesses. The acquisition complemented the Group’s existing Gaming Services business, providing increased scale and diversification of earnings. (a) Identifiable assets acquired and liabilities assumed The fair values of the identifiable assets and liabilities of Intecq as at the date of the acquisition were: Cash and cash equivalents Receivables Prepayments Other assets Property, plant and equipment Other intangible assets Deferred tax assets Payables Current tax liabilities Provisions Other liabilities Net identifiable assets acquired Goodwill arising on acquisition (i) Purchase consideration transferred (cash) (i) Goodwill recognised is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Intecq with those of the Group. The goodwill is not deductible for tax purposes. At the acquisition date, the fair value of trade debtors was $13.3 million. The gross contractual amounts due from trade debtors was $13.9 million, of which $0.6 million was expected to be uncollectible at the acquisition date. (b) Purchase consideration The cash outflow on acquisition was: – Net cash acquired – Cash paid Net cash outflow (c) Acquisition costs $m 14.5 13.3 0.3 10.2 4.1 22.2 (1.2) (7.3) (1.8) (2.5) (4.9) 46.9 80.8 127.7 14.5 (127.7) (113.2) Transaction costs of $4.7 million have been expensed and are included in other expenses in the income statement in the prior year. (d) Revenue and profit contribution In the prior year, the Group’s profit before income tax expense includes revenue of $28.3 million and a profit of $6.3 million contributed by Intecq since the date of acquisition. If the acquisition had taken place at the beginning of the prior year, the Group’s revenue and profit before income tax expense in the prior year would have been $2,256.3 million and $8.6 million respectively. 116 Tabcorp Annual Report 2018 D5 Disposal group held for sale In December 2017, the Group completed the sale of its Odyssey Gaming Services business (by way of the sale of 100% of the shares of Odyssey Gaming Limited), which was classified as held for sale at 30 June 2017. Assets classified as held for sale (and all assets and liabilities in a disposal group) are recognised at the lower of carrying amount and fair value less costs to sell. Gains and losses on subsequent re-measurement are included in the income statement. No depreciation or amortisation is charged on these assets while they are classified as held for sale. D6 Investment in an associate Investment in Jumbo Interactive Ltd 2018 $m 22.7 2017 $m - The Group owns 6,609,686 fully paid ordinary shares acquired through the combination with Tatts Group in the current period. The above associate was incorporated in Australia. The Group does not have representation on the Board of Directors, although it does have the option to have representation. The Group does not participate in the significant financial and operating decisions but has arrangements in place with the associate which are material to its operational financial performance. The Group has therefore determined that it has significant influence over this entity. At balance date, the Group also owned options over a further 3,474,492 ordinary shares at a strike price of $2.37 which had a maturity date of 13 July 2018 (refer note B4). Subsequent to year end the options were exercised, and the Group disposed of 2.85 million shares with a profit before tax impact of $0.8 million. An associate is an entity over which the Group has significant influence but not control or joint control. Significant influence is the power to participate in the financial and operating decisions of the investee. Investments in associates are accounted for using the equity method. 117 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2018 SECTION E – OTHER DISCLOSURES E1 Employee share plans The Company operates share plans which provide equity instruments to senior executives and management as a component of their remuneration. Long Term Performance Plan (LTPP) The LTPP is available at the most senior executive levels. Under the LTPP employees may become entitled to Performance Rights in the Company. The fair value of Performance Rights is measured at grant date and is recognised as an employee expense (with a corresponding increase in equity) over three years irrespective of whether the Performance Rights vest to the holder. A reversal of the expense is only recognised in the event the instruments lapse due to cessation of employment within the three year period. The fair value of the Performance Rights is determined by an external valuer and takes into account the terms and conditions upon which they were granted. The dilutive effect, if any, of outstanding Performance Rights is reflected in the computation of diluted earnings per share. Short Term Performance Plan (STPP) For senior management it is mandatory to defer 25% (50% for the Managing Director and Chief Executive Officer) of their STPP into Restricted Shares, which are subject to a two year service condition. The cost of the Restricted Shares is based on the market price at grant date and is recognised over the vesting period. The maximum number of shares that can be outstanding at any time under these plans is limited