Tabcorp Holdings
Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2019 DIRECTORS’ REPORTCONTENTS Operating and financial review About Tabcorp Our purpose and vision Strategic pillars and foundations Chairman’s message Managing Director’s message FY19 overview Future priorities FY19 financial performance Benefits for our stakeholders Lotteries and Keno business Wagering and Media business Gaming Services business Corporate responsibility 01 01 02 03 04 06 08 09 10 12 14 17 20 23 Governance Board of Directors Corporate governance Executive Leadership Team Directors’ Report Remuneration Report Financial Report Independent auditor’s report At the back Five year review Shareholder information Major announcements Online shareholder services Glossary Company directory Key dates 28 28 30 32 34 42 73 123 128 128 129 131 131 132 133 133 About the Annual Report Tabcorp Holdings Limited (Company or 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. This Annual Report relates to the operations of Tabcorp and the consolidated entity comprising Tabcorp and its subsidiaries (Group or Tabcorp Group) and the Group’s interests in joint arrangements and associates in respect of the financial year ended 30 June 2019. The Group’s results for the financial year ended 30 June 2019 comprise the first full year contribution from Tatts Group Limited (Tatts) following the Tabcorp-Tatts combination which was implemented in December 2017 (Combination). Tabcorp Holdings Limited ABN 66 063 780 709 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. Notice of meeting The Annual General Meeting of Tabcorp Holdings Limited will be held at 10.00am (Sydney time) on Thursday 24 October 2019 at the Amora Jamison Hotel, 11 Jamison Street, Sydney NSW. ABOUT TABCORP • The Tabcorp Group is a world-class diversified gambling entertainment group. • We employ more than 5,000 people and have more than 3 million registered customers. • We manage iconic brands which ignite passion and excitement in millions of Australians. • Our goal is to build a sustainable future for gambling entertainment while making a positive impact for our stakeholders. • Each year our operations return hundreds of millions of dollars to the Australian community, the racing industry and venue partners including newsagents, hotels, clubs and TAB agents. • FY19 is the first full year contribution from Tatts following the Tabcorp-Tatts combination in December 2017. F I N A N C I A L R E V I E W O P E R A T I N G & The Group has three market leading business units: • Lotteries and Keno • Wagering and Media • Gaming Services ® ® ® $5.5 billion Revenues $7.2 billion Net assets $4.9 billion Benefits to stakeholders 3 million+ Registered customers 9,000+ Venues, the largest Australian retail footprint 5,000+ Employees (i) For FY19 or as at 30 June 2019, as applicable. 01 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019 We created a new purpose and vision in FY19 to bring our people together under a shared set of values and help focus our endeavours to deliver our strategic objectives. OUR PURPOSE OUR VISION EXCITEMENT INTEGRITY The Trusted Gambling Entertainment Company 02 For more than 100 years, Australians have trusted us to make life more exciting. We enhance moments and bring people and communities together. It is Excitement with Integrity, and it is our purpose. For us, integrity goes hand-in- hand with moments that engage, surprise and thrill. We balance the winning-ticket, first-past-the-post, jackpot-feeling with high standards and rigorous safeguards. You can see integrity in the collaborative, supportive partnerships that span our industry and beyond. It is in what we give back to our communities, and in our passion for always putting our customers first. It balances out the risks of our industry and keeps our customers having fun, safely and responsibly. Excitement with Integrity is core to our vision to be The Trusted Gambling Entertainment Company. Tabcorp Annual Report 2019Our strategy and the way we operate support the delivery of long term sustainable value for our multiple stakeholders. STRATEGIC PILLARS CUSTOMER LED We understand our customers, engage with them personally and create products they love SUPERB EXPERIENCES We leverage the powerful combination of our venues, digital and live event channels to deliver amazing experiences BRILLIANT EXECUTION Customers 100 Shareholders People STAKEHOLDERS We take pride in simply and efficiently delivering with excellence Government Community Industry Partners COLLABORATIVE PARTNERSHIPS We love winning with our partners through aligning our interests and deep collaboration OUR FOUNDATIONS OUTSTANDING PEOPLE AND TEAMS We are the best place to work, and we unlock the potential of our people to deliver superb customer experiences COMMITMENT TO COMMUNITY AND INTEGRITY We are trusted by governments, industry partners and our communities to grow responsible gambling sustainably LEADING TECHNOLOGY AND INNOVATION We create value through our unique combination of thought leadership and delivery excellence 03 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019CHAIRMAN’S MESSAGE “The performance of Tabcorp in FY19 demonstrates that the combination with Tatts was strategically positive with the benefits of our balanced portfolio already being realised.” Paula Dwyer / Chairman The 2019 financial year was the first full year that Tabcorp and Tatts operated as a combined business. The Board is confident that Tabcorp today is a strong and resilient business, with a portfolio of high-quality assets and earnings, diversified across our businesses of Lotteries and Keno, Wagering and Media, and Gaming Services. Tabcorp has a stable of powerful consumer brands which reach across the Australian market. The equivalent of one in three adult Australians purchases a ticket in our biggest lottery jackpot draws. And on our biggest race day – the Melbourne Cup – Tabcorp takes circa 17m individual bets. 2019 PERFORMANCE AND DIVIDEND The Group delivered a strong net profit after tax (NPAT) result of $362.5m in FY19 reflecting the benefits of our diversified business and notwithstanding the significant internal transformation taking place across our businesses to integrate Tatts. Tabcorp announced a final dividend of 11 cents per share, fully franked, taking the full year dividend to 22 cents per share. This represents a dividend payout ratio of 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting, in line with stated policy. Tabcorp actively manages capital and the Board regularly reviews alternatives to distribute value created to shareholders. We know our shareholders value fully franked dividends. As a result of the reliable free cashflows generated by our unique portfolio of businesses, Tabcorp has consistently adopted a high payout ratio policy and returned franking credits to shareholders. The Group target dividend payout ratio in FY20 is 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. INTEGRATION DELIVERING BENEFITS CONDUCT AND CULTURE I am extremely pleased to report that the complex Tabcorp/Tatts integration program is ahead of schedule and is clearly delivering benefits for shareholders. In FY19 $64m in EBITDA synergies and business improvements were delivered, ahead of plan, and expectations for the total operational expenditure synergies under the integration program have been upgraded. The Group remains on track to deliver on the upgraded total target of between $130m and $145m in EBITDA from synergies and business improvements in FY21. The aim of the Board and management of Tabcorp is to lead an inclusive and diverse organisation with a culture founded on our vision to be The Trusted Gambling Entertainment Company. The Board recognises it is accountable for ensuring Tabcorp has a strong executive team running the Group, and for overseeing a governance framework, systems and policies designed to deliver the highest standards of responsible gambling, risk management and regulatory compliance. During the year further investment was made to strengthen the capability and systems of the combined Group and underpin the achievement of our vision. 04 Tabcorp Annual Report 2019“The Group delivered a strong net profit after tax result reflecting the benefits of our diversified business.” $362.5m NPAT Up >100% 22 cents Total full year dividends (cents per share fully franked) CONCLUSION The performance of Tabcorp in FY19 demonstrates that the combination with Tatts was strategically positive with the benefits of our balanced portfolio already being realised. I am confident that we are taking the necessary actions and directing investment to deliver sustained value and returns for our shareholders, industry partners, customers and employees well into the future. On behalf of the Board I would like to thank all our people for their substantial efforts and commitment during the year. Finally, I would like to thank our shareholders for their ongoing support. Paula J Dwyer Chairman Dr Ziggy Switkowski has expressed his intention to retire from the Board by no later than the 2020 Annual General Meeting. As part of managing this transition, from 1 July 2019, Mr Steven Gregg has become Chairman of the People and Remuneration Committee. The Board oversees succession planning for the Executive Leadership Team. This is an ongoing process with key roles monitored and talent mapped and developed. During the year we welcomed a new Group General Counsel, Patrick McGlinchey, and announced a new Chief Financial Officer, Adam Newman, due to commence in October 2019. GOVERNANCE AND THE BOARD During FY19 Tabcorp undertook an external review of the Board’s performance and effectiveness, including a review of competencies and capabilities as part of the process of planning for Board renewal and succession. I am standing for re-election at the 2019 Annual General Meeting and, if re-elected, it is my intention to retire as Chairman by no later than the 2021 Annual General Meeting. The precise timing will be managed to ensure continuity of leadership through to completion of the Tatts integration and a streamlined process for Board Chairman succession. Mr Justin Milne is also standing for re-election at the 2019 Annual General Meeting. 05 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019MANAGING DIRECTOR’S MESSAGE “We remain focused on generating attractive and sustainable shareholder returns over the long term, as well as delivering benefits for our partners, customers and the community.” David Attenborough / Managing Director and Chief Executive Officer In the 2019 financial year we delivered a strong Group result reflecting the compelling logic of combining Tabcorp and Tatts and the benefits of diversification and scale. The integration is well ahead of schedule on cost synergies, with all key corporate initiatives largely implemented. We delivered $64m of EBITDA from synergies and business improvements in the year, which exceeded our previously upgraded target of $55m. Pleasingly, the critical milestones for the full combination of the TAB and the former Tatts UBET wagering business are on track to be completed in FY20. Our total synergies and business improvements target remains between $130m and $145m of EBITDA in FY21. Group revenues in FY19 were $5,482.2m (up 45.9%) and EBITDA from continuing operations before significant items was $1,064.7m (up 38.4%). The Group reported NPAT of $362.5m. This was impacted by significant expense items of $25.3m after tax and a $9.8m loss from the discontinued Sun Bets business. NPAT from continuing operations before significant items was $397.6m (up 42.5%). LOTTERIES AND KENO Lotteries and Keno revenues were $2,864.9m and EBITDA was $509.0m. With integration of this business now complete, there has been a positive step change in its performance. Successful game initiatives, most notably the redesign of Powerball, reinvigorated the lottery market and drove strong growth in our digital and retail channels. Digital turnover was up a record 73.5%(ii) and represented 23.5% of total Lotteries turnover. Digital remains a key growth opportunity. Retail turnover grew 17.7%(ii), while active registered players were up 22.2% to 3.3 million. Powerball had a halo effect on other games such as Set For Life and Monday and Wednesday Lotto. In addition, particularly favourable jackpot runs for Lucky Lotteries and Oz Lotto added circa $30m of incremental EBIT. Lotteries and Keno has strong momentum and is well placed for sustainable growth through digital expansion and continued game innovation. WAGERING AND MEDIA Wagering and Media revenues were $2,312.2m and EBITDA was $416.0m. In Wagering and Media the focus in FY19 was the transformation of the business and the integration program to bring together TAB and Tatts’ former wagering business, UBET. In the first full year of the combination, we made progress towards closing the gap in UBET’s performance relative to market and completed the rebrand of 1,300 UBET retail venues to TAB. We are executing against our plan on the integration and are on track to have UBET fully aligned with the superior TAB customer experience in the second half of FY20. A focus in the year was to maintain active customer numbers during a period of integration and transformation. In addition to sharper pricing and regular and competitive offers, we brought new products to market including Same Game Multi and the tote products Trio and Odds & Evens. These new tote products have been enabled by our investment in Longitude’s Merged Pool Technology. The Wagering and Media business will continue to execute against its strategy for sustained profitable market leadership. The implementation of a new data platform and further digitalisation of the retail experience are among the main initiatives to be delivered in FY20. 06 Tabcorp Annual Report 2019 “The Tabcorp-Tatts combination has created a strong and diversified portfolio of high-quality businesses.” $5,482.2m $1,064.7m Revenue Up 45.9% EBITDA from continuing operations before significant items Up 38.4% GAMING SERVICES Gaming Services revenues were $304.0m, and EBITDA was $139.7m. A new structure for Gaming Services was implemented during the year, bringing together MAX Venue Services and MAX Regulatory Services under a consolidated brand. A priority was extending the contracts of existing Venue Services customers. Good progress was made with 40% of the Victorian electronic gaming machine (EGM) network now contracted beyond 2022. While these extensions have come at reduced margins, they support Gaming Services’ long term sustainability. The business now has 10,090 EGMs under contract. Gaming Services has a more sustainable base from which to pursue growth opportunities. I would like to thank all our people for their dedication and commitment to delivering Excitement with Integrity. TABCORP’S PEOPLE We have prioritised the creation of a high-performing organisation, with a focus on an aligned culture, and lifting the organisation’s capability. Enhancing our employees’ experience at work in an inclusive environment has been a priority as it drives engagement, retention and results. During the year we launched several employee policies covering inclusion and diversity, parental leave and domestic and family violence. Tabcorp was also once again awarded the WGEA Employer of Choice for Gender Equality citation in FY19. LOOKING TO THE FUTURE The Tabcorp-Tatts combination has created a strong and diversified portfolio of high-quality businesses across Lotteries and Keno, Wagering and Media and Gaming Services. We started FY20 in a strong position to deliver long term profitable growth. We remain focused on generating attractive and sustainable shareholder returns over the long term, as well as delivering benefits for our partners, customers and the community. Disciplined execution of the integration program is a priority in the coming year, with the program largely scheduled to complete by the end of FY20. We will also continue to prioritise our investment in compliance, risk management and responsible gambling whilst continuing to be disciplined with operating expense, capital investment and balance sheet management. Thank you for your support of Tabcorp. David R H Attenborough Managing Director and Chief Executive Officer (i) Earnings before interest, taxation, depreciation and amortisation (EBITDA) is non-IFRS financial information. (ii) Pro-forma comparison includes adjustments to Tabcorp’s FY18 results to facilitate examination of the performance of the combined Group as if the Combination had been in place for the full FY18, and is non-IFRS financial information. 07 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019 FY19 OVERVIEW HIGHLIGHTS KEY POINTS Strong Group result › Revenue of $5,482.2m and NPAT of $362.5m with first full year contribution from Tatts and ongoing business unit developments › Positive step change in Lotteries and Keno performance, with record result from successful game portfolio initiatives, strong growth in digital and retail channels, and favourable jackpots › Wagering and Media results reflect the incomplete status of integration and the heightened investment in maintaining active customer numbers during business transformation › Gaming Services made good progress on contract extensions and consolidated under the MAX brand Increased dividend › Full year dividends totalled 22 cents per share fully franked, including a final dividend of 11 cents per share fully franked › Increase of 4.8% from prior year Integration delivering benefits Digital experience accelerated › Successful year with significant cost savings realised ahead of plan › Delivered $64m EBITDA synergies and business improvements in FY19 › Initiatives in place to deliver FY20 EBITDA target of $90m › On track to deliver FY21 total EBITDA target of $130m–$145m › Lotteries digital turnover up 73.5%(iii), now representing 23.5% of total annual turnover › Wagering digital turnover up 7.7%(iii), with TAB up 11.2%, now representing 44.6% of total annual turnover › New omni-channel model being rolled out with Lotteries’ retail partners(iv) (i) Revenue and net profit after tax (NPAT) include from discontinued operations. (ii) Earnings before interest, taxation, depreciation and amortisation (EBITDA) is non-IFRS financial information. (iii) Pro-forma comparison includes adjustments to Tabcorp’s FY18 results to facilitate examination of the performance of the combined Group as if the Combination had been in place for the full FY18, and is non-IFRS financial information. (iv) Subject to regulatory approval. 08 Revenue $5,482.2m Up 45.9% NPAT $362.5m Up >100% Total full year dividends 22 cents per share fully franked Tabcorp Annual Report 2019 FUTURE PRIORITIES PRIORITY FOCUS AREA Well positioned for long term profitable growth › Customer-led omni-channel strategy focused on optimising our diverse and unique assets › Customer focus enhanced by investments in product innovation, data, digital, and retail modernisation › Continued investment in compliance, risk management and responsible gambling initiatives › Disciplined management of operating expenses, capital investment and balance sheet Advance integration and further opportunities › Complete integration and deliver synergies and business improvements › Potential acquisitions that leverage core capabilities (focused on Australia and New Zealand) Businesses executing growth strategies › Lotteries and Keno has strong momentum and is well positioned to increase its share of the gambling entertainment market through game portfolio innovation and growth in digital › Wagering and Media strategy on track to integrate and transform the business through enhanced digital and data capability; creating sustainable market leadership and future expansion opportunities › Gaming Services is creating a solid and sustainable base from which to pursue geographic and adjacent growth opportunities › Continue to be recognised as an employer of choice Supporting our people Industry leader in inclusion, diversity and occupational health, safety › and wellbeing › Continue to embed values and behaviours to enable our people to deliver on our purpose of Excitement with Integrity F F I I N N A A N N C C I I A A L L R R E E V V I I E E W W O O P P E E R R A A T T I I N N G G & & Tabcorp Annual Report 2019 09 FY19 FINANCIAL PERFORMANCE Revenues(i)(iii) $m EBIT(i) $m NPAT before significant items(i)(ii) $m Earnings per share(i)(iv) Cents per share Dividends per share Cents per share (fully franked) 5,482.2 724.3 397.6 18.5 22.0 21.0 3,757.3 279.1 368.5 10.3 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 Segment revenues (i) $m 5.5% Segment profit before interest and tax (i) $m 8.7% 42.2% 52.3% 35.6% 55.7% Lotteries and Keno Wagering and Media Gaming Services Group results from continuing operations(i) For the year ended 30 June Revenues Taxes, levies, commission and fees Operating expenses Depreciation and amortisation Impairment EBIT NPAT NPAT (including discontinued operations) NPAT before significant items(ii) EPS(iv) – cents per share DPS – cents per share (fully franked) FY19 FY18 $m $m 3,757.3 5,482.2 (3,508.6) (2,248.6) (861.5) (247.3) (31.4) 368.5 152.1 28.7 279.1 (945.2) (301.2) (2.9) 724.3 372.3 362.5 397.6 (iii) Change % 45.9 56.0 9.7 21.8 (90.8) 96.6 >100 >100 42.5 18.5 22.0 10.3 21.0 79.6 4.8 (i) Results from continuing operations. The prior year results include contribution from Tatts Group from 14 December 2017 and have been restated to reflect Sun Bets as a discontinued operation. (ii) Significant items after tax in FY19 totalled $25.3m, which comprise benefits from ACTTAB point of consumption tax compensation of $10.6m offset by Tatts Group combination expenses regarding implementation costs of $24.1m and Racing Queensland arrangements costs of $11.8m. (iii) FY18 results have been restated to reflect the impact of the application of AASB 15 Revenue from Contracts with Customers. (iv) Earnings per share (EPS) calculated using weighted average shares for the period. 10 Tabcorp Annual Report 2019 Review of results The financial results of the Tabcorp Group for the financial year ended 30 June 2019 (FY19) relate to the Tabcorp Group’s operations, which comprise its three businesses of: • Lotteries and Keno • Wagering and Media • Gaming Services The Sun Bets operating segment reported in the financial results for the previous financial year ended 30 June 2018 was discontinued following the closure of the Company’s Sun Bets business in the UK. Comparisons to the prior year includes contribution from Tatts Group following the Company’s acquisition of all the ordinary shares of Tatts Group in December 2017 and have been restated to reflect Sun Bets as a discontinued operation. The results for FY19 were positively impacted by the first full year contribution from Tatts Group. Reported NPAT, including discontinued operations, was $362.5m, up from $28.7m in the previous year. Reported revenues from continuing operations were $5,482.2m and NPAT from continuing operations was $372.3m, up 45.9% and >100% respectively on the previous year. Earnings before interest and tax (EBIT) from continuing operations was $724.3m, up 96.6% from the prior year. Basic EPS from continuing operations was 18.5 cents per share, up from 10.3 cents per share in the previous year. The FY19 financial result was negatively impacted by significant items expense after tax of $25.3m, which comprise benefits from ACTTAB point of consumption tax compensation of $10.6m offset by Tatts Group combination expenses regarding implementation costs of $24.1m and Racing Queensland arrangements costs of $11.8m. Before significant items, NPAT from continuing operations was $397.6m, up 42.5% from the previous year. Tabcorp delivered a strong Group result in the first full year of the combined Tabcorp and Tatts business, reflecting the compelling logic of the combination and the benefits of diversification and scale. The record performance of the Lotteries and Keno business was the highlight. We have been focused on driving sustainable growth through investments in our digital and retail channels, as well as game innovation. The new Powerball game reinvigorated the Australian lottery market, delivering bigger jackpots more often. This helped drive an increase of 600,000 active registered players and had positive revenue impacts on other lottery games. In Wagering and Media the focus in FY19 was the effective integration and transformation of the business. This program is on track to have UBET fully aligned with the superior TAB customer experience in the second half of FY20. Pleasingly, active customer numbers were maintained during this period of significant change and TAB’s digital growth continued. Gaming Services substantially completed its integration and consolidated its operations under the MAX brand. The integration program is delivering for shareholders and we are ahead of schedule on delivering the cost synergies. The integration program yielded $64m of EBITDA from synergies and business improvements in FY19 and we are on track to deliver our FY21 EBITDA target of between $130m and $145m. F F I I N N A A N N C C I I A A L L R R E E V V I I E E W W O O P P E E R R A A T T I I N N G G & & The Dividend Reinvestment Plan will operate in respect of the 2019 final dividend, with no discount applicable. 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. Dividends A final dividend of 11 cents per share fully franked has been announced. The final dividend will be payable on 20 September 2019 to shareholders registered at 22 August 2019. The ex-dividend date is 21 August 2019. The interim and final dividends payable in respect of FY19 totalled 22 cents per share fully franked (up 4.8% on the prior year) and equates to a dividend payout ratio of 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. The FY20 dividend payout target is 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. Description 2019 final dividend 2019 interim dividend 2018 final dividend Amount per share fully franked 11 cents 11 cents 10 cents Record date 22 Aug 2019 19 Feb 2019 16 Aug 2018 Payment date Total 20 Sep 2019 $222.1m 13 Mar 2019 $221.7m 14 Sep 2018 $201.3m 11 Tabcorp Annual Report 2019 BENEFITS FOR OUR STAKEHOLDERS We have a rich heritage in lotteries and wagering, with our iconic Australian brands being an important part of social experiences enjoyed by many Australians. Our business model generates significant benefits for our stakeholders, and supports Tabcorp’s sustainability. In respect of FY19, nearly 70% of Tabcorp’s revenue(i) was returned to government, racing industry and retail partners. $1.0b State and Federal Government taxes (Lottery, wagering and Keno taxes, GST, and income taxes paid and payable) $2.3b $4.9b(i) of total benefits for our stakeholders generated by Tabcorp’s businesses in FY19 $0.8b $0.4b $0.4b (i) Total includes 100% of Victorian Racing Industry joint venture interest and 100% of Keno NSW interest. Racing industry (Payments to state and territory racing industry bodies) Retail partners (Commissions to hotels, clubs, TAB agents, newsagents and lottery retailers) Employee costs (Salaries, training and development) Shareholders (Dividends paid and payable) 12 $ TA X Tabcorp Annual Report 2019F I N A N C I A L R E V I E W O P E R A T I N G & OUR PURPOSE EXCITEMENT I’m excited that Tabcorp is committed to making a real difference in the community by investing in the Charitable Games business. Tabcorp’s support of the 50-50 Charity Raffle and Play For Purpose means we’re helping to create exciting winning experiences every week, and providing fundraising solutions that have benefited over 300 community organisations. INTEGRITY Integrity means delivering on our commitments whilst living our values, and I am proud that Tabcorp is committed to supporting hundreds of local community sports clubs and charities. John Corry General Manager Charitable Games 13 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019 lottery business with operations in all states and territories of Australia, except Western Australia, operating under exclusive licences. • Our leading game brands include Set for Life, Powerball, Oz Lotto, TattsLotto, Saturday Lotto, Gold Lotto, X Lotto, Monday and Wednesday Lotto, Lucky Lotteries, Lotto Strike, Super 66, Keno and Instant Scratch-Its. • Our lotteries products can be purchased in over 3,700 retail outlets, online at theLott.com and via our mobile app. LOTTERIES AND KENO BUSINESS Licensee Brands Game Brands ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® Operations Lotteries licences/approvals(i) Lotteries licences/approvals(i) • The Lott is Australia’s leading • NSW Operator Licence and various product licences expire in April 2050. • Victorian Public Lottery Licence expires in June 2028. • Queensland Licensed Lottery Operator’s Licence expires in July 2072. • Lotteries operates under an agency agreement with the Lotteries Commission of South Australia which runs until December 2052. NSW VIC QLD SA 2028 2050 2052 2072 • Tasmanian lotteries operate under renewable five year permits linked TAS 2020 to Victorian (June 2020) and Queensland (June 2023) licences. • ACT Approval to conduct a lottery indefinitely unless revoked. • Northern Territory Lottery Agreement expires in June 2032. ACT NT 2032 Keno licences/approvals(i) Keno licences/approvals(i) • NSW Keno Licence expires in April 2050. Tabcorp operates Keno under a management agreement with ClubKENO Holdings Pty Ltd. NSW • Keno is a random number • Victorian Keno Licence expires in April 2022. • Queensland Keno Licence expires in June 2047. • Keno operates under an agency agreement with the Lotteries Commission of South Australia which runs until December 2052. • ACT Approval to Conduct Keno expires in October 2064. game that is played every 3 to 3.5 minutes with the chance for customers to win instant prizes and multi-million dollar lifechanging jackpots. • Keno is distributed to over 3,500 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. 14 VIC 2022 QLD SA 2050 2047 2052 ACT 2020 2064 (i) Ordered by population. Tabcorp Annual Report 2019LOTTERIES AND KENO BUSINESS Review of results Statutory revenue for the Lotteries and Keno business was $2,864.9m, up >100%, and EBIT was $425.2m, up >100%, with FY19 being the first full year contribution of the Tatts Lotteries business following the Combination. In FY19, the performance of the business was positively impacted by continued game innovation, and upweighted investment in technology and data-led capability. Digital turnover was up a record 73.5%(ii), representing 23.5% (FY18: 16.8%(ii)) of total Lotteries turnover and digital momentum is continuing. Retail turnover grew 17.7%(ii). The new Powerball game delivered bigger and more frequent jackpots, and more winners overall, leading to increased customer demand. Active registered players were up 22.2% to 3.3m, positively impacting revenues for other games. In addition, Lotteries and Keno revenues were supported by particularly favourable jackpot runs for Lucky Lotteries and Oz Lotto, which together added circa $30m of incremental EBIT. A new omni-channel model was introduced for lottery retailers during the year and will commence in most jurisdictions in August 2019, subject to regulatory approvals. The model will deliver greater alignment between lottery retailers and Tabcorp’s digital growth strategy. 3,700+ Lotteries outlets(i) 3,500+ Keno outlets(i) 500m Lotteries tickets 105m Keno tickets Lotteries and Keno results for the year ended 30 June Revenues Taxes, levies, commission and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY19 $m 2,864.9 (2,123.0) (232.9) 509.0 (83.8) 425.2 FY18(i) $m 1,390.7 (998.1) (137.4) 255.2 (55.9) 199.3 Change % >100 >100 69.5 99.5 49.9 >100 3.3m Active registered Lotteries customers 24.1k Active digital Keno account customers (i) FY18 results include the Tatts Lotteries business from 14 December 2017 and have been restated to reflect the Group’s current reportable segments. (ii) Pro-forma comparison includes adjustments to Tabcorp’s FY18 results to facilitate examination of the performance of the combined Group as if the Combination had been in place for the full FY18, and is non-IFRS financial information. Revenues EBIT $2,864.9m $425.2m Up >100% Up >100% (i) For FY19 or as at 30 June 2019, as applicable. Tabcorp Annual Report 2019 15 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEW OUR PURPOSE EXCITEMENT Lotteries is an exciting business to work in. That jackpot winning feeling flows through everything we do and to know that we’re providing a lifechanging experience for our customers is exciting. INTEGRITY Maintaining the integrity of our brands across our extensive retail network is vital. Ensuring that our retailers are well trained and supported and doing the right thing by them is at the core of our business. Brad Chappel Business Development Manager (QLD) with Cara Hickey, Chermside Nextra Agent 16 Tabcorp Annual Report 2019 WAGERING AND MEDIA BUSINESS Operations • The Wagering and Media • Three Sky Racing television business offers totalisator (or pari-mutuel) and fixed odds betting on racing, sports and other events. • The business operates through a network of TAB 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, operates in Victoria, NSW and the ACT, and licensed in other Australian and overseas jurisdictions. • International wagering and pooling is conducted through the Premier Gateway International (PGI) joint venture on the Isle of Man (50% interest). channels broadcast 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. • The Sky Sports Radio network operates in NSW and the ACT, the RadioTAB network operates in Queensland, South Australia, Northern Territory and Tasmania, and the business has advertising and sponsorship arrangements with Radio Sport National. • The Media business broadcasts Australian racing throughout Australia and distributes Australian and international racing to other countries, and imports overseas racing to Australia. Wagering licences/ approvals(i) • NSW Wagering Licence expires in March 2097, with retail exclusivity period to expire in June 2033. • Victorian Wagering and Betting Licence expires in August 2024, and may be extended by the State of Victoria for a further two year period. • 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. • 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. • Northern Territory Totalisator Licence and Sports Bookmaker Licence expire in October 2035. Wagering licences/approvals(i) NSW VIC 2024 QLD SA TAS ACT NT 2062 2064 2035 (i) Ordered by population. 2097 2098 2100 F F I I N N A A N N C C I I A A L L R R E E V V I I E E W W O O P P E E R R A A T T I I N N G G & & 17 Tabcorp Annual Report 2019 WAGERING AND MEDIA BUSINESS Review of results Statutory revenue for the Wagering and Media business was $2,312.2m, up 9.0%, and EBIT was $271.8m, up 5.1%, with FY19 being the first full year contribution of the Tatts UBET business following the Combination. Tabcorp significantly increased its investment in maintaining active customer numbers in FY19 during a period of integration and transformation. TAB competed well with active customer numbers up 2.5% to 538,000. TAB turnover growth of 1.3% translated to a revenue decline of 3.6% due to the step-up in customer generosities and lower gross yields. Turnover in the former UBET business (Queensland, Tasmania, South Australia and Northern Territory) was down 9.5%(ii), largely as a result of the legacy offering. UBET revenues declined 7.2%(ii), with the better revenue performance relative to turnover indicating early benefits from consolidation of our fixed odds teams and better yield management. The transition of UBET to the full TAB offering is progressing well and is on track for completion during FY20. During the year TAB launched products such as Same Game Multi, Trio and Odds & Evens, as well as Venue Mode, which gives participating account customers offers that can only be accessed in TAB retail venues. This is an example of Tabcorp using its retail network as a point of difference to create unique, digitally-led retail experiences. Wagering and Media results for the year ended 30 June Revenues Taxes, levies, commission and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY19 $m 2,312.2 (1,367.9) (528.3) 416.0 (144.2) 271.8 FY18(i) $m 2,122.1 (1,244.6) (483.7) 393.8 (135.2) 258.6 Change % 9.0 9.9 9.2 5.6 6.7 5.1 (i) FY18 results include the Tatts UBET Wagering business from 14 December 2017. FY18 results have been restated to reflect the impact of the application of AASB 15 Revenue from Contracts with Customers and the Group’s current reportable segments. (ii) Pro-forma comparison includes adjustments to Tabcorp’s FY18 results to facilitate examination of the performance of the combined Group as if the Combination had been in place for the full FY18, and is non-IFRS financial information. 18 57% National wagering market share of revenue (approx) 1.1b Bets taken 4,400+ Venues $1.0b Returns to racing industry 720,000 Active account customers 2.4m Subscribers receiving Sky broadcast Revenues EBIT $2,312.2m $271.8m Up 9.0% Up 5.1% (i) For FY19 or as at 30 June 2019, as applicable. Tabcorp Annual Report 2019 F F I I N N A A N N C C I I A A L L R R E E V V I I E E W W O O P P E E R R A A T T I I N N G G & & OUR PURPOSE EXCITEMENT We’re always looking to deliver fun and engaging initiatives that create exciting experiences for our customers. We want our customers to have a positive experience every time they interact with us, and we aim to be at the top of our game by creating moments of excitement every day. INTEGRITY I’m proud to work for a trusted company that prides itself on doing the right thing. Maintaining a high standard of integrity and trust is at the heart of this organisation and is integral to the way my team operates both internally and in our interactions with customers. Cathy Nigro Senior Wagering Business Partner Metro North (Sydney) 19 DIRECTORS’ REPORTTabcorp Annual Report 2019 GAMING SERVICES BUSINESS Monitoring licences(i) • NSW Centralised Monitoring System Licence expires in November 2032. • Queensland Monitoring Operator’s Licence expires in August 2027, with indefinite rolling renewal capability. • Northern Territory Monitoring Provider’s Licence expires in July 2021 with indefinite rolling renewal capability. Other licences/ approvals • 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. • Victorian listings on the Roll of Manufacturers, Suppliers and Testers. • Queensland Service Contractor Licence. • South Australian Gaming Machine Dealer’s Licence (voluntarily suspended) and Gaming Machine Service Licence. • Tasmanian listings on the Roll of Recognised Manufacturers, Suppliers and Testers of Gaming Equipment. • ACT Supplier Certificates. • Northern Territory listing on the Roll of Approved Gaming Equipment Suppliers, Gaming Machine Service Contractors Licence and other approvals. Operations • The Gaming Services business operates two units under the MAX brand: MAX Regulatory Services and MAX Venue Services. • MAX Regulatory Services provides electronic gaming machine (EGM) monitoring and related services across NSW, Queensland, and the Northern Territory. • MAX Venue Services provides a mix of services including: gaming machine and systems supply and expertise, specialised services and strategic advice to licensed gaming venues in Victoria and NSW; value-add services to venues in NSW, Victoria, Queensland, South Australia, Tasmania, the ACT and the Northern Territory such as gaming and loyalty systems, business intelligence tools, linked jackpots, and cashless and ticket in ticket out (TITO) services; and logistics, installation, relocation, repair and maintenance of EGMs, lottery and wagering terminals and other transaction devices across Australia. 20 Monitoring licences (i) NSW QLD 2032 2027 NT 2021 (i) Ordered by population. Nikolas Davies (Field Technician NSW and ACT) Tabcorp Annual Report 2019GAMING SERVICES BUSINESS Review of results Statutory revenue for the Gaming Services business, which now operates under the umbrella MAX brand, was $304.0m, up 21.7%, and EBIT was $66.5m, up 1.8%, with FY19 being the first full year contribution of Tatts Group following the Combination. The Gaming Services structure was simplified into two units during FY19: MAX Venue Services (venue solutions, gaming systems and support services) and MAX Regulatory Services (monitoring and related services). Initiatives in FY19 were centred on creating a sustainable base for the future. MAX Venue Services revenue was $208.9m. The expiry of some contracts in Victoria negatively impacted MAX Venue Services revenue. Good progress was made on contract extensions with 40% of Victorian electronic gaming machines (EGMs) now contracted beyond 2022, albeit on lower margins. There were 730 new EGMs signed during the year in Victoria and NSW bringing the total under contract to 10,090. MAX Regulatory Services revenue was $95.1m. Gaming Services results for the year ended 30 June Revenues Taxes, levies, commission and fees Operating expenses EBITDA Depreciation and amortisation EBIT FY19 $m 304.0 (14.0) (150.3) 139.7 (73.2) 66.5 FY18(i) $m 249.7 (14.4) (113.8) 121.5 (56.2) 65.3 Change % 21.7 (2.8) 32.1 15.0 30.2 1.8 (i) FY18 results include the Tatts MAX and MAXtech business from 14 December 2017 and have been restated to reflect the Group’s current reportable segments. 85%+ Reach across national EGMs 80% QLD 100% NSW EGM monitoring share 10,090 EGMs under contract to MAX Venue Services 647k Customer call-outs 3,500+ Venues Market leading gaming technology systems Revenues EBIT $304.0m $66.5m Up 21.7% Up 1.8% (i) For FY19 or as at 30 June 2019, as applicable. 21 OPERATING & FINANCIAL REVIEWOPERATING & FINANCIAL REVIEWTabcorp Annual Report 2019 OUR PURPOSE EXCITEMENT Getting out in the field and meeting our customers face-to-face is exciting for me. I enjoy the challenges and opportunities that my role brings, and there’s a great sense of accomplishment and reward when we work as a team and deliver a great result for our customers. INTEGRITY Integrity means upholding a sense of professionalism and accountability in everything we do. We aim to get the job right the first time, every time, and I’m proud to work in a team that is committed to doing the right thing. Aidan Craine Senior Field Technician (NSW) 22 Tabcorp Annual Report 2019 CORPORATE RESPONSIBILITY Our purpose of Excitement with Integrity underpins everything we do at Tabcorp. We believe in taking responsibility for the role we play in our communities and sharing the benefits of our success with all our stakeholders – our shareholders, customers, people, industry partners, governments, and the community. Tabcorp’s corporate responsibility strategy supports our business strategy and vision to be The Trusted Gambling Entertainment Company, and builds upon the progress and achievements made by Tabcorp over many years. Our corporate responsibility strategy is founded on the five pillars below. The assessment indicated that Tabcorp’s top three material corporate responsibility priorities are responsible gambling, integrity in business and customer focus. In FY19, Tabcorp undertook a materiality assessment to identify those environmental, social and governance issues most relevant to our business and stakeholders. These findings have been incorporated into our corporate responsibility strategy and priorities. Throughout FY19, we continued to make good progress in delivering our corporate responsibility strategy. See pages 24 to 26 for key corporate responsibility activities and progress during the year. In recognition of our continued improvements in sustainability performance and disclosure, Tabcorp’s rankings were upgraded in the most recent annual independent assessments for the Dow Jones Sustainability Index (DJSI) and FTSE4Good Index. Tabcorp is now ranked second globally in the Casinos and Gambling sector in the DJSI World and DJSI Australia Indices. More detail about Tabcorp’s corporate responsibility activities can be found on our website and in our annual Corporate Responsibility Report, available at www.tabcorp.com.au. R R E E S S P P O O N N S S I I B B I I L L I I T T Y Y C C O O R R P P O O R R A A T T E E The five pillars of our 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 23 Tabcorp Annual Report 2019 CORPORATE RESPONSIBILITY RESPONSIBLE GAMBLING • Referrals to independent support services that can assist customers who are concerned about their own or another person’s gambling. FY19 highlights • Launched the TAB responsible gambling microsite. • Developed “Take a Break” and enhanced self-service tools that help customers manage their gambling. • Supported the National Consumer Protection Framework launched by federal, state and territory governments which requires all online wagering customers to opt in or out of setting a deposit limit for their account. • Implemented shorter customer ID verification timelines and a simplified online customer experience. • Enhanced training of front-line customer service staff within retail venues, on-course and at call centres to ensure they are trained to understand and promote responsible gambling, and are equipped with tools and information to help identify problem gambling behaviour. Tabcorp is committed to responsible gambling, gaming and play as we believe it is integral to our overall business strategy and long term success. Customer care is at the core of our approach to responsible gambling. Our goal is to equip customers with information and resources to help them make informed decisions about how they gamble to minimise potential harm. We have developed customer care technologies and human-led tools that work hand-in-hand to better understand gambling behaviour and empower customer choice. TAB responsible gambling microsite In April 2019, TAB launched a new responsible gambling microsite to create a user-friendly and easily accessible information and assistance hub for TAB wagering customers. The site provides: • Information for customers about how to use our products safely and responsibly. • Self-service tools to help customers manage their gambling, such as setting a deposit limit, electing to take a break from wagering, setting a maximum bet cost and self-excluding from on-line and/or in-venue wagering. 24 Tabcorp Annual Report 2019PEOPLE We are focused on making Tabcorp the most exciting and rewarding place for our people to succeed. We continue to build an inclusive and diverse organisation with a values and purpose-led culture that supports our business priorities. Tabcorp values In November 2018, Tabcorp launched its new purpose, vision and values with our employees. The values, which were developed in consultation with our employees, support our business strategy. Employee engagement In May 2019, Tabcorp conducted an employee experience and engagement survey. It was the first time using the Culture Amp survey following the Combination. More than 72% of our employees responded to the survey and our engagement score was 65%. This is slightly below the 2019 Our values median of 70% for Australian companies and establishes a baseline against which we can measure future efforts. Inclusion and diversity During FY19, the Board approved a three year Inclusion and Diversity Strategy consistent with our broader business and people priorities. The strategy sets out our commitment to a culture of inclusion and the creation of a bias-free workplace where all are welcomed and respected. In FY19, Tabcorp also enhanced key policies to support this strategy, including: • Updated its market leading Parental Leave Policy to increase paid leave for primary carers from 13 weeks to 18 weeks, and reduce the qualifying period from 12 months to three months. • Adopted a new Domestic and Family Violence Support Policy that provides unrestricted paid leave for people experiencing violence, 10 days paid carer’s leave for those who may be supporting others experiencing violence, a financial allowance of up to $2,500, access to removalist services for an emergency move, and other support arrangements. The Board has set a target for management to have at least 40% female representation in the Senior Leadership Cohort by the end of FY21. The Board has also introduced a target for the Tabcorp Board to comprise at least 40% female Non Executive Directors by the end of FY23. Employee health and safety Tabcorp is committed to providing a safe environment for employees, contractors and visitors, and actively promotes health, safety and wellbeing in the workplace. In FY19 there was a reported increase in lost time injuries resulting in a lost time injury frequency rate of 3.6 lost time injuries per million hours worked, up from 2.3 in FY18. This rate is still well below the industry average of 7.0 based on Safe Work Australia benchmarks. We continue to review, monitor and report on health and safety risk profiles throughout the business. We have increased our focus on early reporting and proactive injury management which has resulted in a decrease in our WorkCover Premiums this year. FY19 highlights • Tabcorp was again named an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency. • Launched our new purpose, vision and values with employees. • Launched new Inclusion and Diversity Strategy supported by four key policies; Inclusion and Diversity, Flexible Working, Domestic and Family Violence Support, and Parental Leave policies. • Combined the Tabcorp and Tatts employee management systems, including employee performance management, contractor management and employee assistance programs. • Implemented the new Donesafe employee health and safety system. Do it as One Team Do the Right Thing Explore What’s Possible Create Awesome Moments Make a Difference We are stronger together. We are inclusive, collaborative and know that amazing ideas can come from anywhere We always act with integrity, standing up (and speaking out) for what is right We listen. We think big. We ask ‘what if’. Our curiosity for what is next will shape tomorrow We create excitement and positive experiences. Everything we do has the power to delight We are passionate and proud about making a real change for customers and benefiting our communities 25 CORPORATE RESPONSIBILITYCORPORATE RESPONSIBILITYTabcorp Annual Report 2019 • Golden Casket facilitated • Tabcorp helped the 50-50 contributions of over $1.8m to charities in Queensland, including the Mater Hospital, Children’s Hospital Foundation and Starlight Children’s Foundation. Foundation partner with Sport Australia and the Australian Sports Foundation to launch Play for Purpose, Australia’s Sport and Charity Raffle, which raised over $1.0m for 98 Australian charities and 108 sporting clubs. • Tabcorp’s support of the 50-50 Foundation enabled it to partner with 15 major sporting clubs and through its 50-50 Charity Raffle raised over $300,000 for 66 Australian charities. • Tabcorp’s CEO and executives raised more than $160,000 for OzHarvest’s annual CEO CookOff fundraiser. CORPORATE RESPONSIBILITY COMMUNITY Tabcorp has a long history of supporting the community. We are committed to making a positive contribution to our industry and charity partners, and through them, the broader community. We believe that supporting the wellbeing of the communities in which we operate is critical to our long term success. Key partnerships We partner with a number of Australian charities, including the Prostate Cancer Foundation of Australia, Starlight Children’s Foundation, OzHarvest and Conservation Volunteers Australia. We also support industry based charities such as the National Jockeys Trust and Team Teal, which raises funds for the Women’s Cancer Foundation. Through Tabcare, our employee- community engagement program, we support our employees to contribute to the community through matched fundraising and volunteering for charities. Tabcorp Charitable Games Tabcorp Charitable Games aims to be one of the biggest supporters of fundraising activities and good causes in Australia. We facilitate fundraising for charities and sporting clubs by providing (i) Independently verified by LBG. 26 innovative fundraising products and technology solutions. Tabcorp recognises the challenges facing not-for-profit fundraising efforts and we use our size, talent, expertise and technology to help. We support the 50-50 Foundation, a registered charity which raises significant funds for charities and sporting clubs through its two products: ® ® ® FY19 highlights • The value of Tabcorp’s support to charities and community organisations in FY19 totalled approximately $9.6m(i). This represents Tabcorp’s voluntary support in the form of cash donations, in-kind support, employee time, and leveraged support, with FY19 being the first full year contribution from Tatts following the Combination. • Over $1.2m in contributions were made to drought relief in NSW and Queensland from Tabcorp, SKY, TAB, Golden Casket and employee contributions. • Tabcorp, TAB and Golden Casket contributed over $500,000 to flood-impacted communities and the racing industry in North Queensland. Tabcorp Annual Report 2019OUR PURPOSE EXCITEMENT Tabcorp takes the role we play in our communities seriously and it’s exciting to be in a position to share our success with all of our stakeholders. R R E E S S P P O O N N S S I I B B I I L L I I T T Y Y C C O O R R P P O O R R A A T T E E INTEGRITY Integrity means acting with honesty and transparency in everything we do, to make a positive impact on all our stakeholders. Melissa Clarkson Corporate Responsibility Manager Tabcorp Annual Report 2019 27 BOARD OF DIRECTORS Paula Dwyer Independent Chairman and Non Executive Director from June 2011(i)(ii) David Attenborough Managing Director and Chief Executive Officer from June 2011 Bruce Akhurst Independent Non Executive Director from July 2017 Harry Boon Independent Non Executive Director from December 2017 Paula Dwyer is a Director of Australia and New Zealand Banking Group Limited, Lion Pty Ltd and Allianz Australia Limited. She is also a Member of the Kirin Holdings International Advisory Board and a Member of the Takeovers Panel. Ms Dwyer was formerly the Chairman of Healthscope Limited and a Director of Leighton Holdings Limited, Suncorp Group Limited and Foster’s Group Limited. She was formerly a member of the ASIC External Advisory Panel, the Victorian Casino and Gaming Authority and of the Victorian Gaming Commission. Ms Dwyer held senior executive positions with Ord Minnett (now JP Morgan) and PricewaterhouseCoopers. Ms Dwyer brings to the Board her commercial experience in strategy, corporate finance and capital management and operating businesses in complex regulated industries. 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 was appointed as the Managing Director and Chief Executive Officer following the Tabcorp-Tatts combination. Mr Attenborough is also a Director of the Australasian Gaming Council. 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 brings to the Board extensive gambling industry experience, strategic and commercial acumen, international experience, retailing and customer experience, and corporate responsibility. Qualifications: • Bachelor of Science (Honours) • Master of Business Administration • Member of AICD Other ASX company directorships in past 3 years: • Nil Tabcorp Committees: • Chairman of Nomination Committee • Member of Audit Committee • Member of Risk and Compliance Committee • Member of People and Remuneration Committee • Chairman of the Victorian Joint Venture Management Committee Qualifications: • Bachelor of Commerce • Fellow of the Chartered Accountants Australia and New Zealand • Senior Fellow of the Financial Services Institute of Australasia • Fellow of AICD Other ASX company directorships in past 3 years: • Healthscope Limited from June 2014 to June 2019 • Australia and New Zealand Banking Group Limited since April 2012 28 Bruce Akhurst is the Executive Chairman of Adstream Holdings Pty Ltd and is a Director of Vocus Group Limited and private investment company Paul Ramsay Holdings Pty Ltd. He is also Chairman of the Peter MacCallum Cancer Foundation and a Council Member of RMIT University. 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 brings to the Board extensive experience in legal and regulatory compliance, governance and risk management, marketing and customer experience, digital innovation, information technology, strategy, finance and capital management. Mr Boon is currently the Chairman of Asaleo Care Limited and is a former Director of Toll Holdings Limited. Mr Boon was previously the Chairman of Tatts, and served as a Non Executive Director of Tatts from May 2005. 