to 5% of the Company’s issued capital. The share based payments expense in respect of the equity instruments granted is recognised in the income statement for the period. Further explanation of the share plans is disclosed in the Remuneration Report. Performance Rights (number) Details of and movements in Performance Rights granted under the LTPP that existed during the current or previous year are: Grant date 2018 28 October 2014 29 October 2015 25 October 2016 27 October 2017 2017 2 October 2013 31 October 2013 28 October 2014 29 October 2015 25 October 2016 Expiry date 16 September 2017 22 September 2018 14 September 2019 15 September 2020 18 September 2016 18 September 2016 16 September 2017 22 September 2018 14 September 2019 No Performance Rights were exercisable at the end of the current or previous year. 118 Balance at start of year 1,315,072 1,239,782 1,324,354 - 3,879,208 994,499 590,062 1,315,072 1,239,782 - 4,139,415 Movement during the year Granted Forfeited Vested - - - 1,566,071 1,566,071 - - - - 1,375,381 1,375,381 (263,017) (103,706) (188,592) (105,829) (661,144) - - - - (51,027) (51,027) (1,052,055) - - - (1,052,055) (994,499) (590,062) - - - (1,584,561) Balance at end of year - 1,136,076 1,135,762 1,460,242 3,732,080 - - 1,315,072 1,239,782 1,324,354 3,879,208 Tabcorp Annual Report 2018 Fair value of equity instruments Performance Rights have been independently valued at the date of grant using a modified form of Monte-Carlo simulation-based model. The weighted average fair value of Performance Rights granted during the year was $2.37 (2017: $2.51). The assumptions underlying the Performance Rights valuations are: Grant date 2 October 2013 31 October 2013 28 October 2014 29 October 2015 25 October 2016 27 October 2017 Expiry date 18 September 2016 18 September 2016 16 September 2017 22 September 2018 14 September 2019 15 September 2020 Share price at date of grant $ 3.27 3.60 4.03 4.73 4.91 4.45 Expected volatility in (i) share price % 22.00 22.00 22.00 25.00 22.00 22.00 (ii) Expected dividend yield % 5.50 5.50 5.00 5.00 5.00 5.50 (iii) Risk free interest rate % 2.92 3.00 2.52 1.80 1.78 2.04 Value per Performance Right $ 1.73 2.07 2.42 2.47 2.51 2.37 (i) Reflects the assumption that the historical volatility is indicative of future trends. (ii) Reflects the assumption that the current payout ratio will continue with no anticipated increases. (iii) Represents the zero coupon interest rate derived from government bond market interest rates on the valuation date and vary according to each maturity date. 119 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2018 E2 Pensions and other post employment benefit plans The Group has two defined benefit superannuation plans (closed to new entrants), the New South Wales Lotteries Corporation Pty Limited defined benefit plan (‘Tatts Group plan’) and the Tabcorp Superannuation Plan (‘Tabcorp Group plan’), which provide benefits based on salary and length of service. The plans are governed by the employment laws of Australia and the Group contributes to the plans at rates based on actuarial advice. Reconciliation of the net defined benefit asset/(liability) recognised in the balance sheet (i) Tatts Group plan – Balance at 30 June 2017 – Acquisitions via business combinations – Actuarial gains/(losses) – Benefits paid – Other – Balance at 30 June 2018 Tabcorp Group plan – Balance at 30 June 2016 – Actuarial gains/(losses) – Actual return on plan assets excluding interest income – Benefits paid – Other – Balance at 30 June 2017 – Actuarial gains/(losses) – Actual return on plan assets excluding interest income – Benefits paid – Other – Balance at 30 June 2018 (i) Net defined benefit plan assets and net defined benefit plan liabilities are recognised on the balance sheet in other non current assets and other non current liabilities respectively. Amounts recognised in other comprehensive income Tatts Group plan Tabcorp Group plan 120 Fair value of plan assets $m Present value of defined benefit obligation $m Net defined benefit plan assets/ (liabilities) $m - 15.7 - (0.5) 0.8 16.0 13.7 - 1.1 (0.4) 0.5 14.9 - 0.6 (1.2) 0.6 14.9 - (25.6) 0.5 0.5 (0.6) (25.2) (12.9) 0.3 - - (0.1) (12.7) (0.2) - - 0.6 (12.3) 2018 $ 0.6 0.5 1.1 - (9.9) 0.5 - 0.2 (9.2) 0.8 0.3 1.1 (0.4) 0.4 2.2 (0.2) 0.6 (1.2) 1.2 2.6 2017 $ - 1.4 1.4 Tabcorp Annual Report 2018 Fair value of plan assets The major categories of plan assets as a percentage of the fair value of total plan assets are as follows: Cash Fixed interest Australian equities International equities Property Alternatives Tatts Group plan Tabcorp Group plan 2018 % 10.5 8.6 22.2 26.1 8.9 23.7 100.0 2017 % - - - - - - - 2018 % 5.0 17.0 28.0 25.0 6.0 19.0 100.0 2017 % 5.0 17.0 30.0 25.0 7.0 16.0 100.0 The Trustees are responsible for the governance and administration of the funds, the management and investment of the fund assets and compliance with other applicable regulations. The defined benefit fund assets are invested with independent fund managers and have a diversified asset mix. The funds have no significant concentration of investment risk or liquidity risk. The Group’s total defined benefit obligation is not materially sensitive to changes in assumptions. Defined benefit plans are recognised in the balance sheet as the difference between the present value of the estimated future benefits that will be payable to plan members and the fair value of the plan’s assets. An annual adjustment is made to recognise all movements in the carrying amount of the plan in the income statement, except for the portion of the movement that is attributable to actuarial gains and losses, which are recognised directly in equity. Actuarial gains and losses represent the difference between previous actuarial assumptions of future outcomes and the actual outcome, in addition to the effect of changes in actuarial assumptions. 