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. Mr Boon brings to the Board extensive experience in global marketing and sales, retailing and customer experience, leadership, remuneration, people and organisational culture. Tabcorp Committees: Tabcorp Committees: • Chairman of Risk and Compliance Committee • Member of Audit Committee • Member of Audit Committee • Member of Nomination Committee Qualifications: • Member of Risk and Compliance Committee • Member of People and Remuneration Committee • Member of Nomination Committee • Bachelor of Economics (Honours) Qualifications: • Bachelor of Laws • Fellow of AICD • Bachelor of Laws (Honours) • Bachelor of Commerce Other ASX company directorships in past 3 years: Other ASX company directorships in past 3 years: • Vocus Group Limited since September 2018 • Asaleo Care Limited since May 2014 • Tatts from May 2005 to December 2017 Tabcorp Annual Report 2019Steven Gregg Independent Non Executive Director from July 2012 Vickki McFadden Independent Non Executive Director from July 2017 Justin Milne Independent Non Executive Director from August 2011 Zygmunt Switkowski AO Independent 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. Mr Gregg 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 brings to the Board extensive experience in corporate finance and capital management, strategic and commercial acumen, retailing and racing industry experience. Tabcorp Committees: • Chairman of People and Remuneration Committee • Member of Audit Committee • Member of Nomination Committee Qualifications: • Bachelor of Commerce Vickki McFadden is Chairman of GPT Group and a Director of Newcrest Mining Limited and Myer Family Investments Pty Ltd. 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 formerly Chairman of Eftpos Payments Australia Limited and Skilled Group Limited, President of the Takeovers Panel, 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 brings to the Board extensive experience in finance and capital management, governance, risk management and compliance, people and organisational culture, strategy and corporate responsibility. Tabcorp Committees: • Chairman of Audit Committee • Member of Risk and Compliance Committee • Member of Nomination Committee Justin Milne is a Director of NBN Co Limited. Mr Milne was a former Chairman of NetComm Wireless Limited, MYOB Group Limited, Australian Broadcasting Corporation and pieNETWORKS Limited, and was a Director of SMS Management and Technology Limited, Members Equity Bank Limited, 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 brings to the Board extensive experience in information technology, media, digital innovation, marketing and customer experience, public policy, strategic and commercial acumen and governance. Tabcorp Committees: Zygmunt Switkowski is Chairman of NBN Co Limited and Chancellor of RMIT University. Dr Switkowski is the former Chairman of Suncorp Group Limited, a former Director of Healthscope Limited and Oil Search Limited, and former Chairman of the Australian Nuclear Science and Technology Organisation. 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 brings to the Board extensive experience in governance, leadership, remuneration, people and organisational culture, information technology, stakeholder relations and public policy. Tabcorp Committees: • Member of People and Remuneration Committee • Member of Nomination Committee • Member of Risk and Compliance Committee Qualifications: • Member of Nomination Committee • Bachelor of Science (Honours) G G O O V V E E R R N N A A N N C C E E Qualifications: • Bachelor of Commerce • Bachelor of Laws • Member of AICD Other ASX company directorships in past 3 years: • Caltex Australia Limited since October 2015 • Challenger Limited since October 2012 Other ASX company directorships in past 3 years: • GPT Group since March 2018 • Newcrest Mining Limited since October 2016 (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. (iv) AICD is the Australian Institute of Company Directors. Qualifications: • Bachelor of Arts • Fellow of AICD Other ASX company directorships in past 3 years: • MYOB Group Limited from March 2015 to May 2019 • NetComm Wireless Limited from March 2012 to July 2019 • SMS Management and Technology Limited from August 2014 to September 2017 • PhD (Nuclear Physics) • Fellow of AICD • Fellow of Australian Academy of Technological Sciences and Engineering • Fellow of Australian Academy of Science Other ASX company directorships in past 3 years: • Healthscope Limited from April 2016 to June 2019 • Oil Search Limited from November 2010 to December 2016 • Suncorp Group Limited from September 2005 to September 2018 29 Tabcorp Annual Report 2019 CORPORATE GOVERNANCE Tabcorp’s Board recognises the importance of having proper and effective corporate governance arrangements and maintaining high standards of corporate behaviour and accountability. The governance arrangements adopted by the Group enable the Board and management to make well informed decisions, provide appropriate accountability and transparency, and instil and reinforce a culture and behaviours that support Tabcorp’s vision to be The Trusted Gambling Entertainment Company. O 8 N 7 FY19 achievements Board Committees Balanced Board • An externally facilitated • The Board has established four assessment was undertaken of the effectiveness and performance of the Board, its Committees and individual Directors and a number of resulting actions will be implemented. • The Director skills matrix was reviewed and updated. Committees: – Audit Committee – Risk and Compliance Committee – People and Remuneration Committee – Nomination Committee • The Board comprises a mix of longer serving NEDs and more recent appointments, with three new Directors having commenced in the past three years. • The Board has set a target of having at least 40% female NEDs by the end of FY23. • All committees comprise only • All Tabcorp’s NEDs are • The Board Nomination Non Executive Directors (NEDs). Committee was re-established effective from 14 June 2019. • Tabcorp reviewed and updated • All committee members, including Chairmen, are independent Directors. its Whistleblower Policy, Market Disclosure Policy and Shareholder Communications Policy. considered by the Board to be independent. • The Board is comprised of Directors who bring a diverse range of skills, experience, qualifications and backgrounds to provide effective leadership and add value. • The Board has commenced a process for orderly and coordinated Board renewal, including for the Chairman role, which is being overseen by the Nomination Committee. Tabcorp’s Corporate Governance Statement 2019, Appendix 4G, Board and Committee charters, key policies and governance documents are available from the Who We Are > Corporate Governance section of Tabcorp’s website at www.tabcorp.com.au 30 Board skills matrix A. Leadership Q 8 A 8 P 8 B 8 C 8 B. Strategic and commercial acumen C. Financial acumen/capital management D. Governance E. Legal and regulatory F. Risk management and compliance Experience M 8 Technical Skills 7 L 6 K 8 J 8 I 8 H Diversity Male Female 2 Target of 40% female NEDs by end of FY23 5 Non Executive Directors (NEDs) G. People D 8 H. Organisational culture I. Remuneration J. Government/stakeholder relations 8 E and public policy 8 F 8 G K. Gambling industry experience L. Experience in other relevant industries M. International experience N. Information technology O. Digital innovation P. Retailing, marketing and customer experience Q. Corporate responsibility Tenure <2 years 1 8+ years 3 Average of 5.3 years 2 2 to <4 years 1 4 to <8 years NED tenure (reset at the time of demerger) Tabcorp Annual Report 2019 Board and Committee meeting attendance Directors’ interests in Tabcorp securities The attendance of the Directors at meetings of the Board and standing Board Committees during the year in review were: Name Current Directors Paula Dwyer(i) David Attenborough(ii) Bruce Akhurst Harry Boon Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Director Elmer Funke Kupper(iii) Board meetings A B Audit Committee A B Risk and Compliance Committee A B People and Remuneration Committee A B 11 11 11 11 11 11 11 10 - 11 11 11 11 11 11 11 11 - 4 4 4 4 4 4 - - - 4 4 4 4 4 4 - - - 4 4 4 4 - 3 4 - - 4 4 4 4 - 4 4 - - 5 5 - 5 5 - - 5 - 5 5 - 5 5 - - 5 - 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(ii) Bruce Akhurst Harry Boon Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Director Elmer Funke Kupper(iii) Ordinary shares Number Value(i) 150,000 1,064,677 80,000 70,000 42,000 50,000 41,808 91,949 $670,500 $4,759,106 $357,600 $312,900 $187,740 $223,500 $186,882 $411,012 64,166 $305,430 A – Number of meetings attended B – Maximum number of possible meetings available for attendance (i) Paula Dwyer also attended meetings of the Victorian Joint Venture Management Committee as Chairman of this Committee. (i) Value of ordinary shares using closing price on ASX of $4.47 as at 1 August 2019 (except for (iii) below). All Non Executive Directors maintain Tabcorp shareholdings which are within Tabcorp’s Non Executive Director Shareholding Policy, noting that the required threshold must be reached within three years of appointment, or by 14 December 2020, whichever is the later. The MD and CEO’s shareholding is within the Executives’ Shareholdings Policy. (ii) David Attenborough also has an interest in 1,720,947 Performance Rights. (ii) David Attenborough attends Board Committee meetings, but he is not a member of any Board Committee. (iii) Retired as a Director of Tabcorp on 17 October 2018, and the interests disclosed above and their value were Only Non Executive Directors are members of Board Committees. applicable at that time. (iii) Elmer Funke Kupper commenced a leave of absence from the Board on 21 March 2016 and retired from the Board on 17 October 2018. He did not attend any Board or Committee meetings during the financial year. 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 Nomination Committee was re-established and effective from 14 June 2019, however did not meet in FY19. The functions and memberships of the Board Committees are set out in the Company’s Corporate Governance Statement available on Tabcorp’s website. The Board and Committee Charters are also available on Tabcorp’s website. 31 GOVERNANCEGOVERNANCETabcorp Annual Report 2019 EXECUTIVE LEADERSHIP TEAM David Attenborough Managing Director and Chief Executive Officer Merryl Dooley Chief People Officer Damien Johnston Chief Financial Officer Clinton Lollback Chief Risk Officer Frank Makryllos Managing Director – Gaming Services 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 and a Member of AICD. 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. 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 under the MAX brand. 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. 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. 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 and 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. 32 Tabcorp Annual Report 2019Patrick McGlinchey Group General Counsel Mandy Ross Chief Information Officer Adam Rytenskild Managing Director – Wagering and Media Ben Simons Chief Strategy Officer Sue van der Merwe Managing Director – Lotteries and Keno 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). Patrick commenced with Tabcorp in March 2019 as Group General Counsel, leading Tabcorp’s Legal and Regulatory functions with functional responsibility for Company Secretariat. Prior to joining Tabcorp, he was Regional General Counsel Asia Pacific at LafargeHolcim Group leading the legal, corporate governance and compliance teams across the region. Patrick also has experience in the gambling entertainment industry, having served previously as Chief Legal Officer and Company Secretary at Aristocrat Leisure Limited. Patrick holds a Bachelor of Laws (Honours) and a Bachelor of Economics (Soc Sc). He has attended various executive development courses including the International Institute for Management Development in Switzerland and the Wharton School in the USA. 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. 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. 33 GOVERNANCEGOVERNANCETabcorp Annual Report 2019DIRECTORS’ REPORT Contents 1. Principal activities 2. Operating and financial review 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. Directors’ interests in contracts 10. Indemnification and insurance of Directors and Officers 11. Company Secretaries 12. Environmental regulation and performance 13. Other matters 14. Rounding of amounts 15. Auditors 16. Non-audit services 17. Auditor’s independence declaration 18. Remuneration Report 35 35 35 35 35 35 36 39 39 39 39 40 40 40 40 40 41 41 34 Tabcorp Annual Report 2019 The Directors of Tabcorp Holdings Limited (the Company) present 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 2019. 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 Directors’ Report. 2. OPERATING AND FINANCIAL REVIEW The financial results of the Group for the financial year ended 30 June 2019 comprise its three operating segments of Lotteries and Keno, Wagering and Media, and Gaming Services. The activities and financial performance of the Group and each of its operating segments for the financial year are set out on pages 1 to 22. 3. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The following event, which may be considered to be a significant change in the state of affairs of the Group, occurred since the commencement of the financial year on 1 July 2018. There were no other 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. 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 and Sun Bets ceased offering products effective from that date. Sun Bets is disclosed as a discontinued operation. 4. SIGNIFICANT EVENTS AFTER THE END OF THE FINANCIAL YEAR In July 2019, the Group entered into sale agreements in relation to two surplus corporate properties. Proceeds of $46.0m are expected to be recognised over the next two financial years in respect of the two properties. 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. 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 discussed on pages 4 to 9. The priorities of the Group’s operating businesses are set out on pages 14 to 22. 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. 35 DIRECTORS’ REPORTTabcorp Annual Report 2019DIRECTORS’ REPORT 7. MATERIAL BUSINESS RISKS The Group has a structured and proactive approach to understanding, identifying and managing risk which is aligned to the Group’s strategies and operations. The Group operates within an established Risk Management Framework (summarised opposite) which enables the effective identification, monitoring, management, reporting and oversight of risks throughout the Group. This framework is overseen by the Chief Risk Officer and the Risk and Compliance Committee, and supports a strong culture of proactive risk management, helps protect our reputation and supports long term value creation for our stakeholders. For further information regarding the Group’s approach to risk management and risk governance, refer to Tabcorp’s Corporate Governance Statement. There are various risks that could have a material impact at a whole-of-Group level on the achievement of the Group’s strategies and future prospects which are presented below, in no particular order, together with existing mitigations employed by the Group. Many of the risks may arise due to events occurring that are outside the control of the Group. Risk Management Framework Business Strategy Risk Governance Risk Categories Key Risk Policies Risk Management Lifecycle and Tools Enterprise Risk Management (ERM) System Risk Breach of laws and licences, and compliance and conduct risks Description and potential consequences The Group’s businesses are regulated by laws, licences, permits and other approvals. Any material breach of the relevant obligations or failure to meet compliance and conduct requirements may have an adverse impact on the financial performance and position of the Group. Any such adverse impact may arise as a result of the suspension or loss of applicable gambling licences, renewal of licences on less favourable terms, increased supervision and oversight by regulators and other stakeholders, civil or criminal penalties, brand or reputational damage, and the inability to obtain future licences or business opportunities. Mitigations employed • The Group has risk management, compliance and accountability frameworks, considered risk appetite positions on material matters, and supporting policies, procedures, tools, training and other controls. • Employees and managers are provided with training and support to enable them to effectively manage their risk and compliance obligations in accordance with the Group’s frameworks. • Internal Audit periodically reviews the effectiveness of, and provides independent and objective assurance regarding the adequacy of, controls and processes for managing risk and compliance obligations. Licences and other approvals The loss of or failure to renew any licence, permit, authorisation or other approval (or renewal on less favourable terms) may have an adverse impact on the financial performance and position of the Group. • The Group 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. Changes in laws and the regulatory environment The Group’s businesses operate in a highly regulated environment and are significantly affected by government policy and the manner in which governments and regulators exercise their powers. Changes in legislation, regulation, taxation or government policy (and related judicial decisions and enforcement policy), including as a result of changes in societal attitudes towards gambling products, may have an adverse impact to varying degrees on the Group’s operational and financial performance as a result of significant changes in the nature of operations, increased compliance or other costs, resourcing demands, and potential changes in the level of competition. • The Group maintains long term gambling licences and, where the terms are appropriate, seeks new licences and to extend existing licences where possible. • The Group proactively engages with regulators and governments, and from time to time makes submissions relating to proposed changes in laws, and regulatory and licensing environments, which may impact the Group. • 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. • The Group proactively engages with industry bodies to align the Group’s business strategies with potential industry changes and ensure the sustainability of the Group’s businesses and those industries more broadly. • The Group continues to invest in and embed responsible gambling practices. 36 Tabcorp Annual Report 2019Risk Consumer discretionary spending Description and potential consequences Gambling activities compete with other consumer products for consumers’ discretionary spending and in particular with other forms of leisure and entertainment. If the Group does not adequately respond to competition for consumers’ discretionary expenditure, there may be an adverse effect on the operational and financial performance of the Group. Consumer discretionary spending may also be affected by adverse changes to general economic or industry conditions which may in turn adversely affect the financial performance of the Group. Competition and disruption The Group’s businesses are affected to varying degrees by competing suppliers of gambling products and services, based both in Australia and overseas. New competitors and disruptors may also enter the Group’s traditional markets. As a result, there are risks that the Group may not be able to compete on the same terms as other operators, or may face increased levels of competition from suppliers of gambling products and services, which could adversely affect the operational and financial performance of the Group. Mitigations employed • As noted above, 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. • The Group adopts a range of strategies to further mitigate this risk, including using 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. • The Group’s strategic marketing and consumer insights teams support the businesses to understand and respond to changing consumer trends. • As noted above, 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/or customer category. • The Group strives for continual improvement in its product and service offering to attract and retain customers, including enhancing its customer service and relationship management, introducing new products, and driving digital innovation and excellence across its multi-channel network. • The Group supports an industry where all gambling operators can compete effectively and are required to adhere to, and are held to, the same laws, regulations, industry codes and standards. Financial risks The Group is exposed to risks relating to the cost and availability of funds to support its operations, including changes in interest rates and foreign currency exchange rates, counterparty credit and liquidity risks which could impact its financing activities. • The Group’s Treasury department is responsible for managing the Group’s finance facilities and interest rate, credit, liquidity and currency risks in line with policies approved by the Board. Technology, cybersecurity and privacy risks The Group’s businesses rely on the successful operation of technology infrastructure, which could be adversely affected by various factors including obsolescence of equipment, complexity of core environments, ability to recover from a significant hardware or datacentre failure, and managing risks associated with outsourcing key processes and activities to third-parties. The Group’s business also relies on technology infrastructure to support ongoing business growth. Where such infrastructure cannot efficiently support the changing needs of the business, this may potentially adversely impact the reputation, operations or financial performance of the Group. 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. • Detailed disclosures are contained in the Financial Report in section B titled “Capital and risk management” on pages 85 to 95. • The Group’s Technology team dedicates resources, systems and expertise to the identification, analysis, and mitigation of technology risks, and leverages the expertise from key technology partners. • This team designs new generation information technology platforms and evolves existing core platforms to take advantage of advances in technologies and practices to provide leading security technologies to support the Group’s growth strategies. • A dedicated information and cyber-security team within the Technology function is tasked with protecting key information assets, detecting any attempted attacks, and responding appropriately. • The Group has a Privacy Policy, Privacy Officer, and a number of internal working groups, and adopts practices, procedures and systems to provide oversight and support the appropriate management of data and its privacy. • The Group has disaster recovery plans and business continuity plans in place to manage major technology failures, cyber-security attacks and privacy breaches should they occur. 37 DIRECTORS’ REPORTTabcorp Annual Report 2019DIRECTORS’ REPORT Risk Reliance on infrastructure and third party commercial arrangements Description and potential consequences The Group is reliant on key infrastructure and third party commercial arrangements for the operation of its businesses. A significant malfunction or interruption to key infrastructure, or a failure of, significant interruption to, or reduction in the quality of third party products and services that the Group relies upon for a sustained period of time, may have an adverse impact on the operating and/or financial performance of the Group. Combination with Tatts Group There are risks associated with the ongoing 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 is in the process of integrating the Tatts Anti-Money Laundering/Counter- Terrorism Financing (AML/CTF) program into a single combined Tabcorp Group AML/CTF program and there is a risk that integration may take longer than expected. Racing and sports products The Group’s Wagering and Media business is 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 events that comprise this program (such as adverse weather conditions, an outbreak of equine influence 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. Changes in race field and sports product fees and taxes Each state and territory of Australia has implemented race fields arrangements, under which wagering operators pay product fees for use of that industry’s race fields information. Similar arrangements exist in relation to sports. There is the potential that fees will increase, new fees will be introduced, or the method for determining fees will change, and such changes may have an adverse effect on the operational and financial performance of the Group. In addition, 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. There is also a risk that racing, sport or industry bodies may disagree with the Group regarding the application of certain aspects of the race fields regimes, contracts that govern product fees, or the manner in which taxes, levies and fees are determined. Such disagreements may lead to litigation or other dispute resolution processes, including negotiated settlement. 38 Mitigations employed • The Group has in place business continuity and disaster recovery plans. • The Group’s procurement function seeks commercial relationships across a diverse supplier base with clear terms of engagement, agreed service levels, regular reporting and monitoring, and where necessary risk mitigation and remediation action plans. • The Group maintains an insurance program which includes limited recourse in the event of major failures of infrastructure or third party supply arrangements. • The Group continues to mitigate these risks through careful planning and execution, the involvement of internal staff and external experts and consultants, as required, and regular reporting to and monitoring by the Executive Leadership Team and Board. • The Tabcorp-Tatts integration program is well advanced, and is on track to be completed by the end of FY20. • The Group is implementing a detailed AML/CTF integration plan and expects to have a single combined Tabcorp Group AML/CTF program by the end of 2020. • The Group 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. • The Group has in place business continuity plans to help manage and respond to significant events which may impact upon the supply of racing product. • The Group also maintains an insurance program which provides limited cover for major disruptions. • The Group currently has contracts in place that the Group considers will allow it to offset or share some of the race field fees or offer additional protections under the respective arrangements. • The Group maintains strong relationships with industry controlling bodies, other industry partners and governments and engages with them in respect of proposed changes to industry funding arrangements, fees and other taxes and levies. • The Group seeks to enter into contracts with racing and sports controlling bodies that provide long term certainty of commercial arrangements. Tabcorp Annual Report 20198. DIRECTORS The names and details of the Company’s Directors in office during the financial year and up to the date of this report (unless otherwise stated) are set out on pages 28 and 29 and below. Elmer Funke Kupper retired as a Non Executive Director of the Company at the conclusion of the Company’s Annual General Meeting on 17 October 2018. He served as a Director of the Company from June 2012, when he re-joined the Company as a Non Executive Director following the demerger. Prior to this, Mr 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. 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. 9. 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. 10. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The Directors and Officers of the Group are indemnified against liabilities pursuant to agreements with the Group. Members of the Group have 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. 11. COMPANY SECRETARIES Chris Murphy commenced as Acting Company Secretary on 23 March 2018 and was formally appointed as Company Secretary on 6 February 2019 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 Tabcorp 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. 39 DIRECTORS’ REPORTTabcorp Annual Report 2019  DIRECTORS’ REPORT 12. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group’s environmental obligations are regulated under both state and federal laws. The Group complies with, or in many cases exceeds, its environmental performance obligations. During the financial year ended 30 June 2019, no environmental breaches have been notified to the Group by any government agency. 13. 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. On 28 June 2019, Racing Queensland (RQ) commenced legal proceedings against the Company and UBET Qld Limited (UBET). RQ is seeking damages and other relief. The proceedings are in relation to two disputes relating to the calculation of fees following the introduction of point of consumption tax in Queensland on 1 October 2018. The Company and UBET currently consider, on the balance of probability, that no provision for liability is required. In the event the Company and UBET are ultimately unsuccessful in the proceedings the estimated financial impact for the year ended 30 June 2019 is an expense of up to $20m post tax. 14. 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. 15. 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. 16. NON-AUDIT 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 2019. 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. 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 $830,000 in relation to the provision of non-statutory audit services to the Company. These services relate to regulatory audit and other assurance services in relation to the Group. Amounts paid or payable by the Company for audit and non-statutory audit services are disclosed in note E6 to the Financial Report. 40 Tabcorp Annual Report 2019  17. 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 2019. This auditor’s independence declaration forms part of this Directors’ Report. 18. REMUNERATION REPORT The Remuneration Report for the financial year ended 30 June 2019 forms part of this Directors’ Report, and can be found on pages 42 to 72. This Directors’ Report has been signed in accordance with a resolution of Directors. Paula J Dwyer Chairman Melbourne 14 August 2019 41 DIRECTORS’ REPORTTabcorp Annual Report 2019 REMUNERATION REPORT (AUDITED) Contents Letter from the People and Remuneration Committee Chairman 1. Purpose 2. Key Management Personnel 3. Summary of key messages 4. Remuneration governance 5. Tabcorp’s first strike on the 2018 Remuneration Report 6. Five year business performance and remuneration outcomes 7. Summary of remuneration outcomes 8. Non Executive Director fees (a) Strategy and framework (b) FY19 Non Executive Director fee structure (c) Non Executive Director Shareholding Policy 9. Executive KMP remuneration strategy and structure (a) Remuneration strategy (b) Remuneration structure 10. Summary of executive KMP remuneration outcomes (a) FY19 STI outcomes (b) LTI awards tested in FY19 (c) Historical variable reward outcomes 11. Executive KMP remuneration arrangements for FY20 12. Executive KMP remuneration in detail (a) Fixed remuneration (b) Short term incentive (STI) structure (c) STI performance measures and outcomes for FY19 (d) Long term incentive (LTI) (e) Tabcorp’s accountability framework (f) Merger Completion Awards modification (g) Policy prohibiting hedging (h) Executives’ Shareholdings Policy 13. Actual remuneration received by executive KMP 14. Executive KMP employment contracts 15. Statutory remuneration disclosures (a) KMP statutory remuneration tables (b) Transactions and loans with KMP 42 Tabcorp Annual Report 2019 43 45 45 46 47 48 49 51 52 52 52 52 53 53 54 55 55 56 56 56 57 57 57 60 63 67 67 68 68 69 69 70 70 72 Letter from the People and Remuneration Committee Chairman Dear Shareholder, On behalf of the Tabcorp Board of Directors, we are pleased to present the 2019 Remuneration Report for which we will seek your approval at the Annual General Meeting (AGM) to be held on 24 October 2019. This year we have made some significant enhancements to Tabcorp’s remuneration framework and retained (or in some instances made the decision to reset) remuneration levels. Our approach has been shaped by several factors including shareholder feedback following the 2018 AGM where Tabcorp received a ‘first strike’ against our 2018 Remuneration Report, the current market capitalisation of the Group, strategic financial and non-financial targets being pursued by the Group and the importance of fostering executive collaboration to deliver strong Group performance and the successful integration of the Tabcorp and Tatts businesses. We have also considered the recommendations made in the final report to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and in recent APRA reviews, specifically in relation to the importance of non-financial measures such as ‘Do the Right Thing’, regulatory compliance, culture, customer centricity and accountability. Accordingly, in FY19, Group performance carried a 60% weighting and individual financial and non-financial performance carried a 40% weighting for the purpose of determining STI outcomes. An individual’s performance across the balanced scorecard of categories (i.e. strategic (including integration), operational excellence (including risk and compliance), customer and people and culture) is monitored throughout the year and an Individual Performance Multiplier is determined at year end which then becomes a key input into the final STI outcome. As noted above, Tabcorp’s FY18 Remuneration Report received a ‘first strike’ with more than 25% votes being cast against the adoption of the report at the 2018 AGM. The Board noted shareholder concerns around the report and has since engaged with shareholders, institutional investors and proxy firms, and made several enhancements to Tabcorp’s FY19 remuneration framework and made decisions regarding remuneration levels, which are detailed in the following pages. Most particularly: • Having regard to Tabcorp’s current market capitalisation, the remuneration benchmark peer group was reset to be the ASX 25 to 75 group of companies (previously the ASX 50). • Board Chairman and base Board member fees were reset against this new peer group, resulting in a reduction of approximately 10% in fees (to take effect from 1 September 2019). In addition, annual fee adjustments have been frozen effective from January 2018 until the end of FY21, when integration synergies should be substantially delivered. • The MD & CEO’s maximum STI opportunity was lowered (effective 1 July 2019), and potential total maximum compensation reduced accordingly (by 9.4%). • Executive KMP remuneration remained unchanged in FY19 and has not been adjusted since December 2017. • As announced at the 2018 AGM, already issued Restricted Shares under the Merger Completion Awards are now restricted for three-and-a-half years (previously two years) and are subject to the achievement of Combination Synergy targets in FY21. Our objective, as always, has been to balance strong and sustainable financial performance with non-financial measures. These comprise strategic outcomes (including successfully delivering the integration), operational excellence (including maintaining a market leading risk and compliance framework and processes), customer centricity, maintaining a talented and highly engaged workforce and fostering a performance culture underpinned by behaviours in line with Tabcorp’s values (including ‘Do the Right Thing’). This year, the benefits of our diversified portfolio of businesses were clear, and enabled the delivery of above target Group revenues, profits and cash flows. Specifically, our Lotteries and Keno business performed very strongly driven by the introduction of new lottery products, investment in digital channels and a run of favourable jackpots. The Lotteries and Keno business unit result more than offset a weaker performance by our Wagering and Media business, which is in year one of a three year integration and transformation program and managing vigorous competition. 43 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 Importantly, the continuing strength of the balance sheet has enabled the payment of a final dividend of 11.0 cents per share fully franked, bringing total dividends for the year to 22.0 cents per share fully franked. Tabcorp’s dividend payout ratio for FY19 was 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting. We believe shareholders value the high payout ratio as well as the consistency of our dividends and appreciate that franking credits are passed on to them expeditiously. The Board considered that strong progress was made during the year on the integration of Tabcorp and Tatts, especially on the realisation of cost savings. In the past financial year, $64m of revenue and cost synergies were delivered (against a target of $55m) and we are well on track to deliver our target of between $130m and $145m in EBITDA synergies and business improvements by FY21. Most importantly, the integration process has concentrated on building a values-driven, motivated and capable workforce supported by upgraded, resilient systems and contemporary processes. In determining variable remuneration outcomes for FY19, the Board considered the excellent progress in integrating the Tabcorp and Tatts businesses, strong Group financial performance and the varied financial and non-financial performances across our operating business units. Under the STI plan, given the above target Group financial results, a higher Group Funding Multiplier would have applied to STI awards. However, the People and Remuneration Committee exercised discretion to reduce this STI multiplier to 1.00, to reflect a balanced assessment of Group and operating business unit financial and non-financial performance outcomes. All executive KMP received 60% of their target STI award (the Group component) in recognition of strong progress on Group integration activity and the delivery of related benefits as well as above target Group financial and at-target non-financial performance in FY19. This reflects an on-target Group component of the STI award calculated using a 1.00 Group Funding Multiplier. When evaluating individual performance based on a balanced assessment of financial and non-financial performance outcomes, the Board determined to award the MD & CEO 85% of his target STI opportunity or 43% of his maximum opportunity. This was determined based on a balanced assessment of strong strategic, operational and customer performance across the Group, balanced with strong Lotteries and Keno financial performance and below target Wagering and Media and Gaming Services financial performance. For the remainder of the executive KMP, the average STI award was 89% of the target opportunity or 44% of the maximum opportunity. This comprised lower individual components of the STI awards made to the Managing Director Wagering and Media, the Managing Director Gaming Services and the Chief Financial Officer balanced with a higher individual component awarded to the Managing Director Lotteries and Keno. None of the LTI awards granted to executive KMP in 2015 vested. The Board continues to remain confident that we are building a world-class gambling entertainment company which should provide superior returns in the years ahead. Steven Gregg People and Remuneration Committee Chairman (current) Zygmunt E Switkowski People and Remuneration Committee Chairman (during FY19) 44 Tabcorp Annual Report 20191. PURPOSE This Remuneration Report details the remuneration policies and arrangements for the Key Management Personnel (KMP) of the Group, comprising Tabcorp and its subsidiaries, for the financial year ended 30 June 2019 (FY19). 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. This 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 Mr Elmer Funke Kupper retired from the Group at the 2018 Annual General Meeting. There were no other changes to the Group’s KMP in FY19. Table 1: List of KMP for FY19 Name Current Non Executive Directors Paula Dwyer Bruce Akhurst Harry Boon Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Non Executive Director Elmer Funke Kupper Executive Director David Attenborough Current executive KMP Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Position held Period in position if less than the full financial 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) Until 17 October 2018 Managing Director and Chief Executive Officer (MD & CEO) Chief Financial Officer Managing Director Gaming Services Managing Director Wagering and Media Managing Director Lotteries and Keno Effective 1 July 2019, Mr Gregg replaced Dr Switkowski as Chairman of the People and Remuneration Committee. Dr Switkowski continues to be a member of this Committee. Mr Johnston (Chief Financial Officer) will cease employment in FY20. As disclosed on 28 June 2019, Mr Adam Newman has been appointed as the Group’s Chief Financial Officer, replacing Mr Johnston. He will commence employment in early October 2019. Details of the qualifications, experience and other responsibilities of KMP are set out on pages 28 to 29, 32 to 33 and 39. Any references made to “executive KMP” in this Remuneration Report includes the MD & CEO unless otherwise stated. 45 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 3. SUMMARY OF KEY MESSAGES In further enhancing Tabcorp’s remuneration framework in FY19, the People and Remuneration Committee considered a number of factors, including: Shareholder feedback Royal Commission Report Market capitalisation Group targets Including specific concerns which resulted in a “first strike” at the 2018 AGM (e.g. Merger Completion Awards without further performance conditions). The recommendations included in the final report to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The current market capitalisation of the Group and any changes during the year. The strategic, financial and non-financial targets currently in place and being pursued by the Group. Integration and executive collaboration The importance of fostering collaboration amongst executives to deliver strong Group performance and the successful integration of the Tabcorp and Tatts businesses. Key changes made to Tabcorp’s remuneration arrangements in FY19 are summarised below. Benchmarking reset Non Executive Director fees reset and frozen The Board Chairman and Non Executive Director fees will reduce by approximately 10%, effective 1 September 2019, and all Board fees will be frozen until FY21, at which point the integration of the Tabcorp and Tatts businesses should be substantially completed. Board fees were last set on Combination. Tabcorp’s remuneration benchmarking peer group was reset to be the ASX 25 to 75 group of companies (from the ASX 50). Non Executive Director fees and executive KMP remuneration are benchmarked against this peer group and its applicability will continue to be assessed annually. Executive KMP remuneration not increased Considering the new remuneration benchmarking peer group, the Board determined not to increase executive KMP remuneration levels in FY19 (executive KMP remuneration was last set on Combination). MD & CEO maximum STI opportunity reduced for FY20 New STI structure Second LTI measure Considering the new remuneration benchmarking peer group, the Board determined to reduce the MD & CEO’s maximum STI opportunity to 150% of the target opportunity (from 200%), from 1 July 2019. This results in an overall reduction in the MD & CEO’s maximum remuneration package by 9.4% (from $8m to $7.25m). The STI structure was amended such that 60% of STI awards are now subject to the achievement of Group objectives and 40% to individual (business unit- specific) objectives (financial and non-financial). This adjustment was made to encourage all participants to work together collaboratively to deliver on key Group objectives including integrating the Tabcorp and Tatts businesses. Previously, the STI award was dependent on business unit and individual performance outcomes. A second LTI measure, a Combination Synergy measure, was included in the 2018 LTI grant, aligning long term reward with Tabcorp’s strategic objective of integrating the Tabcorp and Tatts businesses and generating synergies which will benefit shareholders. Amendments to the Merger Completion Awards already granted Merger Completion Awards (granted in FY18 to executive KMP) were amended such that already issued Restricted Shares are now subject to a Combination Synergy measure and the restriction period is now three and a half years (previously two years). Key remuneration outcomes in FY19: FY19 short term incentive awards FY19 long term incentive vesting outcome The Board considered FY19 Group financial and non-financial performance against targets set across a balanced scorecard of measures. Under the STI plan, a higher Group Funding Multiplier would have applied. However, the Board exercised its discretion to reduce the Group Funding Multiplier to 1.00 for FY19. As a result, the MD & CEO received an STI award of 85% of his target opportunity (43% of his maximum opportunity) paid as Restricted Shares (50% and restricted for two years) and cash (50%). The remainder of the executive KMP received STI awards, on average, to the value of 89% of their target opportunities (44% of their maximum opportunities) paid as a combination of Restricted Shares (25% and restricted for two years) and cash (75%). More details of these awards can be found in section 12(b). The 2015 LTI grant was tested on 22 September 2018. The relative TSR result at the test date for this grant placed Tabcorp at the 46th percentile of the peer group and no Performance Rights vested for this grant. Executive KMP derived no value from this grant. 46 Tabcorp Annual Report 20194. REMUNERATION GOVERNANCE The People and Remuneration Committee comprises four independent Non Executive Directors and assists the Board in fulfilling its responsibilities with respect to people-related and remuneration matters as outlined below: Establishing and maintaining strategically aligned, competitive, reasonable and equitable people and remuneration policies and processes. Policies and processes Ensuring the people and remuneration frameworks and processes are competitive, equitable, free from bias and promote integrity (mitigating financial and non-financial risk). Governance Remuneration framework Non Executive Director Fees People strategies and processes Establishing and maintaining a remuneration framework that aligns to and rewards the achievement of the Group’s strategic objectives and shareholder value creation in a sustainable manner. Setting and adjusting Non Executive Director fee arrangements and levels. Overseeing people strategies and processes that ensure a culture of “Do the Right Thing”, a healthy and safe environment and optimal employee experience. MD & CEO remuneration Executive remuneration Organisation remuneration Setting and adjusting remuneration arrangements and levels and determining appropriate variable remuneration outcomes. Setting and adjusting remuneration arrangements and levels and determining appropriate variable remuneration outcomes. Overseeing broad based remuneration and variable reward programs to ensure they continue to align to the Group’s strategic objectives and mitigate against risks. The People and Remuneration Committee regularly reviews Non Executive Director and executive KMP remuneration arrangements to ensure they continue to be fair, competitive, encourage strong business performance and shareholder value creation, and align with the Group’s Values and approach to risk management and compliance. To inform its decisions, the People and Remuneration Committee sources a range of data and may receive independent advice, as appropriate. No such advice was provided during FY19 and to the date of this report 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. 47 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 5. TABCORP’S FIRST STRIKE ON THE 2018 REMUNERATION REPORT At the 2018 AGM, Tabcorp recorded a “first strike” because more than 25% of votes cast were against the resolution to adopt the Remuneration Report. Tabcorp values shareholder feedback and the following table summarises how Tabcorp has actively addressed the key concerns expressed by shareholders in 2018. Table 2: Key shareholder concerns in relation to the 2018 Remuneration Report and Tabcorp’s responses Topic Merger Completion Award Description • One-off awards made to executive KMP, recognising the completion of the Combination. Non Executive Director fees • Provided partly in Restricted Shares (restricted for 2 years with no further performance conditions). • Following the Combination new fees were set considering the size and complexity of the combined Group. Key concerns raised by shareholders • Awards not linked to integration related Actions taken by Tabcorp to address shareholder concerns • Combination Synergy measure to apply to already issued measures. Restricted Shares. • Restriction period extended to three and a half years. • Testing date and performance criteria detailed under section 12(f). • No additional payments or Restricted Share allocations made. • The level of NED fees set post-Combination. • Tabcorp’s remuneration benchmarking peer group was reset to be the ASX 25 to 75 group of companies (from the ASX 50). In this context, the Board determined: – to reduce the Board Chairman and Non Executive Director fees by approximately 10% from 1 September 2019; and – to freeze fees until FY21, at which point the integration of the Tabcorp and Tatts businesses should be substantially complete. • Fees were last set in January 2018 on Combination. • FY18 executive KMP STI awards equated to 33% of the target STI opportunities (17% of the maximum opportunities). This was deemed appropriate given the balanced assessment of Group and individual financial and non-financial performance in FY18. • The same balanced assessment has been applied for FY19 STI awards. Pay for performance • FY18 STI awards were paid considering a balanced view of Group and individual financial and non-financial performance. • STI awards were provided despite below expectations Sun Bets performance. MD & CEO remuneration • On Combination new remuneration arrangements were set considering the size of the combined Group, market peers and role responsibilities. STI scorecard weightings • Tabcorp uses a balanced scorecard of measures covering financial, strategic (including integration), operational excellence (including risk and compliance), customer and people and culture categories. 48 • The level of remuneration set post- • Tabcorp’s remuneration benchmarking peer group was reset to be the Combination. • The STI scorecard not being weighted by category. ASX 25 to 75 group of companies (from the ASX 50). In this context, the Board determined: – not to adjust remuneration levels in FY19 (they have not been adjusted since December 2017 on Combination); – not to adjust remuneration levels in FY20; and – to reduce the maximum STI opportunity to 150% of the target opportunity (from 200%) effective 1 July 2019. • In FY19, the STI structure was amended such that 60% of STI awards are subject to Group performance and 40% to individual (business unit-specific) performance across the same balanced scorecard of measures. Previously 100% of the STI award was dependent on business unit and individual performance outcomes. Tabcorp Annual Report 20196. FIVE YEAR BUSINESS PERFORMANCE AND REMUNERATION OUTCOMES Table 3: Five year Group financial performance and remuneration outcomes Net profit after tax (NPAT) – $m Basic earnings per share (EPS) – c Closing share price(ii) – $ Dividends(iii) – CPS Overall Group STI pool (percentage of the target pool) MD & CEO STI awards % of target opportunity % of maximum opportunity Average executive KMP (excluding the MD & CEO) STI awards % of target opportunity % of maximum opportunity LTI vesting (all executive KMP) % of maximum opportunity FY15 334.5(i) 42.4(i) 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 (20.8) (2.5) 4.37 25.0 30% 0% 0% 17% 8% 100% 100% FY18 28.7 1.9 4.46 21.0 33% 33% 17% 33% 17% 80% FY19 362.5 18.0 4.45 22.0 100% 85% 43% 89% 44% 0%(iv) (i) 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 the calculation of STI awards in the relevant year. (ii) Closing share price is as at 30 June of the respective financial year. Opening share price as at 1 July 2014 was $3.36. (iii) 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. (iv) The 2015 LTI grant of Performance Rights was tested on 22 September 2018 and the entire grant lapsed for all participants (including the executive KMP). No participant benefited from the 2015 LTI grant. As detailed in Table 3, both the overall Group STI pool and executive KMP incentive outcomes (long and short term) have varied over the preceding five years in line with business results (financial and non-financial), demonstrating a strong link between variable pay and Group performance. Diagram 1 on the following page continues to demonstrate the close alignment between financial and non-financial performance, Tabcorp’s STI pools and executive KMP STI outcomes over the preceding five financial years. 49 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 Diagram 1: The relationship between financial and non-financial performance and executive KMP STI awards Above target At target Below target Above target At target Below target Maximum At target Minimum 200% 100% 0% 200% 100% 0% NPAT performance Non financial performance Short term incentive pools MD & CEO STI awards Average executive KMP STI awards 50 FY15 FY16 FY17 FY18 FY19 Key NPAT target NPAT performance (statutory) NPAT performance from continuing operations before significant items (used as a basis for STI awards) Key Non financial performance target Actual non financial performance (average across all categories of the balanced scorecard) Key Target STI pool Actual STI pool Maximum possible pool Note: Given above-target Group financial results, a higher pool for FY19 would have applied. The Board exercised its discretion to reduce the pool considering a balanced view of performance across the operating business units. Key MD & CEO target STI opportunity MD & CEO maximum STI opportunity MD & CEO actual STI awards as a percentage of target opportunity Key Executive KMP target STI opportunities Executive KMP maximum STI opportunities Average executive KMP actual STI awards as a percentage of target opportunities Tabcorp Annual Report 2019 7. SUMMARY OF REMUNERATION OUTCOMES Table 4: Summary of executive KMP remuneration outcomes in FY19 and changes from 1 July 2019 FY19 FY20 Executive KMP (excl. MD & CEO) $800,000 (average) 0% 50% Executive KMP (excl. MD & CEO) $829,500 (average) 3.7%(i)(ii) 50% MD & CEO $2,000,000 0% 75% Summary Annual fixed remuneration (refer section 12(a)) No adjustments in FY19 (previous adjustments were applied in December 2017 on Combination). No adjustment for the MD & CEO in FY20. MD & CEO Actual: $2,000,000 Increase: 0% Opportunity No adjustments in FY19. Reduction of the MD & CEO’s maximum STI opportunity for FY20. Target (% of fixed remuneration): Maximum (% of fixed remuneration): 75% 150% 100% 112.5% 100% STI (refer section 12(b)) Awards A new STI plan was implemented in FY19. The People and Remuneration Committee determined, based on a balanced assessment of financial and non-financial performance outcomes, that a Group Funding Multiplier of 1.00 should apply (under the STI plan, a higher Group Funding Multiplier would have applied given NPAT performance). As such executive KMP received 60% of their target opportunities in recognition of Group performance with the remainder of the STI awards reflecting business unit and individual performance. Award ($): $1,275,000 Award (% of target): 85% Award (% of maximum): 43% $351,875 (average) 89% (average) 44% (average) N/A N/A N/A N/A N/A N/A Opportunity No adjustments in FY19 and for FY20. LTI (refer section 12(d)) Vesting Performance Rights granted in 2015 did not vest due to below threshold performance. Allocations Performance Rights were granted during FY19, based on a face value allocation methodology. Vesting of this grant is subject to two performance conditions. Executives’ Shareholdings Policy Minimum requirement Under this Policy, the MD & CEO and executive KMP are required to hold a minimum value of Tabcorp shares. The minimum shareholding must be met within five years from the date of the Combination. Target (% of fixed remuneration): Outperformance (% of fixed remuneration): % of Performance Rights that vested under the 2015 LTI grant: Value of Performance Rights that vested under the 2015 LTI grant: Maximum number of Performance Rights granted: Minimum requirement: (% of fixed remuneration) 75% 50% 75% 50% 150% 100% 150% 100% 0% 0% N/A N/A $0 $0 N/A N/A 646,551 689,654 (total) To be confirmed in FY20 To be confirmed in FY20 200% 100% 200% 100% Meet policy requirements: Yes Yes N/A N/A (i) Effective 1 September 2019, Mr Rytenskild’s fixed remuneration will increase by 2%, and Mr Johnston’s and Mr Makryllos’ remuneration will remain unchanged. (ii) In recognition of Ms van der Merwe’s below market fixed remuneration level (considering the size of the business she manages) and her proven performance since the Combination, her fixed remuneration will increase, effective 1 September 2019, to $800,000 per annum. 