121 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2018 E3 Commitments (a) Capital expenditure commitments Property, plant and equipment Software (b) Operating lease commitments Contracted but not provided for and payable: Not later than one year Later than one year but not later than five years Later than five years Sublease payments expected to be received under non-cancellable subleases 2018 $m 4.8 3.3 8.1 62.1 143.9 146.2 352.2 5.6 2017 $m 6.6 1.1 7.7 41.0 94.2 69.2 204.4 6.1 The Group leases property under operating leases expiring from 1 to 15 years. Leases generally provide the Group with a right of renewal at which time all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on either movements in the Consumer Price Index or are subject to market rate review. For leases relating to the Victorian wagering operations, 50% of the cost is recoverable from VicRacing Pty Ltd. E4 Contingencies Details of contingencies where the probability of future payments is not considered remote are set out below as well as details of contingencies, which although considered remote, the Directors consider should be disclosed as they are not disclosed elsewhere in the notes to the financial statements. Contingent liabilities (a) Charge A controlled entity, Tabcorp Wagering Participant (Vic) Pty Ltd, which is a participant in the joint venture outlined in note E5(a), has entered into a deed of cross charge with its joint venture partner to cover the non payment of a called sum in the event of the joint venture incurring a loss. The charge is over undistributed and future earnings of the joint venture to the level of the unpaid call. (b) Legal challenges There are outstanding legal actions between controlled entities and third parties at 30 June 2018. It is expected that any liabilities arising from such legal action would not have a material adverse effect on the Group’s financial position. 122 Tabcorp Annual Report 2018 E5 Related party disclosures (a) Transactions with joint arrangements The Group conducts an unincorporated joint venture with VicRacing Pty Ltd in Victoria (the joint venture). The principal activity of the joint venture is the organisation, conduct, promotion and development of wagering and betting in Victoria. The Group receives 50% of the revenue and expenses of the joint venture, which is accounted for as a joint operation. The Group charges the joint venture for the provision of employee, management and asset services. On consolidation, 50% of the charges eliminate (being the Group’s interest in the joint venture). Charges for the remaining 50% of $85.5 million were received by the Group in 2018 (2017: $79.9 million). (b) Director and executive disclosures (i) Compensation of Key Management Personnel (KMP) Short term Other long term Post employment Share based payments E6 Auditor’s remuneration Amounts received or due and receivable by Ernst and Young for: – audit and review of the Financial Report of the Group and subsidiaries – regulatory audit and other assurance services in relation to the Group 2018 $ 7,054,988 452,556 275,431 2,558,411 10,341,386 2017 $ 4,867,952 185,855 231,236 2,680,621 7,965,664 2018 $000 1,883 723 2,606 2017 $000 1,260 844 2,104 123 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2018 E7 Other accounting policies (a) Statement of compliance (i) Changes in accounting policy and disclosures A number of new and amended accounting standards became mandatorily applicable for the Group for the first time in the current financial year. The adoption of these new and amended standards had no impact on the financial position or performance of the Group, or the disclosures included in this Financial Report. (ii) New Australian Accounting Standards or International Financial Reporting Standards issued but not yet effective The following new and amended accounting standards and interpretations have been recently issued by the Australian Accounting Standards Board but not yet effective, are considered relevant to the Group. They are available for early adoption but have not been applied by the Group in this Financial Report: AASB 9 Financial Instruments is applicable to the Group from 1 July 2018. It includes revised guidance on classification and measurement of financial instruments and new hedge accounting requirements including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. The Group have undertaken an assessment of the potential impact of this standard and no material impacts have been identified. AASB 15 Revenue from Contracts with Customers