51 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 8. NON EXECUTIVE DIRECTOR FEES (a) Strategy and framework Board and Board Committee fees are set considering the Non Executive Directors’ skills, qualifications and experience, the responsibilities and workload imposed upon them and market benchmarks. Board fees are not paid to the MD & CEO or to executives for directorships of any subsidiaries. In order to maintain independence and impartiality, Non Executive Directors do not receive any performance or incentive-related payments. In FY19, Tabcorp’s remuneration benchmarking peer group was reset to be the ASX 25 to 75 group of companies (from the ASX 50). Considering this and the set timeframe to integrate the Tabcorp and Tatts Group businesses, the Board determined to reduce the Board Chairman and Non Executive Director fees by approximately 10% from 1 September 2019 and to freeze fees until FY21, at which point the integration of the Tabcorp and Tatts businesses should be substantially completed. Fees were last set in January 2018, on Combination. (b) FY19 Non Executive Director fee structure Non Executive Directors receive a base Board fee and a fee for each Board Committee that they chair or are a member of (with the exception of the Nomination Committee, where no additional fees are paid). The Board Chairman receives a single fixed fee which is inclusive of services on all standing Board Committees. Superannuation contributions are paid in addition to all fees and Non Executive Directors are not eligible to receive any other retirement benefits. Table 5: FY19 Non Executive Director fees Board Audit Committee Risk and Compliance Committee People and Remuneration Committee Non Executive Director fees ($ per annum, excluding superannuation) Chairman(i) Member (ii) Chairman Member Chairman Member Chairman Member At 30 June 2018 590,000 190,000 50,000 22,000 45,000 20,000 45,000 20,000 at 30 June 2019 590,000 190,000 50,000 22,000 45,000 20,000 45,000 20,000 Change 0% 0% 0% 0% 0% 0% 0% 0% at 1 September 2019 530,000 170,000 50,000 22,000 45,000 20,000 45,000 20,000 Change -10.2% -10.5% 0% 0% 0% 0% 0% 0% (i) The fee paid to the Board Chairman is inclusive of services on all standing Board Committees. (ii) The fee paid to Board Members is inclusive of services on the Nomination Committee. Non Executive Director fees ($ per annum, including superannuation) at 1 September 2019 580,350 186,150 54,750 24,090 49,275 21,900 49,275 21,900 Certain Non Executive Directors received additional fees for membership of other Board Sub-Committees. During FY19, a Sub-Committee of the Board was in operation with responsibility for overseeing and managing special business and legal matters. Table 16 details all fees paid to Non Executive Directors including additional fees paid to members of these Sub-Committees. 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. 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 $3.0 million, as approved by shareholders at the Annual General Meeting held on 17 October 2018. No adjustment to this limit is proposed for 2019. The total actual fees paid to Non Executive Directors in FY19 was $2,267,745. (c) Non Executive Director Shareholding Policy This policy requires Non Executive Directors to hold a minimum shareholding in Tabcorp equivalent to the annual Board Member base fee (currently $190,000), and the Board Chairman to hold a minimum shareholding equivalent to double the annual Board Member base fee. At the date of this report, all Non Executive Directors (including the Board Chairman) complied with this policy, noting that Non Executive Directors are required to reach the applicable threshold within three years of appointment, or by 14 December 2020, whichever is the later. A copy of this policy is available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 52 Tabcorp Annual Report 2019  9. EXECUTIVE KMP REMUNERATION STRATEGY AND STRUCTURE (a) Remuneration strategy Tabcorp’s remuneration strategy aims to reward its employees competitively and appropriately for strong Group performance (financial and non-financial), for creating long term shareholder value and to align shareholder and management interests through equity. Tabcorp’s performance and remuneration frameworks also align performance and reward with the Group’s Values and approach to risk management and compliance, ensuring employees are recognised and rewarded for results that are achieved in a sustainable and ethical manner. Diagram 2: Tabcorp’s 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 Create long term shareholder value Drive Group and individual performance Ensure market competitiveness Reward for the creation of sustained shareholder value. Appropriately recognise and reward superior performance. Ensure remuneration structures and levels are market competitive. Reward behaviours in line with the Group’s Values Ensure both the “what” and the “how” are equally recognised and rewarded. Executive KMP remuneration framework Fixed remuneration Short Term Incentive (STI) Long Term Incentive (LTI) Set considering the responsibilities of the role and the incumbent’s experience and qualifications. It is benchmarked to the median of the ASX 25 to 75 group but may include additional organisations where talent from specific industries is being sourced. + 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 Individual Cash and Restricted Shares Performance Rights Group and individual Group Performance requirements Adjustments annually consider market movements, economic data and individual performance levels. Dependent on the achievement of financial, strategic, customer, operational and people targets, aligned to the Corporate Plan. Directly linked to Group measures which create shareholder value. Timeframe 1 year 3 years – 1 year performance period with a further 2 year deferral period 3 years 53 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 (b) Remuneration structure Executive KMP remuneration packages are set in line with their responsibilities in a complex and highly regulated business and are reviewed annually against market benchmarks to ensure they remain competitive and that their skills and experiences are retained. Table 6: Executive KMP FY19 remuneration template (at target) Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Fixed remuneration $ (% of remuneration package) STI (cash) $ (% of remuneration package) STI (Restricted Shares) $ (% of remuneration package) LTI (Performance Rights) $ (% of remuneration package) 2,000,000 (40%) 900,000 (50%) 700,000 (50%) 900,000 (50%) 700,000 (50%) 750,000 (15%) 337,500 (18.8%) 262,500 (18.8%) 337,500 (18.8%) 262,500 (18.8%) 750,000 (15%) 112,500 (6.3%) 87,500 (6.3%) 112,500 (6.3%) 87,500 (6.3%) 1,500,000 (30%) 450,000 (25%) 350,000 (25%) 450,000 (25%) 350,000 (25%) At risk and subject to performance conditions Equity-based Total $ 5,000,000 1,800,000 1,400,000 1,800,000 1,400,000 No adjustments were made to executive KMP remuneration packages in FY19 (the last adjustments were made in December 2017). 54 Tabcorp Annual Report 201910. SUMMARY OF EXECUTIVE KMP REMUNERATION OUTCOMES (a) FY19 STI outcomes STI structure In FY19, a new STI plan was implemented with 60% of participants’ target STI opportunities dependent on Group performance (Group component) and 40% on individual (financial and non-financial) performance (individual component). Section 12(b) details the operation of the FY19 STI plan. Group component (60% of target STI opportunity) All executive KMP received the full at-target Group component (i.e. 60%) of their STI opportunity in recognition of strong progress on integration activity and the delivery of related benefits as well as above-target Group financial results and on-target non-financial performance outcomes. Individual component (40% of target STI opportunity) In determining the individual component of each executive KMP’s STI award, the People and Remuneration Committee considered each operating business unit’s financial and non-financial performance outcomes over the year. STI awards All STI awards (with the exception of Mr Johnston) will be paid as Restricted Shares (50% for the MD & CEO and 25% for other executive KMP) and cash (50% for the MD & CEO and 75% for other executive KMP). Restricted Shares are restricted for two years and are subject to forfeiture, malus and claw back provisions. As Mr Johnston will be ceasing employment in FY20, his STI award will be paid fully in cash (as agreed by the Board). Table 7: Executive KMP FY19 STI awards Group component (60% of the STI opportunity) Awarded $ 900,000 (100%) Target $ 900,000 270,000 210,000 270,000 270,000 (100%) 210,000 (100%) 270,000 (100%) Target $ 600,000 180,000 140,000 180,000 Awarded $ 375,000 (62.5%) 112,500 (62.5%) 35,000 (25%) 90,000 (50%) 210,000 210,000 (100%) 140,000 210,000 (150%) David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Individual component (40% of the STI opportunity) Assessment Based on a balanced assessment of financial and non-financial performance across the Wagering and Media, Lotteries and Keno and Gaming Services business units. Based on a balanced assessment of financial and non-financial performance across the Wagering and Media, Lotteries and Keno and Gaming Services business units. Although below target on financial performance, the Gaming Services business unit met their strategic and operational targets. Although below target on financial performance, the Wagering and Media business unit achieved strong strategic, operational and customer results amidst integration, transformation and vigorous competition. The total STI award (which was below maximum) was reflective of strong Lotteries and Keno financial, strategic, operational and customer performance outcomes over the year, balanced with (and adjusted downward for) consideration of management effort (versus favourable Lotteries jackpot outcomes) and opportunities to improve on some non-financial measures within the balanced scorecard. Total STI awarded Awarded Target $ $ 1,500,000 1,275,000 (85%) 450,000 350,000 450,000 382,500 (85%) 245,000 (70%) 360,000 (80%) 350,000 420,000 (120%) 55 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 (b) LTI awards tested in FY19 The 2015 LTI grant was tested in FY19. All Performance Rights under this grant lapsed and executive KMP derived no value from this grant. (c) Historical variable reward outcomes In the last five years, the executive KMP STI awards and LTI vesting outcomes have been closely aligned to Group performance (financial and non-financial) and have varied as depicted in Diagram 3. Diagram 3: Executive KMP actual STI awards and LTI vesting outcomes over the last five years Historical MD & CEO STI awards (% of target opportunity) Historical vesting of executive KMP LTI grants (% of maximum opportunity) e g a t n e c r e p ( d r a w a I T S ) y t i n u t r o p p o t e g r a t f o 100% 75% 50% 25% 0% e g a t n e c r e p ( d r a w a I T S ) y t i n u t r o p p o t e g r a t f o 100% 75% 50% 25% 0% (i) 113% 90% FY15 FY16 0% FY17 33% FY18 85% FY19 % of STI target opportunity awarded NPAT performance Average historical executive KMP (excl. MD & CEO) STI awards (% of target opportunity) (i) $400.0m $200.0m $0.0m $400.0m $200.0m $0.0m 91% 99% FY15 FY16 17% FY17 33% FY18 89% FY19 Average % of STI target opportunity awarded NPAT performance e c n a m r o f r e p T A P N s n o i t a r e p o g n u n i t n o c m o r f ( i e c n a m r o f r e p T A P N s n o i t a r e p o g n u n i t n o c m o r f ( i (i) The NPAT result 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 the calculation of STI awards in the relevant year. 56 ) s m e t i i t n a c fi n g s e r o f e b i ) s m e t i i t n a c fi n g s e r o f e b i g n i t s e v I T L ) m u m x a m i f o % ( 100% 75% 50% 25% 0% 88% 100% 100% 80% FY15 FY16 FY17 FY18 0% FY19 80 70 60 50 40 i g n k n a r e l i t n e c r e p R S T e v i t a e R l e t a d t s e t e h t t a Actual percentage of Performance Rights vesting (% of maximum opportunity) Maximum LTI vesting Relative TSR percentile ranking 11. EXECUTIVE KMP REMUNERATION ARRANGEMENTS FOR FY20 The MD & CEO’s remuneration levels will remain unadjusted for FY20 with the exception of his maximum STI opportunity. As mentioned previously, Tabcorp’s remuneration benchmarking peer group was reset to the ASX 25 to 75 group of companies (from the ASX 50). Considering this and shareholder feedback, effective 1 July 2019, the MD & CEO’s maximum STI opportunity was reduced from 200% to 150% of the target STI opportunity. This reduces the MD & CEO’s maximum remuneration package by 9.4% from $8,000,000 to $7,250,000. Mr Johnston’s and Mr Makryllos’ remuneration levels will remain unadjusted for FY20 whilst Mr Rytenskild’s fixed remuneration will increase by 2% (effective 1 September 2019). Ms van der Merwe’s fixed remuneration will increase to $800,000 (effective 1 September 2019) reflecting her current below market fixed remuneration level (given the size of the business she leads) and her proven performance since Combination. Tabcorp Annual Report 2019 12. EXECUTIVE KMP REMUNERATION IN DETAIL (a) Fixed remuneration What constitutes fixed remuneration? How is it set? How is it benchmarked? How often is it benchmarked? Cash salary, statutory superannuation contributions and other employee-elected salary sacrificed benefits (e.g. additional superannuation contributions). With reference to the executive’s knowledge, experience, skills, the responsibilities and complexities associated with the role, and market benchmarks. Remuneration is benchmarked to the median of the ASX 25 to 75 group of companies. Variations may occur where a rare skill set may be required or where the executive KMP has significant knowledge and/or experience that is sought by Tabcorp. Annually and upon appointment of an executive KMP. The People and Remuneration Committee approve executive KMP remuneration adjustments (the Board approves this for the MD & CEO) to ensure that remuneration continues to be well governed, fair, equitable and competitive. (b) Short term incentive (STI) structure A new Group STI plan was implemented in FY19, which was designed to better align reward and the achievement of the combined Group’s short and long term strategic priorities (including integration and synergy generation), and to reflect good incentive practices. Diagram 4: Summary of Tabcorp’s FY19 STI plan Group component of STI award (60%) Target STI opportunity X Group Funding Multiplier (GFM) STI award (cash and Restricted Shares) Individual component of STI award (40%) X Individual Performance Multiplier (IPM) Acts as a gateway. If the individual does not meet their personal objectives or behaves incongruently with the Group’s Values, the entire STI award is forfeited. 57 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 What is the “target STI opportunity”? What is the “maximum” STI opportunity? The individual’s STI award if target Group and individual performance levels are achieved and behaviours are aligned with the Group’s Values. The individual’s STI award if stretch Group and stretch individual performance levels (as determined in advance by the Board) are achieved and Tabcorp’s Values are role modelled in behaviours. What is the “Group Funding Multiplier (GFM)”? A multiplier that is principally based on the Group’s NPAT from continuing operations before significant items for the year, but also considers Group strategic, operational, customer and risk and compliance performance outcomes. This multiplier ensures all STI awards are linked to overarching Group performance. What is the “Group component”? After the target STI opportunity is multiplied by the GFM, it is split into two components – a Group component (weighted 60%) and an individual component (weighted 40%). The Group component rewards participants for contributing to the achievement of strong business results. Minimum(i) Target (i) Maximum(i) FY19 actual Minimum(i) Target(i) (target opportunity X 1.00 (GFM) X 60%) Maximum(i) (target opportunity X 1.25 (GFM) X 60%) FY19 actual Chief Financial Officer and Managing Director Wagering and Media 50% of fixed remuneration/ $450,000 100% of fixed remuneration/ $900,000 Managing Director Lotteries and Keno and Managing Director Gaming Services 50% of fixed remuneration/ $350,000 100% of fixed remuneration/ $700,000 0.00 1.00 1.25 1.00 $0 0.00 1.00 1.25 1.00 $0 MD & CEO 75% of fixed remuneration/ $1,500,000 150% of fixed remuneration/ $3,000,000 0.00 1.00 1.25 1.00 $0 $900,000 $270,000 $210,000 $1,125,000 $900,000 $337,500 $270,000 $262,500 $210,000 STI participants are assigned IPMs depending on their business units’ and individual performance outcomes. The IPM acts as a gateway. If an individual fails to meet their individual performance or behavioural targets, no STI award will be provided (including no Group component). Individual performance is assessed using a balanced scorecard of measures which include financial, strategic (including integration), operational excellence (including risk and compliance), customer and people and culture. The IPM is also based on participants’ behaviours as they relate to the Group’s Values ensuring that “what” is delivered, is as important as “how” it is delivered. The IPM is only applied to the individual component (40% of the STI award). Minimum(i) 0.00 Target(i) 1.00 Maximum(i) 2.50 FY19 actual 0.625 0.00 1.00 2.50 0.00 1.00 2.50 0.625 (Chief Financial Officer) 0.50 (Managing Director Wagering and Media) 0.25 (Managing Director Gaming Services) 1.50 (Managing Director Lotteries and Keno) What is the “Individual Performance Multiplier (IPM)”? 58 Tabcorp Annual Report 2019 What is the “individual component” of the STI award? This component (weighted 40%) rewards STI participants for strong individual performance across a range of financial and non-financial measures. How is the final STI award calculated? As the sum of the Group and individual components after the GFM and IPM have been applied. If the performance measures or behavioural expectations are not met, the minimum STI value possible is zero. Chief Financial Officer and Managing Director Wagering and Media $0 Managing Director Lotteries and Keno and Managing Director Gaming Services $0 MD & CEO $0 $600,000 $180,000 $140,000 $1,875,000 $562,500 $437,500 Minimum(i) Target(i) (target opportunity X 1.00 (GFM) X 40% X 1.00 (IPM)) Maximum(i) (target opportunity X 1.25 (GFM) X 40% X 2.50 (IPM)) $112,500 (Chief Financial Officer) $90,000 (Managing Director Wagering and Media) $0 $35,000 (Managing Director Gaming Services) $210,000 (Managing Director Lotteries and Keno) $0 FY19 actual $375,000 $0 Minimum(i) Target(i) (target Group + target individual components) Maximum(i) (maximum Group + maximum individual components) $1,500,000 $450,000 $350,000 $3,000,000 $900,000 $700,000 FY19 actual $1,275,000 $382,500 (Chief Financial Officer) $360,000 (Managing Director Wagering and Media) $245,000 (Managing Director Gaming Services) $420,000 (Managing Director Lotteries and Keno) What happens if an STI participant leaves the Group? Can Restricted Shares be forfeited or clawed back? How does the STI align with Tabcorp’s risk and compliance objectives? Accounting treatment All Restricted Shares will be forfeited unless they leave for reasons outside of their control (e.g. death or disability). In this case Restricted Shares would generally be released. However, the People and Remuneration Committee has discretion to keep Restricted Shares on foot or forfeit them (in full or on a pro rata basis) where a participant has left the Group. Restricted Shares may be forfeited at the Board’s discretion based on certain events or information that may come to light (see section 12(e)). If these events occur or information becomes available after the Restricted Shares have become unrestricted, the Board may require the participants to repay all or part of the value of the Restricted Shares. The STI scorecard contains non-financial measures which include adherence with risk management and compliance objectives, appropriate customer outcomes and cultural measures. In addition, the STI is dependent on participants displaying the appropriate behaviours in line with the Group’s Values, ensuring that both “what” is delivered and “how” it’s delivered are equally important. For executive KMP, the STI is delivered partly in Restricted Shares which are restricted for two years. These Restricted Shares are subject to malus and claw back provisions (see above). 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. (i) Operates on a sliding scale between minimum and target, and target and maximum. (ii) 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 malus and clawback provisions). 59 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 (c) STI performance measures and outcomes for FY19 Diagram 5: How the Group Funding Multiplier was determined Statutory NPAT performance NPAT from continuing operations before significant items Other Board considerations GFM • Group NPAT was $362.5m, exceeding target and which represents an uplift of $333.8m on FY18. • The increase in FY19 statutory NPAT (on FY18) reflects the first full year of the Combination being effective, strong Group performance and fewer significant items in FY19. • FY19 result was $397.6m, exceeding target. • Significant items included costs associated with the implementation of the Combination and some compensation payments received. > > The People and Remuneration Committee considered management’s contributions to Lotteries outperformance (versus favourable Lotteries jackpot outcomes) as well as the risk and compliance performance in FY19. > Under the STI Plan (considering NPAT performance) a higher GFM would have applied in FY19. Following a balanced assessment of financial and non-financial performance across the operating business units, the Board exercised its discretion to reduce the GFM to 1.00 for FY19. Actual $362.5m FY19 performance Above target Actual $397.6m FY19 performance Above target Group STI measures and targets are derived from the Board-approved long term strategic Corporate Plan which comprise financial and non-financial objectives. These are included in the MD & CEO’s scorecard and cascaded to the other executive KMP scorecards (and determines their IPMs). 60 Tabcorp Annual Report 2019 Diagram 6: FY19 STI scorecard and performance outcomes FY19 revenue Financial • Exceeded target, with revenue up 8.7% on FY18 (on a pro-forma basis). • Largely driven by a 22.8% increase in revenue in the Lotteries and Keno business unit, generated from strong management of the business unit’s operations, game innovation and digital and retail channel growth. FY19 NPAT from continuing operations before significant items • NPAT from continuing operations before significant items result of $397.6m, exceeding target and benefitting from operational performance and synergy delivery. • Some depreciation and amortisation savings were delivered without impacting overall performance. • Minor interest and tax savings also contributed to the outcome. FY19 Combination synergies • Target exceeded with $64m in EBITDA synergies and business improvements delivered (comprised of cost synergies of $57m and revenue benefits of $7m). • Synergy performance was underpinned by strong focus and disciplined integration management. Actual $5,482.2m FY19 performance Above target Actual $397.6m FY19 performance Above target Actual $64m EBITDA synergies FY19 performance Above target Strategic (including integration) Operational excellence (including risk and compliance) Customer first People and culture • Integration of Tabcorp and Tatts Group on track and already delivering shareholder benefits. • FY19 EBITDA synergy and business improvement target exceeded. • FY21 target was revised upwards from $130m to $130m–$145m of EBITDA synergies. • The Group delivered significant revenue and EBITDA growth in FY19 through domestic business growth. • Group operating expenses remained flat, driven by synergy benefits. • The FY19 operating cost to revenue ratio of 16.7% improved from 18.1% (on a pro forma basis) from FY18. • Tabcorp’s risk framework has been rolled out across the combined Group. • There were no material compliance breaches during FY19, although several non-material breaches did occur, resulting in a below target performance outcome overall for this category. • Strong growth in active customer numbers. • Lotteries active registered players of 3.3m, up 24% and Wagering active account customers of 720k up 0.1%. • Digital growth continued to accelerate, with a record year for Lotteries of 73.5% and growth for Wagering of 7.7%. • Combined Group culture program and overall employee engagement on track. • Significant inclusion and diversity work has been undertaken including mentoring and development programs, partnerships with racing bodies and new Group inclusion and diversity policies. • WGEA citation as an employer of choice for gender equality received for another year. • Strong health and safety performance with overall Group lost time injuries well below market benchmarks. Non-financial Measures Performance against target Measures Performance against target Measures Performance against target Measures Performance against target Tabcorp / Tatts Group integration Business growth Target Cost management Target Risk management Threshold Compliance Threshold Customer acquisition and retention Target Customer engagement and satisfaction Digital turnover growth Threshold Culture and engagement Target Health and safety Diversity Threshold 61 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 Table 8: FY19 executive KMP overall STI outcomes Actual STI achieved Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Financial year 2019 2018 2019 2018 2019 2018(iv) 2019 2018 2019 2018(iv) Cash portion(i) $ 637,500 247,500 382,500 111,375 183,750 45,330 270,000 111,375 315,000 45,330 Deferred portion(ii) $ 637,500 247,500 - 37,125 61,250 15,110 90,000 37,125 105,000 15,110 Total(iii) $ 1,275,000 495,000 382,500 148,500 245,000 60,440 360,000 148,500 420,000 60,440 Actual STI achieved as a % of target STI 85% 33% 85% 33% 70% 33% 80% 33% 120% 33% STI foregone as a % of target STI 15% 67% 15% 67% 30% 67% 20% 67% 0% 67% Actual STI achieved as a % of maximum STI 43% 17% 43% 17% 35% 17% 40% 17% 60% 17% (i) The cash portion of the FY19 STI (50% for the MD & CEO and 75% for other executive KMP) will be paid in August 2019. As Mr Johnston will cease employment in FY20, the Board determined to award his FY19 STI fully in cash. (ii) The Restricted Share portion of the FY19 STI will be granted in August 2019. 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 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 2019. 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 and their STI value relates to the 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. 62 Tabcorp Annual Report 2019 (d) Long term incentive (LTI) For the 2018 LTI grant, a second three year LTI performance measure was introduced, being the Combination Synergy measure. This was in addition to the relative TSR measure. LTI grants are tested once following the end of the performance period and all or a portion of the Performance Rights granted may lapse or vest depending on testing outcomes. There is no retesting of LTI grants. What were the target and outperformance LTI opportunities? How is the LTI delivered? On what basis are Performance Rights allocated? How long is the performance period? What is the weighting? How is this measure defined? Why does the Board consider this an important measure? MD & CEO Executive KMP (excl. the MD & CEO) 50% of fixed remuneration 100% of fixed remuneration Target Outperformance Participants are allocated a maximum number of Performance Rights (based on the outperformance opportunity). Each Performance Right provides the right to receive one Tabcorp ordinary 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. 