is applicable to the Group from 1 July 2018. It establishes a framework for determining whether, how much and when the revenue is recognised. The core principle is that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Based on impact assessments undertaken, the Group’s financial performance is not expected to be materially impacted by the new standard. AASB 16 Leases is applicable to the Group from 1 July 2019. It introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Depreciation of the asset and interest on the liability will be recognised. This standard will materially impact the Group’s financial position at transition and in future years, as the Group’s operating leases (primarily in relation to office and agency leases) are recognised on balance sheet. At the present time the standard is not expected to materially impact the Group’s financial performance. Rental expense currently recognised in the statement of financial performance will be replaced with depreciation and interest. Initial assessment activities have been undertaken on the Group’s current leases, however the impact of the standard will depend on the leases in place on transition. Detailed review of contracts, financial reporting impacts and system requirements will continue. (b) Goods and services tax Revenues, expenses, assets and liabilities are recognised net of the amount of GST except: 124 Tabcorp Annual Report 2018 • when 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; • wagering and certain Keno revenues, due to the GST being offset against government taxes; and • receivables and payables, which 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. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (c) Foreign currency translation and balances Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at balance date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement with the exception of differences on foreign currency borrowings that are in an effective hedge relationship. These are taken directly to equity until the liability is extinguished at which time they are recognised in the income statement. Refer to note B4 for further detail. Non monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. 125 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT DIRECTORS’ DECLARATION In the opinion of the Directors of Tabcorp Holdings Limited: (a) the financial statements and notes of the Group are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the Directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note D2 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. Signed in accordance with a resolution of Directors. Paula J Dwyer Chairman David R H Attenborough Managing Director and Chief Executive Officer Melbourne 8 August 2018 126 Tabcorp Annual Report 2018 INDEPENDENT AUDITOR’S REPORT Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au INDEPENDENT AUDITOR’S REPORT To the members of Tabcorp Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Tabcorp Holdings Limited (the company) and its subsidiaries (collectively the Group), which comprises the consolidated balance sheet as at 30 June 2018, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors’ Declaration. In our opinion: the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated financial position of the Group at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 127 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Tatts combination transaction Why significant In December 2017 the acquisition of Tatts Group Limited by Tabcorp Holdings Limited was completed. Due to the significance of the combination and the magnitude of the goodwill and other fair value adjustments arising from the acquisition, finalisation of the accounting for the business combination was considered a key audit matter. There was judgement in determining the fair value of net assets acquired, the allocation of purchased goodwill, and the acquisition date for accounting purposes. Accounting for the acquisition of Tatts Group Limited is disclosed in D4 to the financial report. How the matter was addressed in the audit We assessed the purchase price accounting for the acquisition under Australian Accounting Standards. In doing so, we: ► Evaluated the completeness of the assets and liabilities recognised in the acquisition accounting; ► Assessed the Group’s purchase price allocation in relation to the acquisition, including relevant information that was obtained from valuation experts in relation to the identification and valuation of identifiable assets acquired and liabilities assumed ► In conjunction with our valuation specialists we considered the work performed by the Group’s expert as follows: • Assessed the competence, capability and objectivity of the valuation expert • Assessed the appropriateness of the valuation methodologies utilised by the expert in the valuation of identifiable assets acquired • Considered the assumptions used in the models against historical performance and industry benchmarks • Subjected the key assumptions to sensitivity analysis; and • Evaluated the useful lives associated with the acquired tangible assets including assessment of management’s estimation and whether it