75% of fixed remuneration 150% of fixed remuneration Face value. 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 Performance Rights grant date. Three years. Tabcorp considers this to be appropriate, balancing the fast-changing industry and competitive landscape that the Group operates in with rewarding executives for the creation of long term shareholder value. A three year performance period also aligns to Tabcorp’s business planning cycle and predominant market practice. Relative total shareholder return (relative TSR) 75% The return received by shareholders (capital returns, dividends and share price movement) over the period relative to a peer group of companies. The contribution of synergies created through the integration of Tabcorp and Tatts Group, to EBITDA savings. Combination Synergy 25% It directly aligns to shareholder value creation. It directly aligns to Tabcorp’s key strategic priority of integrating the Tabcorp and Tatts Group businesses and delivering expected synergies. What are the performance hurdles? Threshold Target Outperformance (i) This vesting schedule aligns to predominant ASX 100 practice. Tabcorp’s relative TSR rank(i) Below 50th percentile At 50th percentile(ii) At 75th percentile(ii) % of Performance Rights that will vest 0% 37.5% 75% Contribution of synergies to EBITDA savings in FY21 Below $130 million $130 million(ii) Stretch performance(ii),(iii) % of Performance Rights that will vest 0% 12.5% 25% (ii) Straight line (pro rata) vesting occurs between the threshold and target, and target and outperformance levels. (iii) The stretch performance target has not been disclosed due to its sensitive nature. This target will be disclosed retrospectively once tested. Which companies were included in the 2018 LTI relative TSR peer group? Constituent companies of the S&P/ASX 100 index excluding organisations operating in the Metals & Mining, Oil and Gas, Transportation Infrastructure, Utilities and Real Estate Investment Trust sectors. 63 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 How are performance measures assessed objectively? What happens when Performance Rights vest? Accounting treatment What happens when an LTI participant leaves the Group? What happens in the event of a change in control of the Group? Can Performance Rights be cancelled or clawed back? The relative TSR measure is calculated by an independent organisation in line with best practice methodologies. The Combination Synergy measure will also be verified by an independent advisor at the end of the performance period. Tabcorp will issue or transfer ordinary shares to the participant. Shares allocated will rank equally with other fully paid shares and have full voting and dividend rights. Performance Rights granted under the LTI are expensed on a straight line basis over the vesting period. Under Accounting Standards, for the relative TSR measure Tabcorp is required to recognise an expense irrespective of whether the Performance Right ultimately vests to the participant. A reversal of the expense is only recognised in the event the Performance Rights lapse due to cessation of employment within the vesting period (for both relative TSR and Combination Synergy measures) or the Performance Rights do not vest (for the Combination Synergy measure). Performance Rights lapse unless a participant leaves because of an uncontrollable event (e.g. death or permanent disablement). In this case a pro rata number of Performance Rights (based on the portion of the performance period that has elapsed) remain on foot and are subject to the original terms and conditions (including performance requirements). The Board has discretion to lapse the grant 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. Performance Rights may lapse at the Board’s discretion based on events that have occurred or where material information becomes available after the Performance Rights have been granted to participants. If this event occurred or information becomes available after the Performance Rights have vested and shares or cash have been awarded, the Board may require the participants to repay all or part of the value of shares or cash. In FY19, the Board reviewed the LTI plan and the following change was approved, effective from 1 July 2019 with the 2019 LTI grant being the first grant to incorporate this change: • The relative TSR peer group will be broadened to include organisations in the Utilities, Transportation Infrastructure and Real Estate Investment Trust sectors. These organisations reflect similar stock profiles to that of Tabcorp. A Combination Synergy measure will be included as a second measure (weighted 25%) in the 2019 LTI grant (in addition to relative TSR). More details will be provided in Tabcorp’s 2020 Remuneration Report. 64 Tabcorp Annual Report 2019Table 9: Performance Rights granted during the year ended 30 June 2019 Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Total Grant date(i) 17 October 2018 17 October 2018 17 October 2018 17 October 2018 17 October 2018 Number 646,551 193,965 150,862 193,965 150,862 1,336,205 Fair value per Performance Right(ii) Relative TSR $ 2.59 2.59 2.59 2.59 2.59 Combination Synergy $ 4.16 4.16 4.16 4.16 4.16 Fair value at grant date(iii) $ 1,928,338 578,501 449,946 578,501 449,946 3,985,231 Vesting date 19 September 2021 19 September 2021 19 September 2021 19 September 2021 19 September 2021 (i) Vesting of the 2018 LTI allocation of Performance Rights is subject to three year relative TSR and Combination Synergy measures. Accordingly, no testing or vesting of the 2018 LTI grant occurred during FY19. The value of the Performance Rights is amortised over the next three years. (ii) The LTI allocation is weighted 75% – Relative TSR and 25% – Combination Synergy. (iii) 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. LTI awards tested in FY19 The 2015 LTI grant (which had one performance measure – relative TSR) was tested on 22 September 2018. The three year TSR result placed Tabcorp at the 46th percentile of the peer group, and accordingly no Performance Rights vested (100% of the Performance Rights lapsed) and participants did not derive any value from this grant. Table 10: Performance Rights vested and lapsed and shares issued during FY19 Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Total Number of Performance Rights vested - - - - - - Value of Performance Rights exercised(i) $ - - - - - - Number of Performance Rights lapsed(ii) 484,581 147,886 - 119,221 - 751,688 Number of shares issued - - - - - - Amount paid per share $ - - - - - (i) No Performance Rights were exercised during the year as the entire 2015 LTI grant lapsed. (ii) Performance Rights that lapsed were granted on 29 October 2015 under the 2015 LTI offer. 65 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 Table 11: KMP interests in Performance Rights for FY19 (number) Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Total Balance at start of year 1,558,977 445,340 - 449,250 - 2,453,567 (i) Reflects the number of 2015 LTI Performance Rights that were tested and lapsed during the FY19. (ii) The number of Performance Rights vested and exerciseable at year end was nil. Table 12: Current LTI Performance Rights allocations to KMP on foot Granted as remuneration 646,551 193,965 150,862 193,965 150,862 1,336,205 Vested - - - - - - Lapsed(i) (484,581) (147,886) - (119,221) - (751,688) Balance at end of year(ii) 1,720,947 491,419 150,862 523,994 150,862 3,038,084 Grant year 2016 2017 2018 Grant date 25 October 2016 27 October 2017 17 October 2018 Number of Performance Rights on foot 761,850 940,029 1,002,156 334,049 Allocation to MD & CEO, senior management MD & CEO, senior management MD & CEO, senior management Performance measure RelativeTSR RelativeTSR RelativeTSR Combination Synergy Test and expiry date 14 September 2019 15 September 2020 19 September 2021 30 June 2021 66 Tabcorp Annual Report 2019(e) Tabcorp’s accountability framework As mentioned in sections 12(b) and 12(d), if a material event has occurred or material information has become available, the Board has the ability to: • reduce STI awards and/or LTI offers (partially or fully) prior to awarding them; • forfeit STI Restricted Shares and/or lapse Performance Rights (partially or fully) while they are restricted/still on foot; and/or • request part or full repayment to the value of the Restricted Shares/Performance Rights that have already become unrestricted/vested. Material events or information may include (but not limited to) where the participant has: • acted dishonestly (including, but not limited to, misappropriation of funds, or deliberately concealing material events that would have influenced business outcomes); • contributed to materially breaching Tabcorp’s compliance obligations (regulatory or legal); • been accountable for significant reputational harm to the Group; and/or • acted in such a way that the Group has made a financial misstatement. In addition to STI and LTI impacts, Tabcorp has the ability to terminate staff where such events have occurred. If this was to occur, by default, all STI and LTI allocations on foot would be forfeited. (f) Merger Completion Awards modification During FY18, one-off Merger Completion Awards were provided to select employees. For the MD & CEO and the pre-Combination Tabcorp executive KMP, the awards were provided in the form of cash and Restricted Shares. The Restricted Share component was restricted for two years and subject only to service-based conditions. As outlined in Table 2, these awards were modified on 17 October 2018. The market price of underlying instruments, being Restricted Shares, at the date of the alteration was $4.76. The alteration, being the introduction of a new performance measure and extension of the restriction period, has made no difference to the total fair value of the Restricted Shares. The value of the Restricted Shares will continue to be amortised over the original restriction period, in accordance with the accounting standards. The modification relates to 78,532 Restricted Shares, with an original restriction period ending on 18 January 2020, now extended to 30 June 2021. 67 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019REMUNERATION REPORT For the financial year ended 30 June 2019 (g) Policy prohibiting hedging Participants in the Group’s incentive plans 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 the terms and conditions of the incentive plans and Tabcorp’s Securities Trading Policy, available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 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). (h) Executives’ Shareholdings Policy The Executives’ Shareholdings Policy (applicable to all executive KMP) ensures that the interests of executives, the Group and shareholders are aligned. Under the Policy, the MD & CEO is required to hold the equivalent of 200% of his fixed remuneration in Tabcorp shares. Other executive KMP are required to hold the equivalent of 100% of their 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 table 17 for details of KMP shareholdings. At the date of this report, all executive KMP complied with this Policy (noting that Mr Makryllos and Ms van der Merwe have until 14 December 2022 to achieve the minimum shareholding required). A copy of the Tabcorp Executives’ Shareholdings Policy is available on Tabcorp’s website (www.tabcorp.com.au) under the Corporate Governance section. 68 Tabcorp Annual Report 201913. ACTUAL REMUNERATION RECEIVED BY EXECUTIVE KMP Table 13 provides a non-statutory voluntary disclosure of the total remuneration received by current executive KMP during FY19. Some of the figures in the table have not been prepared in accordance with the Australian Accounting Standards. This information is supplementary to the remuneration disclosure prepared in accordance with the statutory requirements and Australian Accounting Standards as detailed in section 15 of this report. 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 FY19. Table 13: Actual value of remuneration received by executive KMP during FY19 Executive KMP David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Total Salary and fees(i) $ 1,979,469 879,469 679,469 879,469 620,842 5,038,718 STI cash bonus(ii) $ 247,500 111,375 45,330 111,375 45,330 560,910 Superannuation $ 20,531 20,531 20,531 20,531 79,158 161,282 Value of STI Restricted Shares that became unrestricted(iii) $ 481,383 73,453 - 98,025 - 652,861 Value of LTI vested(iv) $ - - - - - - Total $ 2,728,883 1.084,828 745,330 1.109,400 745,330 6,413,771 (i) Comprises salary and salary sacrificed benefits (including salary sacrificed superannuation and motor vehicle novated leases including FBT where applicable). (ii) STI cash bonus reflects the portion of the FY18 STI which was paid in cash in August 2018. (iii) Value of the deferred component of the FY16 STI (provided in the form of Restricted Shares) which was released during FY19 and calculated based on the market value of Tabcorp shares at the date the restrictions ceased to apply (being 11 August 2018). (iv) The 2015 LTI grant of Performance Rights lapsed in full. As such, executive KMP did not receive any benefit from this grant. 14. EXECUTIVE KMP EMPLOYMENT CONTRACTS Table 14: Executive KMP contracts and notice periods Executive KMP 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 69 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019  REMUNERATION REPORT For the financial year ended 30 June 2019 15. STATUTORY REMUNERATION DISCLOSURES (a) KMP statutory remuneration tables The following table provides a breakdown of the executive KMP remuneration in accordance with statutory requirements and the Australian Accounting Standards. Table 15: Executive KMP remuneration for FY19 Executive KMP Current executives David Attenborough Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Former executive Craig Nugent Total Financial year 2019 2018 2019 2018 2019 2018(v) 2019 2018 2019 2018(v) Salary and fees(i) $ 1,979,469 1,623,687 879,469 781,731 679,469 356,130 879,469 839,934 620,842 337,762 637,500 247,500 382,500 111,375 183,750 45,330 270,000 111,375 315,000 45,330 2018 2019 2018 96,391 5,038,718 4,035,635 - 1,788,750 560,910 Short term Long term Post employment Cash bonus(ii) $ Merger Completion Award (cash) $ Accrued leave benefits $ Super- annuation $ Charge for share based allocations(iii) Merger Completion Award (Restricted Shares) $ Performance Rights $ Restricted Shares $ Total $ Performance related(iv) - 315,069 - 132,052 - - - 170,138 - - - - 617,259 10,981 175,004 54,331 105,096 (7,870) 14,533 23,106 140,769 (598) 7,558 9,596 79,950 452,556 20,531 19,170 20,531 20,049 20,531 10,024 20,531 20,049 79,158 28,392 2,833 161,282 100,517 300,405 252,297 14,082 39,015 24,766 4,901 56,457 58,655 38,955 4,901 5,312 434,665 365,081 126,027 126,027 17,607 17,607 - - 22,686 22,686 - - 1,451,676 4,526,589 4,028,737 1,269,983 1,806,716 438,196 1,574,353 367,428 1,030,039 129,393 430,918 - 1,729,643 457,394 1,705,913 342,307 1,182,750 129,393 423,943 - - 166,320 166,320 47,292 2,606,052 2,027,010 161,424 10,275,737 8,325,288 56% 55% 47% 42% 33% 12% 47% 41% 41% 12% 33% (i) Comprises salary and salary sacrificed benefits (including salary sacrificed superannuation and motor vehicle novated leases including FBT 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. As Mr Johnston will cease employment in FY20, the Board determined to award his FY19 STI fully in cash. (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 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. For FY18, figures represent the period 22 December 2017 to 30 June 2018 (i.e. partial year). 70 Tabcorp Annual Report 2019 Table 16: Non Executive Director remuneration for FY19 KMP Current Non Executive Directors Paula Dwyer (i) Bruce Akhurst (iv) Harry Boon Steven Gregg (v) Vickki McFadden Justin Milne (vi) Zygmunt Switkowski Former Non Executive Directors Elmer Funke Kupper (vii) Jane Hemstritch (viii) Total Financial year Short term Fees $ Post employment Superannuation $ 2019 2018 2019 2018(ii) 2019 2018(iii) 2019 2018 2019 2018(ii) 2019 2018 2019 2018 2019 2018 2018 2019 2018 590,000 510,000 265,750 226,000 252,000 130,643 249,500 248,500 260,000 231,458 218,750 202,500 235,000 223,750 - - 68,333 2,071,000 1,841,184 56,050 48,450 25,246 21,470 23,940 12,411 23,703 23,608 24,700 21,989 20,781 19,238 22,325 21,256 - - 6,492 196,745 174,914 Total $ 646,050 558,450 290,996 247,470 275,940 143,054 273,203 272,108 284,700 253,447 239,531 221,738 257,325 245,006 - - 74,825 2,267,745 2,016,098 (i) Ms Dwyer also received a fee of $35,000 (plus superannuation at 9.5%) for the role of Chairman of the Victorian Joint Venture Management Committee in FY19. This fee was borne by the 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. (iii) Commenced as a Director and KMP on 22 December 2017, following the implementation of the Combination. Includes additional fees of $8,750 (FY18: $8,750) (plus superannuation at 9.5%) received for membership of other Board Sub-Committees. (iv) Includes additional fees of $17,500 (FY18: $35,000) (plus superannuation at 9.5%) received for membership of other Board Sub-Committees. (v) (vi) Includes additional fees of $8,750 (FY18: $8,750) (plus superannuation at 9.5%) received for membership of other Board Sub-Committees (vii) Mr Funke Kupper retired from the Board at the 2018 Tabcorp AGM. Mr Funke Kupper did not receive Tabcorp Board Fees whilst on leave of absence. (viii) Ceased as a Director and KMP on 27 October 2017. FY18 Fees reflect the period as KMP until employment ceased. Includes additional fees of $2,500 (plus superannuation) received in FY18 for membership of other Board Sub-Committees. 71 REMUNERATION REPORTREMUNERATION REPORTTabcorp Annual Report 2019 REMUNERATION REPORT For the financial year ended 30 June 2019 Table 17: KMP interests in Tabcorp shares for FY19 (number) KMP Current Non Executive Directors Paula Dwyer Bruce Akhurst Harry Boon Steven Gregg Vickki McFadden Justin Milne Zygmunt Switkowski Former Non Executive Director Elmer Funke Kupper Executive Director David Attenborough Current Executives Damien Johnston Frank Makryllos Adam Rytenskild Sue van der Merwe Total Balance at start of year Granted as remuneration(i) On vesting of Performance Rights Net change other(ii) Balance at KMP cessation(iii) Balance at end of year 150,000 80,000 70,000 35,000 50,000 31,208 91,949 64,166 1,364,435 522,186 39,483 284,703 76,343 2,859,473 - - - - - - - - 50,242 7,536 3,067 7,536 3,067 71,448 - - - - - - - - - - - - - - - - - 7,000 - 10,600 - n/a n/a n/a n/a n/a n/a n/a 150,000 80,000 70,000 42,000 50,000 41,808 91,949 - 64,166 n/a (350,000) n/a 1,064,677 (153,659) - (100,000) - (586,059) n/a n/a n/a n/a 64,166 376,063 42,550 192,239 79,410 2,280,696 (i) Includes Restricted Shares issued during FY19 as the deferred component of the FY18 STI. (ii) Includes voluntary on-market transactions. (iii) Reflects shareholding at 17 October 2018 for Elmer Funke Kupper. (b) 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 2019 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. 72 Tabcorp Annual Report 2019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 74 75 76 77 78 78 79 85 96 104 114 122 123 R E P O R T F I N A N C I A L Tabcorp Annual Report 2019 73 INCOME STATEMENT For the year ended 30 June 2019 Revenue Other income Commissions and fees Government taxes and levies Employment costs Communications and technology costs Advertising and promotions Property costs Other expenses Depreciation and amortisation Impairment Transaction costs – combination with Tatts Group Profit before income tax expense and net finance costs Finance income Finance costs Profit from continuing operations before income tax expense Income tax expense Profit from continuing operations after income tax expense Discontinued operations Loss from discontinued operations net of tax Net profit 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/(losses) 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: From continuing operations Basic earnings per share Diluted earnings per share Total attributable to shareholders of Tabcorp 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. 74 Note A4 A4 A4 D4 A4 A5 D5 A2 A2 A2 A2 A3 A3 2019 $m 5,482.2 17.3 (1,499.2) (2,009.4) (421.2) (125.8) (162.0) (69.9) (183.6) (301.2) (2.9) - 724.3 1.7 (191.8) 534.2 (161.9) 372.3 (9.8) 362.5 (5.1) 1.1 1.4 (3.2) 0.9 (4.9) 357.6 2019 cents 18.5 18.4 18.0 17.9 21.0 22.0 2018 $m 3,757.3 1.8 (1,174.5) (1,074.1) (344.1) (102.1) (125.9) (74.9) (167.7) (247.3) (31.4) (48.6) 368.5 2.0 (129.9) 240.6 (88.5) 152.1 (123.4) 28.7 (46.4) (1.0) 13.7 1.1 (0.1) (32.7) (4.0) 2018 cents 10.3 10.3 1.9 1.9 23.5 21.0 Tabcorp Annual Report 2019BALANCE SHEET As at 30 June 2019 Current assets Cash and cash equivalents Receivables Prepayments Current tax assets Derivative financial instruments Other financial assets Other Total current assets Non current assets Receivables Investment in an associate Other financial assets Licences Other intangible assets Property, plant and equipment Prepayments Derivative financial instruments Other Total non current assets TOTAL ASSETS Current liabilities Payables Interest bearing liabilities Provisions Derivative financial instruments 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 B2 C6 D6 B2 C1 C2 C4 B4 C7 B3 C8 B4 C7 B3 A5 C8 B4 2019 $m 463.0 111.3 35.2 26.7 18.8 12.8 97.0 764.8 4.3 29.2 156.6 2,254.4 9,184.1 562.0 23.0 289.0 31.7 12,534.3 13,299.1 1,206.1 192.0 66.1 46.3 81.6 1,592.1 234.2 3,526.9 575.3 69.9 81.5 12.7 4,500.5 6,092.6 7,206.5 8,561.7 (629.0) (726.2) 7,206.5 2018 $m 368.2 98.1 44.9 21.1 49.6 - 85.8 667.7 7.0 22.7 75.8 2,361.1 9,142.0 488.2 29.9 123.0 23.4 12,273.1 12,940.8 1,070.2 132.9 92.4 48.1 67.3 1,410.9 211.5 3,371.8 596.1 78.9 21.8 11.2 4,291.3 5,702.2 7,238.6 8,529.1 (566.2) (724.3) 7,238.6 75 Tabcorp Annual Report 2019FINANCIAL REPORTCASH FLOW STATEMENT For the year ended 30 June 2019 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 Payment for property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment and intangibles Payment for exercise of call option Proceeds from sale of shares in an associate Payment for other financial assets Loan repayments received from customers 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 Net cash flows used in investing activities Cash flows from financing activities Net cash flows from revolving bank facilities Repayment of borrowings Proceeds from borrowings Dividends paid Settlement of dividends payable by business acquired Payments for on-market share purchase Payment of transaction costs for share issue Net cash flows used in financing activities Net increase 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. The cash flow statement includes the cash flows of the discontinued Sun Bets business, refer note D5. 76 Note C5 D4 C5 2019 $m 5,729.4 (2,834.2) (1,800.8) 2.0 (198.2) (183.4) 714.8 (278.4) 2.4 (8.2) 12.1 (93.1) 1.8 - - - - (363.4) 236.0 (83.5) - (393.0) - (0.7) - (241.2) 110.2 0.1 352.7 463.0 2018 $m 3,994.8 (2,353.0) (923.3) 1.4 (150.0) (122.4) 447.5 (291.7) 1.0 - - - 5.4 (325.1) 625.3 (193.4) 13.2 (165.3) 35.0 (4,873.8) 5,350.0 (313.8) (235.0) (4.8) (1.7) (44.1) 238.1 0.3 114.3 352.7 Tabcorp Annual Report 2019Hedging $m Demerger $m Other $m Total equity $m STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2019 Issued capital Reserves 2019 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 Balance at end of year 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 Issued capital Number of ordinary shares m 2,013.0 - - - - 6.3 - - - 2,019.3 835.3 - - - - 2.5 - - - 1,175.2 - - 2,013.0 Ordinary shares $m 8,529.2 - - - - 30.0 2.8 - - 8,562.0 Treasury shares $m Accumulated losses $m (0.1) - - - - - - (0.7) 0.5 (0.3) (566.2) 362.5 (2.3) 360.2 (423.0) - - - - (629.0) (56.9) - (3.7) (3.7) - - - - - (60.6) (669.9) - - - - - - - - (669.9) Total issued capital $8,561.7m Total reserves ($726.2m) 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 $8,529.1m Total reserves ($724.3m) 2.5 - 1.1 1.1 - - (2.8) - 3.5 4.3 3.3 - (1.0) (1.0) - - (3.0) - 3.2 - - - 2.5 7,238.6 362.5 (4.9) 357.6 (423.0) 30.0 - (0.7) 4.0 7,206.5 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 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. 77 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2019 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 2019 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 14 August 2019. The Financial Report is a general purpose financial report which: • has been prepared in accordance with the Corporations Act 2001 (Cth), 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 equity instruments 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 79 81 81 82 83 84 B1 Capital management B2 Other financial assets B3 Interest bearing liabilities B4 Derivative financial instruments B5 Fair value measurement B6 Financial instruments – risk management 85 85 86 88 91 C1 Licences C2 Other intangible assets C3 Impairment testing C4 Property, plant and equipment C5 Notes to the cash flow statement 92 C6 Receivables C7 Payables C8 Provisions 96 97 98 99 100 101 101 102 D1 Subsidiaries D2 Deed of cross guarantee D3 Parent entity disclosures D4 Business combinations D5 Discontinued operations 104 107 109 110 112 D6 Investment in an associate 113 E1 Employee share plans 114 E2 Pensions and other post employment benefit plans 116 E3 Commitments E4 Contingencies E5 Related party disclosures E6 Auditor’s remuneration E7 Other accounting policies 117 118 118 119 119 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 B2 – Other financial assets B4 – Derivative financial instruments C1 – Licences C2 – Other intangible assets C3 – Impairment testing C8 – Provisions D4 – Business combinations E4 – Contingencies 78 Tabcorp Annual Report 2019 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 three operating segments at year end. Sun Bets ceased trading during the period and is reported as a discontinued operation (refer Note D5). Comparative information has been restated to reflect the Group’s current reportable segments. Tabcorp Group Lotteries and Keno Wagering and Media Gaming Services Operation of lotteries and Keno pursuant to licences and approvals in certain Australian states and territories Provision of totalisator and fixed odds betting and retail wagering networks, and global racing media business Gaming machine monitoring operations in New South Wales, Queensland and the Northern Territory and venue services nationwide Segment revenue $m Segment profit before interest and tax $m 2,864.9 2019 2,312.2 2018 2,122.1 1,390.7 425.2 2019 271.8 2018 258.6 199.3 304.0 249.7 66.5 65.3 Lotteries and Keno Wagering and Media Gaming Services 79 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2019 A1 Segment information (continued) 2019 Revenue – external Revenue – intersegment Segment revenue Segment profit before interest and tax Depreciation and amortisation Capital expenditure (i) 2018 Revenue – external Revenue – intersegment Segment revenue Segment profit before interest and tax Depreciation and amortisation Capital expenditure (i) Lotteries and Keno $m Wagering and Media $m Gaming Services $m 2,864.9 - 2,864.9 425.2 83.8 64.5 1,390.7 - 1,390.7 199.3 55.9 17.4 2,310.3 1.9 2,312.2 271.8 144.2 151.6 2,121.2 0.9 2,122.1 258.6 135.2 93.7 304.0 - 304.0 66.5 73.2 91.5 244.5 5.2 249.7 65.3 56.2 67.8 (i) Capital expenditure excludes the acquisition of licences, unallocated items, assets acquired via business combinations (refer note D4) and make good provisions raised during the year. Reconciliation of segment revenue and profit before tax Segment total (per above) Intersegment revenue elimination Unallocated items: – significant items: – costs relating to combination with Tatts Group (i) – Racing Queensland arrangements (ii) – ACT point of consumption tax compensation – net gain on cash-settled equity swap – other (iii) – finance income – finance costs (iv) – other Total per income statement (continuing operations) Revenue 2019 $m 2018 $m 5,481.1 (1.9) 3,762.5 (6.1) - - - - - - - - 3.0 5,482.2 - - - - - - - - 0.9 3,757.3 Profit 2019 $m 763.5 - (34.6) (16.8) 15.1 - - (36.3) 1.7 (191.8) (2.9) 534.2 (i) Includes implementation costs of $34.6 million (2018: $62.9 million). Prior year also includes transaction costs per note D4 of $48.6 million, impairments of $17.6 million and surplus lease space provision of $14.2 million. (ii) Additional fees related to the minimum performance obligations under Racing Queensland arrangements. (iii) Prior year comprised costs relating to Luxbet closure of $17.0 million. (iv) Prior period includes financing costs relating to the combination with Tatts Group and the cash-settled equity swap of $9.3 million. 80 Total $m 5,479.2 1.9 5,481.1 763.5 301.2 307.6 3,756.4 6.1 3,762.5 523.2 247.3 178.9 2018 $m 523.2 - (143.3) - - 6.6 (17.0) (153.7) 2.0 (129.9) (1.0) 240.6 Tabcorp Annual Report 2019A2 Earnings per share Profit from continuing operations after income tax Loss from discontinued operations net of tax Earnings used in calculation of earnings per share (EPS) attributable to shareholders Weighted average number of ordinary shares used in calculating basic EPS Effect of dilution from Performance Rights Weighted average number of ordinary shares used in calculating diluted EPS(i) 2019 $m 372.3 (9.8) 362.5 2018 $m 152.1 (123.4) 28.7 2019 Number (m) 2,016.2 3.8 2,020.0 2018 Number (m) 1,480.0 3.2 1,483.2 (i) The prior year was impacted by the issue of shares as consideration for business combination in December 2017. The number of ordinary shares 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 Fully franked dividends declared after balance date to be recognised in subsequent year: Final dividend Franking credits available at the 30% company tax rate after allowing for tax payable or receivable 2019 cents per share 2018 cents per share 10.0 11.0 21.0 11.0 11.0 22.0 11.0 12.5 11.0 23.5 11.0 10.0 21.0 10.0 2019 $m 201.3 221.7 423.0 221.7 222.1 443.8 222.1 61.4 2018 $m 104.4 221.2 325.6 221.2 201.3 422.5 201.3 73.9 81 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2019 A4 Revenue and expenses (a) Revenue comprises: Revenue from contracts with customers Other revenue(i) (b) Other income Net gain on cash-settled equity swap Net loss on disposal of non current assets Net gain/(loss) on disposal of subsidiaries Fair value gains on financial assets at fair value through profit or loss ACT point of consumption tax compensation Other (c) Employment costs include: Defined contribution plan expense (d) Operating lease rentals Minimum lease payments (e) Finance costs Interest costs Other (f) Impairment (ii) Leasehold improvements Plant and equipment Buildings Other intangible assets – software Other intangible assets – other 2019 $m 4,424.9 1,057.3 5,482.2 - (1.1) 0.3 - 15.1 3.0 17.3 30.8 62.9 176.3 15.5 191.8 1.6 1.2 0.1 - - 2.9 2018 $m 2,804.1 953.2 3,757.3 6.6 (1.3) (9.3) 5.3 - 0.5 1.8 24.8 50.8 112.7 17.2 129.9 2.3 9.2 - 15.8 4.1 31.4 (i) Includes fixed odds betting revenue, refer accounting policy below. (ii) Prior year includes the write down of the business assets relating to the Luxbet closure. Revenue from contracts with customers is recognised when control of the goods or services is transferred to customers at an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services. Incremental costs of obtaining contracts with a duration of one year or less are expensed as incurred. The following specific criteria must also be met before revenue is recognised: 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. 82 Tabcorp Annual Report 2019Wagering revenue is recognised as the residual value after deducting the return to customers from wagering turnover. Fixed odds betting revenue is classified as other revenue and 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 is allocated to the loyalty points awarded to customers on relative stand-alone selling price and recognised as a contract liability until the points are redeemed. 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. Gaming services revenue is recognised once the service has been rendered or the goods have been delivered to the buyer. 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. 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 from continuing operations before income tax expense Loss from discontinued operations before income tax benefit 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 – unbooked deferred tax assets – research and development claims – other Effect of differing international tax rates Income tax expense Income tax expense reported in the income statement Income tax benefit attributable to discontinued operations Income tax expense 2019 $m (168.1) (11.7) 18.5 (161.3) 534.2 (10.4) 523.8 (157.1) (12.1) (1.1) 1.7 7.6 (0.3) (161.3) (161.9) 0.6 (161.3) 2018 $m (101.5) 12.7 4.0 (84.8) 240.6 (127.1) 113.5 (34.0) (11.9) (23.0) 2.7 (5.3) (13.3) (84.8) (88.5) 3.7 (84.8) 83 Tabcorp Annual Report 2019FINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP PERFORMANCE For the year ended 30 June 2019 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 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 - 0.4 2.7 16.5 - 1.3 - 11.3 (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 24.5 16.9 38.1 - 8.3 - 12.8 (623.1) (44.0) (8.8) (28.6) (596.1) Recognised in income statement $m (3.1) - (2.2) (8.2) - 2.4 - (6.9) 20.7 1.8 1.0 13.0 18.5 Recognised directly in equity $m - 1.4 - - - - - 0.9 - - - - 2.3 Balance at 30 June 2019 $m 4.7 25.9 14.7 29.9 - 10.7 - 6.8 (602.4) (42.2) (7.8) (15.6) (575.3) 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 Subsequent events other than those disclosed elsewhere in this report are: Sale of corporate properties In July 2019 the Group entered into sale agreements in relation to two surplus corporate properties. Proceeds of $46.0 million are expected to be recognised over the next two financial years, in respect of the two properties. 84 Tabcorp Annual Report 2019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 appropriate 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)(ii) Gearing ratio (i) EBITDA for 2019 represents continuing operations, whereas EBITDA for 2018 includes both continuing and discontinued operations. (ii) EBITDA for 2018 includes allowance for 12 months contribution from Tatts Group. B2 Other financial assets Other financial assets are held to fund payments to winners of certain lottery games, where winnings are payable for up to 20 years. 2019 $m 3,441.5 1,064.7 3.2 2018 $m 3,308.3 954.0 3.5 AASB 9 requires that, subsequent to initial recognition, an entity recognises its financial assets at amortised cost or fair value, depending on the entity’s business model for managing the financial assets and the contractual characteristics of the financial assets. Following the adoption of AASB 9, the Group classifies its financial assets as follows: Equity instruments at fair value through other comprehensive income Unlisted investments – managed fund Debt instruments at amortised cost Investment – term deposits Current Non current 2019 $m 21.3 148.1 169.4 2019 $m 12.8 156.6 169.4 2018 $m 20.8 55.0 75.8 2018 $m - 75.8 75.8 Equity instruments at fair value through other comprehensive income are equity instruments which the Group intends to hold for the foreseeable future, and for which an irrevocable election to classify as such upon transition to AASB 9 has been made. After initial measurement, they 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. No subsequent recycling of gains or losses to profit or loss is permitted. Debt instruments at amortised cost are financial assets held in order to collect contractual cash flows that solely represent payments of principal and interest. They are carried at amortised cost. 85 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2019 B3 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 2019 aggregate US dollar principal of $1,553.0 million (2018: $1,640.0 million). Cross currency swaps are in place for all US dollar debt. Under these swaps the aggregate Australian dollar amount payable at maturity is $1,925.0 million (2018: $2,008.5 million). Facility limit $m 100.0 Maturity Feb-20 660.0 600.0 600.0 1,860.0 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 Jul-22 Jul-23 Jul-24 n/a Dec-20 Apr-22 Jun-26 Jun-28 Jun-30 Jun-33 Jun-35 Jun-36 2019 $m - 631.6 494.7 - 1,126.3 - 246.1 189.2 148.9 637.8 737.0 248.0 96.8 96.8 2,400.6 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 (i) Floating rate interest 90 day BBSW +3.1% paid quarterly in arrears. 192.0 Jul-19 192.0 195.0 Current Non current (i) The Tatts Bonds were fully redeemed in July 2019, and a payment of $192.0m was made to the Bond holders. 3,718.9 3,504.7 192.0 3,526.9 3,718.9 132.9 3,371.8 3,504.7 86 Tabcorp Annual Report 2019B3.1 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 Interest bearing liabilities Current Non current Cross currency interest rate swaps Current assets Non current assets Current liabilities Non current liabilities Balance at 30 June 2018 $m Cash flows $m Foreign exchange movement $m Changes in fair values $m 132.9 3,371.8 (40.5) (121.8) 9.5 0.4 3,352.3 Cash flows $m (958.7) 1,469.9 - - - - 511.2 (99.0) 236.0 - - - - 137.0 (34.0) 114.7 - - - - 80.7 - - 21.7 (167.2) (4.1) (0.4) (150.0) Acquisitions via business combinations $m Foreign exchange movement $m Changes in fair values $m - 1,272.1 (2.4) (55.0 ) - - 1,214.7 4.4 69.1 - - - - 73.5 - - (35.5) 10.4 7.4 0.4 (17.3) Balance at 1 July 2017 $m 974.3 684.0 (2.6) (77.2) 2.1 - 1,580.6 Other $m 192.1 (195.6) - - - - (3.5) Other $m 112.9 (123.3) - - - - (10.4) Balance at 30 June 2019 $m 192.0 3,526.9 (18.8) (289.0) 5.4 - 3,416.5 Balance at 30 June 2018 $m 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. 87 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2019 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 Equity derivative Non current assets Cross currency swaps Interest rate swaps Current liabilities Cross currency swaps Interest rate swaps Open betting positions Non current liabilities Cross currency swaps Interest rate swaps 2019 $m 18.8 - 18.8 289.0 - 289.0 307.8 5.4 30.0 10.9 46.3 - 81.5 81.5 127.8 2018 $m 40.5 9.1 49.6 121.8 1.2 123.0 172.6 9.5 22.4 16.2 48.1 0.4 21.4 21.8 69.9 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, the Group’s hedges are classified as cash flow hedges. At inception, hedge relationships are designated as such and documented. This includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedge effectiveness requirements are assessed. A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: – There is an economic relationship between the hedged item and the hedging instrument. – The effect of credit risk does not dominate the value changes that result from that economic relationship. – The hedge ratio is the same as that resulting from actual amounts of hedged items and hedging instruments for risk management. 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. 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. 88 Tabcorp Annual Report 2019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 2019 $m 240.0 427.0 722.1 1,389.1 2018 $m 258.5 667.0 722.1 1,647.6 1.9% – 7.3% 1.2% – 1.7% 1.9% – 7.3% 1.9% – 2.1% 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. There is an economic relationship between the hedged item and the hedged instrument as the key terms of the interest rate swap are similar to the key terms of the floating rate borrowings. The Group has established a hedge ratio of 1:1 which has been determined by comparing the notional principal of the swap with the notional amount of the designated debt. Further information about the Group’s interest rate risk management is disclosed in note B6.1. 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. 2019 2018 Pay principal AUD m 298.5 1,626.5 1,925.0 Receive principal USD m 303.0 1,250.0 1,553.0 Pay principal AUD m 382.0 1,626.5 2,008.5 Receive principal USD m 390.0 1,250.0 1,640.0 3.3% – 5.6% 4.2% – 5.6% 4.6% – 5.2% 4.6% – 5.2% There is an economic relationship between the hedged item and the hedged instrument as 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. The Group has established a hedge ratio of 1:1 which has been determined by comparing the notional principal of the swap with the notional amount of the designated debt. Further information about the Group’s foreign currency risk management is disclosed in note B6.2. 89 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2019 B4 Derivative financial instruments (continued) B4.3 Impact of hedging on balance sheet The change in fair value used for measuring ineffectiveness is set out in the below table. All hedging instruments are presented within derivative financial instruments in the balance sheet. Interest rate swaps Cross currency swaps The ineffectiveness recognised in the income statement was immaterial in the current and prior financial years. B4.4 Impact of hedging on equity Set out below is a reconciliation of the movement in the hedging reserve: As at 1 July 2018 Effective portion of changes in fair value arising from: – Interest rate swaps – Cross currency swaps Loss on revaluation of USD debt Amount reclassified to income statement Other Tax effect As at 30 June 2019 As at 1 July 2017 Effective portion of changes in fair value arising from: – Interest rate swaps – Cross currency swaps Loss on revaluation of USD debt Other Tax effect As at 30 June 2018 90 2019 $m (70.1) 187.9 117.8 2018 $m 6.2 21.6 27.8 Hedging reserve $m (56.9) (70.1) 187.9 (120.7) (1.6) (0.6) 1.4 (60.6) (24.2) 6.2 21.6 (72.8) (1.4) 13.7 (56.9) Tabcorp Annual Report 2019B5 Fair value measurement The fair value of financial assets and financial liabilities is 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 is 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 is estimated as follows: Investment in an associate Fair value is determined using quoted market price (level 1 in fair value hierarchy). Carrying amount Fair value 2019 $m 29.2 29.2 2,410.7 192.0 2,602.7 2018 $m 22.7 22.7 2,416.3 195.6 2,611.9 2019 $m 145.8 145.8 2,749.0 194.3 2,943.3 2018 $m 33.0 33.0 2,440.3 196.2 2,636.5 US private placement 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). Equity instruments at fair value through other comprehensive income Fair value is reference to market prices prevailing at balance date (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 2019. 91 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2019 B6 Financial instruments – risk management The Group’s principal financial instruments, other than derivatives, comprise cash, term deposits, unlisted investments 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 receives 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 72.3% (2018: 83.1%) 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 Investment term deposits – current Investment term deposits – non current Overdraft – unsecured Bank loans – unsecured Tatts Bonds Interest rate swaps – notional principal amounts Cross currency swaps – notional principal amounts 92 2019 $m 314.8 56.3 12.8 135.3 519.2 - (1,126.3) (192.0) (1,389.1) (1,925.0) (4,632.4) 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) Tabcorp Annual Report 2019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 + 0.50% (50 basis points) (2018: + 1.00%) - 0.50% (50 basis points) (2018: - 1.00%) USD + 0.20% (20 basis points) (2018: + 0.20%) - 0.20% (20 basis points) (2018: - 0.20%) Post tax profit higher/(lower) 2019 $m (1.4) 1.8 - - 2018 $m (3.7) 3.7 - - Other comprehensive income higher/(lower) 2018 2019 $m $m 66.9 (70.3) (27.7) 28.3 135.2 (163.7) (70.7) 40.0 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 (2018: + 10 cents) AUD/USD - 10 cents (2018: - 10 cents) Post tax profit higher/(lower) 2019 $m - - 2018 $m - - Other comprehensive income higher/(lower) 2018 2019 $m $m (22.3) (43.3) 23.8 57.7 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. 93 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: CAPITAL AND RISK MANAGEMENT For the year ended 30 June 2019 B6 Financial instruments – risk management (continued) B6.2 Foreign currency risk (continued) 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, term deposits, 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 (2018: nil), as the possibility of an outflow occurring is considered remote. Details of the financial guarantee contracts at balance date are outlined below: • The Company has entered into a deed of cross guarantee as outlined in note D2. • The maximum amount of bank guarantee contracts at balance date is $37.9 million (2018: $37.7 million). 94 Tabcorp Annual Report 2019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 current policy is that not more than 33% of debt facilities should mature in any financial year within the next four years. At 30 June 2019, 7% (2018: 2%) of debt facilities will mature in less than one year. 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 Financial liabilities Interest rate swaps – pay AUD fixed Cross currency swaps – pay AUD floating Open betting positions Net inflow/(outflow) < 1 year $m (1,206.1) (41.8) (118.5) (194.3) (1,560.7) 23.5 107.5 131.0 (44.2) (93.9) (10.9) (149.0) (18.0) 2019 1 – 5 years $m (121.2) (1,228.8) (711.2) - (2,061.2) 57.8 663.5 721.3 (101.5) (622.9) - (724.4) (3.1) > 5 years $m (113.0) - (2,408.1) - (2,521.1) 63.1 2,086.9 2,150.0 (72.9) (2,079.9) - (2,152.8) (2.8) < 1 year $m (1,070.2) (51.4) (200.9) (11.5) (1,334.0) 31.4 190.8 222.2 (52.1) (184.7) (16.2) (253.0) (30.8) 2018 1 – 5 years $m (114.4) (995.1) (713.3) (192.1) (2,014.9) 88.0 665.7 753.7 (125.6) (655.4) - (781.0) (27.3) > 5 years $m (97.1) - (2,475.8) - (2,572.9) 70.4 2,143.8 2,214.2 (92.9) (2,152.3) - (2,245.2) (31.0) 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. 95 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2019 SECTION C – OPERATING ASSETS AND LIABILITIES C1 Licences 2019 Carrying amount at beginning of year Amortisation Carrying amount at end of year Cost Accumulated amortisation and impairment 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 Lotteries licences $m Wagering licences $m Gaming machine monitoring licence $m Keno licences $m 1,374.2 (45.7) 1,328.5 1,391.0 (62.5) 1,328.5 - 1,397.6 (23.4) 1,374.2 1,397.6 (23.4) 1,374.2 719.2 (41.2) 678.0 978.4 (300.4) 678.0 557.2 202.2 (40.2) 719.2 978.4 (259.2) 719.2 193.3 (13.8) 179.5 200.3 (20.8) 179.5 - 200.3 (7.0) 193.3 200.3 (7.0) 193.3 74.4 (6.0) 68.4 128.0 (59.6) 68.4 80.3 - (5.9) 74.4 128.0 (53.6) 74.4 Total $m 2,361.1 (106.7) 2,254.4 2,697.7 (443.3) 2,254.4 637.5 1,800.1 (76.5) 2,361.1 2,704.3 (343.2) 2,361.1 Amortisation policy – straight line basis over useful life (years): 10 – 55 12 – 93 15 10 – 34 Licence expiration date: – Victoria – Queensland – New South Wales – Australian Capital Territory – Northern Territory – South Australia 2028 2072 2050 2032 2052 2024 2098 2097 2064(i) 2100 2022 2047 2050 2032 (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 Licences that are acquired by the Group are stated at cost less accumulated amortisation, and impairment losses. 96 Tabcorp Annual Report 2019C2 Other intangible assets 2019 Carrying amount at beginning of year Additions: – acquired – internally developed Amortisation Transfers Disposals Other Carrying amount at end of year Cost Accumulated amortisation and impairment Includes capital works in progress of: 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: Amortisation policy – straight line basis over useful life (years): Expiration date: (i) New South Wales retail exclusivity Goodwill $m NSW Trackside concessions $m Customer related assets $m Brand names $m Media content and broadcast rights $m 8,249.6 137.0 149.6 - - - - - 0.2 8,249.8 8,955.5 (705.7) 8,249.8 1,512.6 - - 6,743.4 - (0.8) (5.6) 8,249.6 8,955.3 (705.7) 8,249.6 - - (1.8) - - - 135.2 150.0 (14.8) 135.2 138.7 - - - (1.7) - - 137.0 150.0 (13.0) 137.0 87 2097 - - (11.3) - - - 138.3 158.7 (20.4) 138.3 9.6 - - 149.5 (6.2) (3.3) - 149.6 167.3 (17.7) 149.6 218.1 - - - - - - 218.1 218.1 - 218.1 110.0 - - 108.1 - - - 218.1 218.1 - 218.1 30.6 - - - - - - 30.6 30.6 - 30.6 30.6 - - - - - - 30.6 30.6 - 30.6 5 – 20 Indefinite Indefinite Other $m 41.5 - - (2.8) - - - 38.7 54.5 (15.8) 38.7 Software $m Total $m 315.6 9,142.0 46.7 93.7 (80.3) (2.2) (0.1) - 373.4 818.2 (444.8) 373.4 92.9 46.7 93.7 (96.2) (2.2) (0.1) 0.2 9,184.1 10,385.6 (1,201.5) 9,184.1 92.9 44.2 212.4 2,058.1 - - (2.7) - - 41.5 54.6 (13.1) 41.5 20 2033(i) 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 25.3 88.9 82.5 (69.6) (23.8) (0.1) 315.6 673.6 (358.0) 315.6 61.1 3 – 10 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. 97 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2019 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 Lotteries and Keno Wagering and Media Gaming Services Other intangible assets with indefinite useful lives Lotteries NSW Wagering Sky Racing Sky Sports Radio ACTTAB 2019 $m 5,304.4 2,638.9 306.5 8,249.8 108.1 98.8 30.8 6.5 4.5 248.7 2018 $m 5,304.4 2,638.7 306.5 8,249.6 108.1 98.8 30.8 6.5 4.5 248.7 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% (2018: 2.0% to 3.5%). These cash flows are then discounted using a relevant long term post tax discount rate, ranging between 7.5% and 8.4% (2018: 7.5% and 8.4%). 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 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 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. • Calculation of fees paid following the introduction of point of consumption tax remain unchanged (refer note E4 Contingencies). • 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. 98 Tabcorp Annual Report 2019 C4 Property, plant and equipment 2019 Carrying amount at beginning of year Additions Disposals Depreciation Transfers Impairment Carrying amount at end of year Cost Accumulated depreciation and impairment Includes capital works in progress of: 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: Depreciation policy – straight line basis over useful life (years): Freehold land $m Buildings $m Leasehold improvements $m Plant and equipment $m 60.7 - - - - - 60.7 60.7 - 60.7 5.3 - 55.4 - - - 60.7 60.7 - 60.7 29.6 0.9 - (2.9) - (0.1) 27.5 45.8 (18.3) 27.5 - 12.1 1.0 18.7 - (2.2) - 29.6 42.8 (13.2) 29.6 0.2 7 – 40 83.3 32.6 (0.3) (16.4) (4.6) (1.6) 93.0 167.9 (74.9) 93.0 20.0 57.7 17.2 26.9 (1.3) (14.9) (2.3) 83.3 140.8 (57.5) 83.3 0.5 5 – 15 314.6 141.1 (1.5) (79.0) 6.8 (1.2) 380.8 961.2 (580.4) 380.8 49.0 264.3 57.2 80.7 (3.6) (74.8) (9.2) 314.6 816.4 (501.8) 314.6 24.6 3 – 10 Total $m 488.2 174.6 (1.8) (98.3) 2.2 (2.9) 562.0 1,235.6 (673.6) 562.0 69.0 339.4 75.4 181.7 (4.9) (91.9) (11.5) 488.2 1,060.7 (572.5) 488.2 25.3 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. 99 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2019 C5 Notes to the cash flow statement (a) Cash and cash equivalents comprise: Cash on hand and in banks Short term deposits Bank overdrafts 2019 $m 406.7 56.3 463.0 - 463.0 2018 $m 257.2 111.0 368.2 (15.5) 352.7 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 note B3). 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 $274.6 million (2018: $263.7 million). (b) Reconciliation of net profit after tax to net cash flows from operating activities Net profit after tax Add items classified as investing/financing activities: – net loss on disposal of non current assets – net gain 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 – other liabilities Net cash flows from operating activities 100 2019 $m 362.5 1.1 - - 301.2 2.9 4.0 (1.6) 670.1 (12.3) (3.9) 7.1 125.3 (42.6) (18.5) (10.4) 714.8 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 Tabcorp Annual Report 2019C6 Receivables Current Trade debtors Allowance for expected credit losses Sundry debtors Other Non current Trade debtors Other 2019 $m 65.0 (2.1) 62.9 47.4 1.0 111.3 2.0 2.3 4.3 2018 $m 58.5 (3.0) 55.5 41.5 1.1 98.1 3.0 4.0 7.0 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. Expected credit losses for the Group are calculated using a lifetime expected loss allowance under the simplified approach of AASB 9. The expected credit loss is based on historical credit loss experience adjusted for forward-looking factors specific to the debtors and the economic environment. C7 Payables Current Payables Non current Payables 2019 $m 2018 $m 1,206.1 1,070.2 234.2 211.5 Non current payables include prizes payable to the lottery major prize winners and instalments payable for the Queensland wagering licence. Non current payables relating to the Queensland wagering licence are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 101 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES For the year ended 30 June 2019 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 made during year Provisions used during year Provisions reversed Carrying amount at end of year 102 2019 $m 56.1 8.4 1.6 - 66.1 9.6 60.3 - 69.9 Premises $m 75.7 13.3 (16.4) (3.9) 68.7 Restructuring costs $m 14.2 14.6 (23.4) (3.8) 1.6 2018 $m 60.9 9.8 14.2 7.5 92.4 7.0 65.9 6.0 78.9 Other $m 13.5 - (13.5) - - Tabcorp Annual Report 2019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. 103 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2019 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 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 Keno (NSW) Pty Ltd Tabcorp Gaming Solutions (NSW) Pty Ltd Tabcorp Gaming Solutions Pty Ltd Intecq Limited eBET Gaming Systems Pty Limited Tabcorp Investments No.5 Pty Ltd Tabcorp Investments No.6 Pty Ltd Tabcorp Wagering (Vic) Pty Ltd Tabcorp Wagering Assets (Vic) Pty Ltd Tabcorp Wagering Participant (Vic) Pty Ltd Tab Limited Tabcorp Services Pty Ltd Tabcorp Finance Pty Ltd Sky Channel Pty Ltd 2KY Broadcasters Pty Ltd Tabcorp Training Pty Ltd Tabcorp International Pty Ltd Tabcorp International No.4 Pty Ltd Tatts Group Limited Ubet Qld Limited Ubet NT Pty Ltd Ubet Radio Pty Ltd Ubet SA Pty Ltd Ubet Tas Pty Ltd Tasradio Pty Ltd Maxgaming Holdings Pty Ltd Maxgaming NSW Pty Ltd Maxgaming Qld Pty Ltd Reaftin Pty Ltd Bytecraft Systems Pty Ltd Bytecraft Systems (NSW) Pty Ltd Tattersall’s Holdings Pty Ltd Tattersall’s Sweeps Pty Ltd George Adams Pty Ltd Tatts NT Lotteries Pty Ltd New South Wales Lotteries Corporation Pty Limited Golden Casket Lottery Corporation Limited Tatts Lotteries SA Pty Ltd TattsTech Pty Ltd 50-50 Software Pty Ltd tatts.com Pty Ltd (i) 100% owned Australian subsidiaries Tabcorp Gaming Solutions (ACT) Pty Ltd Tabcorp Gaming Solutions (Qld) Pty Ltd Tabcorp International No.5 Pty Ltd Tabcorp International No.6 Pty Ltd Tabcorp Investments No.9 Pty Ltd Tabcorp Investments No.10 Pty Ltd Tabcorp Investments No.11 Pty Ltd Tabcorp Wagering Manager (Vic) Pty Ltd OneTab Australia Pty Ltd OneTab Holdings Pty Ltd 104 Sky Australia International Racing Pty Ltd Club Gaming Systems (Holdings) Pty Ltd COPL Pty Ltd eBET Systems Pty Limited Industry Data Online Pty Ltd Sky Channel Marketing Pty Ltd Tattersall’s Gaming Systems (NSW) Pty Ltd Tatts Online Pty Ltd Thelott Enterprises Pty Ltd Ubet Enterprises Pty Ltd Clubline Systems Pty Limited (ii) eBET Services Pty Limited (ii) EGM Tech Pty Ltd (ii) Inov8 Mobile Pty Limited (ii) Maxgaming Vic Pty Ltd (ii) Maxi Gaming Pty Limited (ii) Showboat Australia Pty Ltd (ii) TAB Queensland Pty Ltd (ii) Tabcorp Investments No.2 Pty Ltd (ii) Tabcorp Investments Pty Ltd (vi) Tabcorp Annual Report 2019100% owned Australian subsidiaries (continued) Tattersall’s Gaming Pty Ltd Tatts Employment Co (NSW) Pty Ltd Tatts Employment Share Plan Pty Ltd Tabcorp Employee Share Administration Pty Ltd 50% owned Australian joint venture entities Gaming Solutions Pty Limited (iii) International subsidiaries Name Tabcorp Canada Limited (ii) Luxbet Europe Limited (v) Luxbet Europe Services Limited (v) Premier Gateway International Limited Premier Gateway Services Limited Tabcorp Europe Holdings Limited Tabcorp Europe Limited Bytecraft Systems (NZ) Limited Tattersall’s Investments (South Africa)(Pty) Limited Tabcorp UK Limited (iv) Talarius Holdings Limited (ii) Sky Racing World Holdco, LLC Sky Racing World, LLC Tabusa, LLC Wintech Investments Pty Ltd Advento Pty Ltd (ii) Agility Interactive Pty Ltd (ii) Tabcorp Manager Pty Ltd (ii) Tattersall’s Australia Pty Ltd (ii) Tattersall’s Club Keno Pty Ltd (ii) 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) Company was added to the deed of cross guarantee with Tabcorp Holdings Limited during the current year. (ii) Companies were deregistered 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 2019. (iv) Company was placed in members’ voluntary liquidation during the current year. (v) Companies were deregistered by the Group on 1 July 2019. (vi) Company was deregistered by the Group on 21 July 2019. % equity interest 100 100 100 50 50 100 100 100 100 100 100 100 100 100 105 Tabcorp Annual Report 2019FINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2019 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. 