is consistent with Group policy and/or relevant accounting standards ► Considered the allocation of goodwill to the combined group segments; ► Agreed key terms to underlying evidence including contracts and the Scheme booklet; ► Assessed the treatment of the acquisition costs and agreed these costs to supporting evidence; and ► Considered the adequacy of the disclosures included in the financial report Impairment Assessment of licence intangibles, other intangibles and goodwill Why significant How the matter was addressed in the audit The Group has licence intangibles of $2,361 million, other intangibles of $892 million and goodwill of $8,250 million, which have increased significantly due to the acquisition of Tatts Group Limited. An impairment assessment is performed on an annual basis or when there is a trigger to assess whether the carrying value of these assets and the related non-current assets exceed the recoverable amount. Our focus was considering whether or not an impairment charge relating to these assets was required. This involved assessing the judgements inherent in the cash flow forecast and testing key assumptions supporting the impairment model such as forecast business growth rates, discount rates, licence tenure and terminal value assumptions. Refer to Note C3 – Impairment testing. ► We evaluated the Group’s future cash flow forecasts supporting the impairment assessments for goodwill, licence intangibles, other intangibles and property, plant and equipment. ► We evaluated the appropriateness of the key assumptions in the forecasts. We performed sensitivity analysis around the key assumptions to ascertain the extent of change in those assumptions that would either individually or collectively result in an impairment charge. ► We assessed the discount rates applied by comparing them to the cost of capital for the Group. ► We involved our valuation specialists to assess whether the methodology applied is in accordance with Australian Accounting Standards and evaluated key assumptions including licence end dates and terminal values, long term growth rates, discount rates, capital expenditure assumptions and working capital requirements applied in the impairment model. ► We performed market capitalisation and earnings multiples cross checks in comparison with other comparable businesses to corroborate the impairment testing models. ► We assessed the adequacy of the disclosures included in note C3 - Impairment testing. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 128 Tabcorp Annual Report 2018 Reliance on automated processes and controls related to revenue Why significant How the matter was addressed in the audit The Group’s financial reporting processes are heavily reliant on IT systems with automated processes and controls over the capturing, valuing and recording of Wagering and Lotteries transactions, fees and charges. Given the significance of these processes and controls to the accounting records and financial reporting process, the understanding and testing of these IT systems, and the related processes and controls was a key audit matter. Interest bearing liabilities Why significant The Group has interest bearing liabilities of $3,505 million at 30 June 2018. During the year the Group repaid debt of $4,874 million and refinanced its bridging debt Syndicated facility with an issuance of $1.8 billion of US Private Placement notes. The Group maintains a portfolio of facilities with varying counterparties, currencies and terms. This portfolio influences the Group’s gearing, liquidity, solvency, covenant obligations and financing cost profile. In relation to this portfolio, the Group incurred $130 million in financing and interest costs during the year. Refer to Note B2 to the financial report for a description of the accounting policy treatment for these liabilities and information of the Group’s interest bearing liabilities. Significant items Why significant With the involvement of our IT specialists we assessed the effectiveness of the control environment and transaction processing controls relevant to the recording of revenue transactions. How the matter was addressed in the audit Our audit procedures included the following: ► We assessed the effectiveness of controls over the recording and reporting of drawdowns and repayments, the valuation of interest bearing liabilities and the monitoring of compliance. ► We reviewed the new US Private Placement debt agreement, and agreed the drawdown and resulting extinguishment of the original bridging debt Syndicated facility to supporting documentation. ► We confirmed details of a sample of interest bearing liabilities as at 30 June 2018 with external counterparties. ► We recalculated the calculation of interest expense recognised in the income statement, and ensured debt issuance costs expensed on extinguishment of the Syndicated facility were appropriately calculated. ► We assessed the maturity profile and compliance with debt covenants of the Group’s interest bearing liabilities to test the appropriate classification of the interest bearing liabilities as current or non-current. ► We assessed the disclosure in B2 on the Company’s available debt facilities. How the matter was addressed in the audit The financial report includes certain items that are disclosed as significant items. These were considered a key audit matter given the individual judgements inherent in calculating such items, and the appropriateness of their disclosure as significant items. Significant items are presented in Note A1 – Segment Information and comprise costs associated with costs incurred during the combination with Tatts Group and on the related cash settled equity swap, Luxbet closure costs, Odyssey divestment, as well as Sun Bets exit costs. ► For Transaction and Implementation costs, and the cash settled equity swap, we agreed a sample to supporting documentation and cash payments and cash receipts where relevant. ► For Sun Bets exit costs, we assessed the calculation of the recoverable amount of contract-specific assets, and evaluated the underlying assumptions to contractual terms and forecast cashflows. ► For Luxbet closure costs, we assessed the calculation of impairment of assets and evaluated the recognition of wind down and onerous contract provisions. ► For expenses related to the Odyssey divestment, we considered the Share Sale agreement, and assessed the calculation of the loss on sale including the allocation of goodwill. ► We considered the presentation of the significant items in the financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 129 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Information Other than the Financial Statements and Auditor’s Report The Directors are responsible for the other information. The other information comprises the information included in the Tabcorp Holdings Limited Annual Report for the year ended 30 June 2018, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based upon the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Directors’ Responsibilities for the Financial Report The Directors 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 130 Tabcorp Annual Report 2018 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 131 Tabcorp Annual Report 2018FINANCIAL REPORTFINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the Directors' Report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Tabcorp Holdings Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors 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. Ernst & Young David Shewring Partner Melbourne 8 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 132 Tabcorp Annual Report 2018 FIVE YEAR REVIEW Financial performance Total revenue EBITDA(i) Profit before interest and tax Profit/(loss) after income tax attributable to members of parent entity(ii) Dividend(iii) Financial position and cash flow Total assets Total liabilities Shareholders’ funds/total equity Net cash flows from operating activities Capital expenditure – payments Cash at end of year Shareholder value Earnings per share Dividends per share(iii) Operating cash flow per share(iv) Net assets per share Return on shareholders’ funds Total shareholder return(v) Share price close Market capitalisation Segment revenue(vi) Wagering and Media Lotteries and Keno(vii) Gaming Services Sun Bets(viii) Employee Safety(ix) Females in senior management positions Stakeholder benefits Returns to racing industry State and territory gambling taxes and GST Income tax expense/(benefit)(ii) Unit $m $m $m $m $m $m $m $m $m $m $m cents cents cents $ % % $ $m $m $m $m $m LTIFR % $m $m $m FY18 3,828.7 490.0 241.4 28.7 422.5 12,940.8 5,702.2 7,238.6 447.5 291.7 352.7 1.9 21.0 10.5 4.89 0.6 7.5 4.46 8,977.9 2,186.1 1,390.7 249.7 7.4 2.3 36 916.8 1,166.4 84.8 FY17 2,234.1 284.9 101.6 (20.8) 208.8 3,740.9 2,257.5 1,483.4 222.5 197.4 114.3 (2.5) 25.0 3.0 1.78 (1.3) 0.6 4.37 3,650.1 1,873.0 212.7 143.9 - 1.5 39 813.0 406.3 45.7 FY16 2,188.7 479.6 301.0 169.7 199.6 3,302.8 1,614.7 1,688.1 401.1 183.1 126.0 20.4 24.0 26.2 2.03 10.0 5.5 4.57 3,799.8 1,873.0 208.5 107.2 - 0.9 37 786.9 428.2 61.4 FY15 2,155.5 508.1 334.6 334.5 389.2 3,384.0 1,693.9 1,690.1 399.7 131.6 160.0 42.4 50.0 34.0 2.14 21.3 50.3 4.55 3,773.8 1,856.9 199.0 99.6 - 1.0 33 773.2 459.2 (75.7) FY14 2,039.8 459.4 295.0 129.9 121.3 3,105.1 1,623.7 1,481.4 387.4 198.4 126.8 17.2 16.0 25.0 1.96 8.9 15.6 3.36 2,563.5 1,737.8 203.9 98.1 - 1.5 35 735.0 438.9 66.7 (i) (ii) FY18 includes impairment of $39.4 million. FY17 includes impairment of $27.5 million. FY15 includes $163.2 million as a result of receiving income tax benefits relating to the Victorian Wagering and Gaming Licences payment and the NSW Trackside payment ($160.4 million) and associated interest income. (iii) Dividends attributable to the year, but which may be payable after the end of the period. FY15 includes a special dividend of 30.0 cents per share. (iv) Net operating cash flow per the cash flow statement does not include payments for property plant and equipment and intangibles, whereas these items are included in the calculation for the operating cash flow per share ratio. (v) Total shareholder return (TSR) is calculated from 1 July to 30 June. The share price used for calculating TSR is the volume weighted average share price used in the Tabcorp Dividend Reinvestment Plan (DRP). Where no DRP was in operation, the closing share price on the dividend payment date is used. (vi) Revenue includes both external and internal revenue. (vii) Prior to FY18, this was the Keno segment. (viii) Sun Bets was identified as an operating segment during FY18 as it was no longer in an establishment phase. (ix) The lost time injury frequency rate (LTIFR) is the number of lost time injuries per million hours worked. 133 Tabcorp Annual Report 2018 SHAREHOLDER INFORMATION As at 30 June 2018 Ordinary Shares Tabcorp has on issue 2,012,972,676 fully paid ordinary shares which are listed on the Australian Securities Exchange (ASX) under the code TAH. The issued capital has increased since 30 June 2017 due to ordinary shares issued in conjunction with the acquisition of Tatts Group Limited and pursuant to Tabcorp’s Dividend Reinvestment Plan. There currently isn’t a share buy-back in operation in respect of the Company’s ordinary shares. Shareholding restrictions The Company’s Constitution, together with an agreement entered into with the State of Queensland, contain restrictions prohibiting an individual from having a voting power of more than 10% in the Company. The Company may refuse to register any transfer of shares which would contravene these shareholding restrictions or require divestiture of the shares that cause an individual to exceed the shareholding restrictions. Voting rights Ordinary shares issued by Tabcorp carry one vote per ordinary share. Tabcorp Performance Rights do not carry any rights to vote at general meetings of the Company’s shareholders. Failure to comply with certain provisions of the Victorian Gambling Regulation Act 2003 or Tabcorp’s Constitution, including the shareholder restrictions discussed above, may result in suspension of voting rights. Substantial shareholders The following is a summary of the substantial shareholders at 30 June 2018 pursuant to notices lodged with the ASX in accordance with section 671B of the Corporations Act 2001: Name Perpetual Limited (iii) AustralianSuper Pty Ltd BlackRock Group The Vanguard Group, Inc Date of interest 2 June 2017 9 February 2018 19 December 2018 29 December 2018 Number of ordinary shares(i) 76,753,683 131,834,848 116,082,764 106,462,742 % of issued capital(ii) 9.19 6.56 5.77 5.295 (i) As disclosed in the last notice lodged with the ASX by the substantial shareholder. (ii) The percentage set out in the notice lodged with the ASX is based on the total issued share capital of Tabcorp at the date of interest. (iii) The most recent substantial shareholder notice was lodged prior to the Tabcorp-Tatts combination and the resulting increase in Tabcorp’s issued capital. 134 Tabcorp Annual Report 2018 Twenty largest registered holders of ordinary shares Investor name HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty LtdBNP Paribas Noms Pty Ltd UBS Nominees Pty Ltd Citicorp Nominees Pty Limited Argo Investments Limited HSBC Custody Nominees (Australia) Limited Robin Edward Davey Navigator Australia Ltd IOOF Investment Management Limited Solid Earth Pty Ltd AMP Life Limited Wentworth Investments Pty Ltd UBS Nominees Pty Ltd Avanteos Investments Limited WBK Pty Ltd Tassyd Pty Limited Total of top 20 registered holders Distribution of securities held Number of ordinary shares 470,618,737 413,489,230 149,400,476 127,366,542 50,810,670 50,571,309 36,002,060 15,080,634 10,586,538 9,723,924 7,654,934 7,078,237 7,050,504 6,015,467 5,741,976 5,311,910 3,912,427 3,792,297 3,461,872 3,432,000 1,387,101,744 % of issued capital 23.38 20.54 7.42 6.33 2.52 2.51 1.79 0.75 0.53 0.48 0.38 0.35 0.35 0.30 0.29 0.26 0.19 0.19 0.17 0.17 68.91 Number of securities held 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Ordinary shares(i) Performance Rights(ii) Number of holders 82,106 70,282 11,646 8,308 393 172,735 Number of securities 27,058,635 164,426,287 82,777,991 179,557,833 1,559,151,930 2,012,972,676 Number of holders - - - 8 8 16 Number of securities - - - 416,212 3,315,868 3,732,080 (i) Ordinary shares includes Restricted Shares and Deferred Shares offered to employees under the Company’s incentive arrangements. (ii) Performance Rights were issued pursuant to the Company’s long term incentive arrangements. Refer to the Remuneration Report on pages 47 to 76 for more information about the Company’s incentive arrangements. Marketable parcel There were 15,723 shareholders holding less than a marketable parcel of ordinary shares ($500 or more, equivalent to 113 ordinary shares) based on a market price of $4.46 at the close of trading on 30 June 2018. 135 Tabcorp Annual Report 2018 MAJOR ANNOUNCEMENTS ONLINE SHAREHOLDER SERVICES Tabcorp’s major announcements since the previous annual report were as follows. For a full list refer to asx.com.au. 2018 8 August 19 July 19 June 8 June 23 March 16 February 9 February 8 February Annual Report and full year results – statutory net profit after tax of $28.7 million Tabcorp to exit Sun Bets Tabcorp advised of new racing product fees for Victoria and Western Australia Tabcorp concludes strategic review of Sun Bets Tabcorp announced a new US$1.4 billion issue of long-term notes to investors in the US private placement market Tabcorp extends wagering retail exclusivity in South Australia to 2032 (subject to regulatory approval) Tabcorp unwinds cash-settled equity swap following implementation of the Tabcorp-Tatts combination Half year results — statutory net profit after tax of $24.6 million 2017 22 December Scheme of Arrangement implemented in relation to the Tabcorp-Tatts combination 22 December Harry Boon appointed as a Non Executive Director 22 December Tabcorp enters into new employment contract with its Managing Director & CEO, David Attenborough 21 December Tabcorp announces Executive Leadership Team appointments 13 December Supreme Court of Victoria approves the Scheme of Arrangement in relation to the Tabcorp-Tatts combination 12 December Tabcorp completes divestment of Odyssey Gaming Services 1 December Australian Competition and Consumer Commission announces it does not intend to challenge the Australian Competition Tribunal’s authorisation in relation to the Tabcorp-Tatts combination 30 November Tabcorp enters into agreements with CrownBet including supply of digital racing vision 17 November Australian Competition Tribunal authorises proposed Tabcorp-Tatts Use the internet to easily manage your shareholding Shareholders can use the online share registry facility available on the Company’s website www.tabcorp.com.au, or on the share registry’s website www.linkmarketservices.com.au to conduct standard shareholding enquiries and transactions, including: • Download dividend statements • Update registered address • Check current and previous shareholding balances • Appoint a proxy to vote at the Annual General Meeting • Lodge or update banking details • Participate in the Dividend Reinvestment Plan • Notify Tax File Number/Australian Business Number Electronic communications Shareholders can elect to receive all their communications electronically, including dividend statements, Annual Report, Notice of Meeting and proxy form. This enables shareholders to receive their communications promptly and securely, and helps minimise the costs of printing and mailing. In addition, by electing to receive communications electronically, shareholders can support Tabcorp with its objective to reduce its impact on the environment. Shareholders can update their communication preferences by using the online share registry facility or by contacting the share registry. 27 October combination Annual General Meeting addresses and presentations by the Chairman and Managing Director Tabcorp provides update on 1Q18 trading performance 27 October 22 September Gambling regulatory authority approvals obtained for proposed 23 August Tabcorp-Tatts combination Tabcorp announces changes to Wagering and Media leadership Visit www.tabcorp.com.au 136 Tabcorp Annual Report 2018 COMPANY DIRECTORY Registered office Tabcorp Holdings Limited Level 21, Tower 2 727 Collins Street Melbourne VIC 3008 Australia Telephone 03 9246 6010 Facsimile 03 9246 6684 Email enquiries@tabcorp.com.au Website www.tabcorp.com.au New South Wales office Level 31 680 George Street Sydney NSW 2000 Telephone 02 9218 1000 Sky Racing/Sky Sports Radio 79 Frenchs Forest Road Frenchs Forest NSW 2086 Telephone 02 9451 0888 Queensland offices Level 16 15 Adelaide Street Brisbane QLD 4000 Telephone 07 3243 4100 87 Ipswich Road Woolloongabba QLD 4102 Telephone 07 3435 4500 Share Registry Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia Telephone 1300 665 661 Telephone 02 8280 7418 Facsimile 02 9287 0303 Facsimile 02 9287 0309 (proxy forms only) Email Website tabcorp@linkmarketservices.com.au www.linkmarketservices.com.au KEY DATES 2018 Annual General Meeting (Brisbane) 2019* Half year results announcement Ex-dividend for interim dividend Record date for interim dividend Interim dividend payment End of financial year Full year results announcement Ex-dividend for final dividend Record date for final dividend Final dividend payment Annual General Meeting (Melbourne) * These are proposed dates. See the Company’s website for updates (if any). 17 October 7 February 12 February 13 February 13 March 30 June 8 August 15 August 16 August 13 September 16 October Corporate information Stock exchange listing Copyright Investment warning Privacy Currency The Company is a company limited by shares that is incorporated and domiciled in Australia. The Company’s ordinary shares are quoted on the Australian Securities Exchange (ASX) under the code ‘TAH’. Information in this report has been prepared by Tabcorp, unless otherwise indicated. Information may be reproduced provided it is reproduced accurately and not in a misleading context. Where the material is being published or issued to others, the sources and copyright status should be acknowledged. Past performance of shares is not necessarily a guide to future performance. The value of investments and any income from them is not guaranteed and can fall as well as rise. Tabcorp recommends investors seek independent professional advice before making investment decisions. Tabcorp respects the privacy of its stakeholders. Tabcorp’s Privacy Policy is available on the Company’s website at www.tabcorp.com.au. References to currency are in Australian dollars unless otherwise stated. 137 Tabcorp Annual Report 2018 W W W.T A B C O R P. C O M . A U