106 Tabcorp Annual Report 2019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 ASIC 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 from continuing operations before income tax expense Income tax expense Profit from continuing operations after income tax expense Discontinued operations Loss from discontinued operations net of tax Net profit 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 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 2019 $m 5,491.1 (4,829.6) 661.5 1.8 (191.8) 471.5 (162.4) 309.1 (82.0) 227.1 (5.1) 1.4 (0.4) 0.1 (4.0) 223.1 227.1 (505.9) 20.3 (0.3) (423.0) (681.8) 2018 $m 3,705.7 (3,382.4) 323.3 1.9 (129.9) 195.3 (77.8) 117.5 (8.7) 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) 107 Tabcorp Annual Report 2019FINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2019 D2 Deed of cross guarantee (continued) Balance sheet Cash and cash equivalents Receivables Prepayments Current tax assets Derivative financial instruments Other financial assets Other Total current assets Receivables Investment in controlled entities Other financial assets Licences Other intangible assets Property, plant and equipment Prepayments 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 108 2019 $m 450.0 110.2 35.2 27.0 18.8 12.8 97.0 751.0 4.3 14.2 156.6 2,254.4 9,089.0 562.0 23.0 289.0 19.6 12,412.1 13,163.1 1,129.7 192.0 65.9 46.3 81.7 1,515.6 234.2 3,526.9 577.5 69.9 81.5 1.3 4,491.3 6,006.9 7,156.2 8,561.7 (681.8) (723.7) 7,156.2 2018 $m 350.4 95.6 42.8 21.0 40.6 - 81.7 632.1 7.0 101.3 75.8 2,361.1 9,047.9 488.2 29.9 123.0 14.0 12,248.2 12,880.3 966.6 132.9 89.2 47.7 66.9 1,303.3 211.1 3,371.8 589.4 78.9 21.8 2.0 4,275.0 5,578.3 7,302.0 8,529.1 (505.9) (721.2) 7,302.0 Tabcorp Annual Report 2019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 2019 $m 247.4 (0.2) 247.2 65.1 8,024.1 40.1 49.8 8,561.7 76.0 (669.9) 6.5 7,974.3 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 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 2019 or 30 June 2018. 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. 109 Tabcorp Annual Report 2019FINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2019 D4 Business combinations Acquisition of Tatts Group Limited in the prior year 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 created 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 Other financial assets 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 liabilities acquired Goodwill arising on acquisition (i) Purchase consideration transferred 2018 $m 195.9 37.0 27.4 73.6 58.9 22.8 75.5 181.7 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. 110 Tabcorp Annual Report 2019(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 In the prior year, transaction costs of $48.6 million were expensed and disclosed as ‘Transaction costs – combination with Tatts Group’ in the income statement and comprised: Consultancy and legal costs Debt related costs Other expenses Total transaction costs 2018 $m 389.3 6,075.7 6,465.0 195.9 (389.3) (193.4) 2018 $m 31.2 17.1 0.3 48.6 Costs of $1.7 million attributable to the issuance of shares were charged directly to equity in the prior year as a reduction in issued capital. (d) Revenue and profit contribution Tatts Group contributed $1,560.0 million revenue and $120.2 million profit after income tax expense in the prior year. If the acquisition had taken place at the beginning of the prior year, 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 excluded transaction costs, gain on the cash-settled equity swap, and the impact of the Odyssey Gaming Services business divested during the prior year. 111 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE For the year ended 30 June 2019 D5 Discontinued operations In July 2018, Sun Bets ceased trading and is reported as a discontinued operation. Sun Bets was a UK online wagering and gaming business that the Group had in partnership with News UK since 2016. The results of the discontinued operations are presented below: Revenue Expenses(i) Loss before income tax benefit Income tax benefit on operating activities of discontinued operations Loss from discontinued operations, net of tax Cash flow information – discontinued operations: The cash flows from the discontinued operations contained in the Group cash flow statement are: Net cash outflow from operating activities Net cash outflow from investing activities Net cash outflow Earnings per share from discontinued operations: Basic earnings per share (cents) Diluted earnings per share (cents) 2019 $m 0.1 (10.5) (10.4) 0.6 (9.8) (91.5) - (91.5) (0.5) (0.5) 2018 $m 7.4 (134.5) (127.1) 3.7 (123.4) (46.0) (9.4) (55.4) (8.3) (8.3) (i) Expenses in the prior year included an impairment of software of $8.0 million and an onerous contract expense in relation to contractual obligations of $82.5 million. A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations, or is a controlled entity acquired or held exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is re-presented as if the operation had been discontinued from the start of the comparative period. 112 Tabcorp Annual Report 2019D6 Investment in an associate Investment in Jumbo Interactive Ltd (Jumbo) 2019 $m 29.2 2018 $m 22.7 The Group owns 7,234,178 fully paid ordinary shares in Jumbo (12% interest), which is a retailer of official government and charitable lotteries in Australia, and is listed on the ASX under the ticker ‘JIN’. The equity accounted profit recognised during the year was $3.0m (2018: $0.9m). Dividends received from Jumbo during the year were $2.5m (2018: $1.0m). 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 Jumbo’s operational financial performance. The Group has therefore determined that it has significant influence over this entity. In the normal course of business, commission is paid to Jumbo for acting as an agent in regards to the sale of lottery tickets. In July 2018, the Group exercised options over 3,474,492 ordinary shares at a strike price of $2.37 and disposed 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. 113 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2019 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. Performance Rights are subject to a relative total shareholder return (relative TSR) measure, a market vesting condition. A second performance measure, being a non-market vesting condition was introduced for grants made in the current financial year. The fair value of Performance Rights under each performance measure is determined at grant date by an external valuer and takes into account the terms and conditions upon which they were granted. The fair value is recognised as an employee expense (with a corresponding increase in equity) over the vesting period. For the relative TSR measure the fair value is recognised as an expense irrespective of whether the Performance Rights vest to the holder, and a reversal of the expense is only recognised in the event the instruments lapse due to cessation of employment within the vesting period. For the second performance measure the amount expensed is based on the expected number of Performance Rights vesting, with the ultimate expense reflecting the actual Performance Rights that vest. 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: - Expiry date 22 September 2018 14 September 2019 15 September 2020 19 September 2021 30 June 2021 Grant date 2019 29 October 2015 25 October 2016 27 October 2017 17 October 2018 17 October 2018 114 Balance at start of year Movement during the year Forfeited Granted Vested Balance at end of year 1,136,076 1,135,762 1,460,242 - - 3,732,080 - - - 1,727,310 575,758 2,303,068 (1,136,076) (25,344) (127,134) - - (1,288,554) - - - - - - - 1,110,418 1,333,108 1,727,310 575,758 4,746,594 Tabcorp Annual Report 2019Grant date 2018 28 October 2014 29 October 2015 25 October 2016 27 October 2017 Expiry date 16 September 2017 22 September 2018 14 September 2019 15 September 2020 Balance at start of year Movement during the year Forfeited Granted Vested Balance at end of year 1,315,072 1,239,782 1,324,354 - 3,879,208 - - - 1,566,071 1,566,071 (263,017) (103,706) (188,592) (105,829) (661,144) (1,052,055) - - - (1,052,055) - 1,136,076 1,135,762 1,460,242 3,732,080 No Performance Rights were exercisable at the end of the current or previous year. 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 $2.98 (2018: $2.37). The assumptions underlying the Performance Rights valuations are: Grant date 28 October 2014 29 October 2015 25 October 2016 27 October 2017 17 October 2018 17 October 2018 Expiry date 16 September 2017 22 September 2018 14 September 2019 15 September 2020 19 September 2021 30 June 2021 Share price at date of grant $ 4.03 4.73 4.91 4.45 4.76 4.76 Expected volatility in share price (i) % 22.00 25.00 22.00 22.00 21.00 21.00 Expected dividend Risk free interest yield (ii) % 5.00 5.00 5.00 5.50 5.06 5.06 rate(iii) % 2.52 1.80 1.78 2.04 2.05 2.05 Value per Performance Right $ 2.42 2.47 2.51 2.37 2.59 4.16 (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. Merger Completion Awards modification During the prior year, Merger Completion Awards were provided to select employees. The awards were delivered in the form of cash or a combination of cash and Restricted Shares. For KMP, the Restricted Shares component was modified during the current year. The modification introduced a non-market vesting condition in addition to the previous service condition, and extended the restriction period. The modification had no impact on the accounting for the Restricted Shares. 115 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2019 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 (‘NSW Lotteries plan’) and the Tabcorp Superannuation Plan (‘Tabcorp 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) NSW Lotteries plan – Balance at 30 June 2017 – Acquisitions via business combinations – Actuarial gains/(losses) – Benefits paid – Other – Balance at 30 June 2018 – Actuarial gains/(losses) – Benefits paid – Other – Balance at 30 June 2019 Tabcorp plan – Balance at 30 June 2017 – Actuarial gains/(losses) – Actual return on plan assets excluding interest income – Benefits paid – Other – Balance at 30 June 2018 – Actuarial gains/(losses) – Actual return on plan assets excluding interest income – Benefits paid – Other – Balance at 30 June 2019 (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 NSW Lotteries plan Tabcorp plan 116 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 0.7 (1.0) 1.6 17.3 14.9 - 0.6 (1.2) 0.6 14.9 - 0.5 (1.2) 0.7 14.9 - (25.6) 0.5 0.5 (0.6) (25.2) (3.5) 1.0 (1.0) (28.7) (12.7) (0.2) - - 0.6 (12.3) (0.9) - - 0.6 (12.6) 2019 $m (2.8) (0.4) (3.2) - (9.9) 0.5 - 0.2 (9.2) (2.8) - 0.6 (11.4) 2.2 (0.2) 0.6 (1.2) 1.2 2.6 (0.9) 0.5 (1.2) 1.3 2.3 2018 $m 0.6 0.5 1.1 Tabcorp Annual Report 2019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 NSW Lotteries plan 2018 % 10.5 8.6 22.2 26.1 8.9 23.7 100.0 2019 % 9.6 10.1 19.8 27.0 8.5 25.0 100.0 Tabcorp plan 2019 % 5.0 17.0 28.0 25.0 6.0 19.0 100.0 2018 % 5.0 17.0 28.0 25.0 6.0 19.0 100.0 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. 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 2019 $m 14.0 15.4 29.4 56.6 141.2 118.2 316.0 17.2 The Group leases property under operating leases expiring from 1 to 14 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. 2018 $m 4.8 3.3 8.1 62.1 143.9 146.2 352.2 5.6 117 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2019 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 2019. It is expected that any liabilities arising from such legal action would not have a material adverse effect on the Group’s financial position, except as set out below. (c) Racing Queensland dispute On 28 June 2019 Racing Queensland (RQ) commenced legal proceedings against the Company and UBET Qld Limited (UBET). RQ is seeking damages and other relief. The proceedings are in relation to two disputes relating to the calculation of fees following the introduction of point of consumption tax in Queensland on 1 October 2018. The Company and UBET currently consider, on the balance of probability, that no provision for liability is required. In the event the Company and UBET are ultimately unsuccessful in the proceedings the estimated financial impact for the year ended 30 June 2019 is an expense of up to $20 million post tax. 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 $83.6 million were received by the Group in 2019 (2018: $85.5 million). (b) Director and executive disclosures (i) Compensation of Key Management Personnel (KMP) Short term Other long term Post employment Share based payments 118 2019 $ 8,898,468 79,950 358,027 3,207,037 12,543,482 2018 $ 7,054,988 452,556 275,431 2,558,411 10,341,386 Tabcorp Annual Report 2019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 E7 Other accounting policies (a) Statement of compliance (i) Changes in accounting policy and disclosures 2019 $000 1,896 830 2,726 2018 $000 1,883 723 2,606 The accounting policies used are consistent with those applied in the 30 June 2018 financial report, except for the adoption of new standards effective as of 1 July 2018. The Group applies, for the first time, AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers. Adoption of AASB 9 impacted how the Group classifies certain financial instruments (refer note B2). Assets previously classified as held to maturity investments are now classified as debt instruments at amortised cost and assets previously classified as available for sale financial assets are now classified as equity instruments at fair value through other comprehensive income (FVOCI). Comparative information has been restated. There were no changes to the measurement of the Group’s financial assets except that changes in the fair value of equity instruments at FVOCI are no longer permitted to be reclassified to profit or loss upon derecognition. There were no changes in the classification or measurement of the Group’s financial liabilities. AASB 15 establishes a framework for determining whether, how much and when revenue from contracts with customers is recognised. The core principle is that revenue must be recognised when control of the goods or services is transferred to the customer, at the transaction price. The Group’s accounting policies in relation to revenue (refer to note A4) have been aligned to the new standard. On application of AASB 15, certain commission arrangements are reclassified out of operating expenses and are presented as a reduction to revenue. The reclassification has no impact on profit. The below table sets out the impact of the restatement: Revenue Commission and fees Reported $m 3,821.3 (1,238.5) 30 June 2018 Impact $m (64.0) 64.0 Restated $m 3,757.3 (1,174.5) A number of other 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. 119 Tabcorp Annual Report 2019FINANCIAL REPORTNOTES TO THE FINANCIAL STATEMENTS: OTHER DISCLOSURES For the year ended 30 June 2019 E7 Other accounting policies (continued) (a) Statement of compliance (continued) (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 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 exemptions available for low value and leases less than 12 months. At commencement of the lease, 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 will be recognised on the asset and interest on the liability, and will replace rental expense which is currently recognised. The lease liability will be remeasured upon occurrence of certain events such as change in lease term or change in rate used to determine lease payments. The remeasurement normally also adjusts the right of use asset. The Group has circa 1,300 leases, and will adopt the ‘full retrospective’ approach whereby on a lease by lease basis the right-of-use asset and lease liability is calculated from commencement of the lease. The cumulative effect will be recognised as an adjustment to the opening balance of retained earnings as at 1 July 2018, and is estimated to reduce retained earnings by $22.0m. The comparative information in relation to the year ended 30 June 2019 will be restated. The Group will elect to use the exemptions provided by AASB 16 for short-term leases (less than 12 months) and leases for low-value assets. The Group will also elect to apply AASB 16 to contracts that were previously identified as leases applying AASB 117 and AASB Interpretation 4. Therefore AASB 16 will not be applied to contracts that were not previously identified as containing a lease. The Group has performed a detailed impact assessment of AASB 16 and the estimated impact is as follows: Estimated impact on the Balance Sheet as at 30 June 2019 Right-of-use asset Lease receivable Property, plant and equipment Total assets impact Lease Liabilities Deferred tax liabilities Provisions Total liabilities impact Equity impact 120 30 June 2019 Reported $m - - 562.0 13,299.1 - 575.3 136.0 6,092.6 7,206.5 Estimated impact $m 316.3 3.4 (7.4) 312.3 398.2 (10.0) (52.9) 335.3 (23.0) 30 June 2019 Restated $m 316.3 3.4 554.6 13,611.4 398.2 565.3 83.1 6,427.9 7,183.5 Tabcorp Annual Report 2019Estimated impact on the Income Statement for the year ended 30 June 2019 Revenue Depreciation and amortisation Impairment Property costs Profit before income tax expense and net finance costs impact Net finance costs Profit from continuing operations before income tax expense impact Income tax expense Net profit after tax impact (b) Goods and services tax Revenues, expenses, assets and liabilities are recognised net of the amount of GST except: 30 June 2019 Reported $m 5,482.2 (301.2) (2.9) (69.9) 724.3 (190.1) 534.2 (161.9) 362.5 Estimated impact $m 6.1 (51.6) 6.4 54.6 15.5 (17.0) (1.5) 0.5 (1.0) 30 June 2019 Restated $m 5,488.3 (352.8) 3.5 (15.3) 739.8 (207.1) 532.7 (161.4) 361.5 • 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. 121 Tabcorp Annual Report 2019FINANCIAL 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 (Cth), including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001 (Cth); (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 2019. 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 14 August 2019 122 Tabcorp Annual Report 2019 INDEPENDENT AUDITOR’S REPORT 123 Tabcorp Annual Report 2019FINANCIAL REPORTINDEPENDENT AUDITOR’S REPORT 124 Tabcorp Annual Report 2019125 Tabcorp Annual Report 2019FINANCIAL REPORTINDEPENDENT AUDITOR’S REPORT 126 Tabcorp Annual Report 2019127 Tabcorp Annual Report 2019FINANCIAL REPORTFIVE YEAR REVIEW FIVE YEAR REVIEW Financial performance Total revenue (i) EBITDA(ii) Profit before interest and tax Profit/(loss) after income tax attributable to members of parent entity(iii) Dividend(iv) 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(iv) Operating cash flow per share(v) Net assets per share Return on shareholders' funds Total shareholder return(vi) Share price close Market capitalisation Segment revenue from continuing operations(vii) Lotteries and Keno (viii) Wagering and Media (i) Gaming Services Employee Safety (ix) Females in senior management roles Other stakeholder benefits Returns to racing industry State and territory gambling taxes and GST Income tax expense/(benefit)(iii) 128 Unit $m $m $m $m $m $m $m $m $m $m $m cents cents cents $ % % $ $m $m $m $m LTIFR % $m $m $m FY19 5,482.3 1,014.9 713.7 362.5 423.6 13,299.1 6,092.6 7,206.5 714.8 278.4 463.0 18.0 21.0 21.6 3.57 5.0 4.2 4.45 8,985.9 2,864.9 2,312.2 304.0 FY18 3,764.7 490.0 241.4 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 1,390.7 2,122.1 249.7 3.6 36 2.3 36 974.5 2,099.9 161.3 916.8 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 3,650.1 212.7 1,873.0 143.9 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 3,799.8 208.5 1,873.0 107.2 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 3,773.8 199.0 1,856.9 99.6 1.0 33 773.2 459.2 (75.7) (i) FY18 has been restated to reflect impact of application of AASB 15 Revenue from Contracts with Customers. (ii) FY19 includes impairment of $2.9 million. FY18 includes impairment of $39.4 million. FY17 includes impairment of $27.5 million. (iii) 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. (iv) 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. (v) 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. (vi) 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. (vii) Revenue includes both external and internal revenue. (viii) Prior to FY18, this was the Keno segment. (ix) The lost time injury frequency rate (LTIFR) is the number of lost time injuries per million hours worked. Tabcorp Annual Report 2019 SHAREHOLDER INFORMATION As at 1 August 2019 Securities on issue Tabcorp has on issue 2,019,296,793 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 2018 due to ordinary shares issued 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. Tabcorp also has 4,746,594 Performance Rights issued to executives pursuant to Tabcorp’s Long Term Incentive Plan. These securities represent the only Company securities on issue. A total of 153,827 ordinary shares were acquired on market during FY19 at an average price of $4.90 per ordinary share pursuant to Tabcorp’s employee incentive plans. 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. 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 pursuant to notices lodged with the ASX in accordance with section 671B of the Corporations Act 2001: Name AustralianSuper Pty Ltd Perpetual Limited The Vanguard Group, Inc BlackRock Group Date of interest 9 February 2018 29 July 2019 29 December 2017 21 May 2019 Number of ordinary shares(i) 131,834,848 119,313,410 106,462,742 101,144,422 % of issued capital(ii) 6.56 5.91 5.295 5.00 (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. 129 Tabcorp Annual Report 2019SHAREHOLDER INFORMATION As at 1 August 2019 Twenty largest registered holders of ordinary shares Investor name HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty Ltd BNP Paribas Noms Pty Ltd UBS Nominees Pty Ltd Citicorp Nominees Pty Limited Argo Investments Limited HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited – GSCO ECA Robin Edward Davey Australian Executor Trustees Limited Solid Earth Pty Ltd Wentworth Investments Pty Ltd AMP Life Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd DRP HSBC Custody Nominees (Australia) Limited Avanteos Investments Limited Navigator Australia Ltd Total of top 20 registered holders Distribution of securities held Number of ordinary shares 517,961,548 407,730,496 172,365,786 90,899,845 57,494,820 27,551,125 20,729,758 18,300,210 10,586,538 9,779,071 8,045,022 7,654,934 6,557,709 6,015,467 5,311,910 4,907,963 4,594,415 4,566,369 4,344,073 3,789,814 1,389,186,873 % of issued capital 25.65 20.19 8.54 4.50 2.85 1.36 1.03 0.91 0.52 0.48 0.40 0.38 0.32 0.30 0.26 0.24 0.23 0.23 0.22 0.19 68.80 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 78,373 69,121 12,313 8,626 390 168,823 Number of securities 25,867,132 163,746,127 87,480,025 184,393,091 1,557,810,418 2,019,296,793 Number of holders - - - 15 11 26 Number of securities - - - 572,824 4,173,770 4,746,594 (i) Ordinary shares includes Restricted 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 42 to 72 for more information about the Company’s incentive arrangements. Marketable parcel There were 13,772 shareholders holding less than a marketable parcel of ordinary shares ($500 or more, equivalent to 112 ordinary shares) based on a market price of $4.47 at the close of trading on the ASX on 1 August 2019. 130 Tabcorp Annual Report 2019MAJOR ANNOUNCEMENTS ONLINE SHAREHOLDER SERVICES Tabcorp’s major announcements since the previous annual report were: 2019 14 August 24 July 28 June 28 June 30 April 13 February 13 February 7 February Annual Report and full year results Update on UBET – Racing Queensland dispute Claim by Racing Queensland Appointment of Adam Newman as Chief Financial Officer Macquarie Australia Conference presentation by David Attenborough Chief Financial Officer, Damien Johnston, to retire Half year results Formal appointment of Chris Murphy as Company Secretary 2018 17 December Tabcorp releases dates for half year results announcement and dividend 25 October 17 October Tabcorp Investor Day presentation Annual General Meeting addresses and presentations by the Chairman and Managing Director 11 September Notice of Annual General Meeting and proxy form 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 (see above) or by contacting the share registry (see next page). Visit www.tabcorp.com.au 131 Tabcorp Annual Report 2019Australian Accounting Standards Board Australian Capital Territory The Tabcorp business located in the ACT Annual General Meeting Anti-Money Laundering/Counter-Terrorism Financing Australian Securities and Investments Commission Australian Securities Exchange Australian dollar The Company’s Board of Directors The Tabcorp-Tatts combination which was implemented in December 2017 Tabcorp Holdings Limited (ABN 66 063 780 709) Director of the Company Dividends per share Dividend Reinvestment Plan Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation, and which is non-IFRS financial information Electronic gaming machine Earnings per share The Group’s financial year is 1 July to 30 June The Group’s business that provides services to licensed gaming venues and EGM monitoring services Group Funding Multiplier, used in determining remuneration under the STI The Tabcorp group of companies Individual performance multiplier, used in determining remuneration under the STI A game of chance that is played approximately every three minutes and is part of the Group’s Lotteries and Keno business Key management personnel The Group’s business that operates lotteries and Keno, which are games of chance Long term incentive The Group’s Gaming Services brand Managing Director and Chief Executive Officer NED NPAT NSW NT Performance Rights PGI QLD Restricted Shares SA Sky Racing STI Sun Bets TAB Tabcare TAH TAS Tatts or Tatts Group TGS The Lott Trackside TSR UBET USD VIC Wagering and Media WGEA Non Executive Director Net profit after tax New South Wales Northern Territory Securities allocated to executives under the LTI, which may vest subject to achieving specified performance hurdles The Premier Gateway International joint venture operating from the Isle of Man Queensland Ordinary shares allocated to executives under the STI, and which may not be traded for a specified period South Australia Part of the Group’s media business, broadcasting racing and sport throughout Australia and internationally Short term incentive The online wagering and gaming business located in the United Kingdom which ceased trading in July 2018 The Group’s wagering brand The Group’s community and employee engagement program The ASX ticker code used to identify Tabcorp Tasmania Tatts Group Limited (ABN 19 108 686 040) which was acquired by Tabcorp Holdings Limited in December 2017 Tabcorp Gaming Solutions, now called MAX Performance Solutions and part of the Gaming Services business The umbrella brand for the Group’s lotteries business The Group’s animated racing game Total shareholder return Part of the Group’s wagering business acquired as part of the Combination United States dollar Victoria The Group’s business that operates fixed odds and pari-mutuel betting products and services on racing, sport and novelty products, and racing and sports broadcasting Workplace Gender Equality Agency GLOSSARY AASB ACT ACTTAB AGM AML/CTF ASIC ASX AUD Board Combination Company or Tabcorp Director DPS DRP EBIT EBITDA EGM EPS Financial year/FY Gaming Services GFM Group IPM Keno KMP Lotteries and Keno LTI MAX MD & CEO 132 Tabcorp Annual Report 2019Queensland office Level 8 180 Ann Street Brisbane QLD 4000 Telephone 07 3877 1010 Share Registry Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia Telephone 1300 665 661 Telephone 02 8280 7418 02 9287 0303 Facsimile 02 9287 0309 (proxy forms only) Facsimile tabcorp@linkmarketservices.com.au Email www.linkmarketservices.com.au Website KEY DATES 2019 Annual General Meeting (Sydney) 2020* 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) 24 October 11 February 14 February 17 February 11 March 30 June 19 August 26 August 27 August 18 September 20 October * Proposed dates set out above are subject to change. Payment of any dividend is subject to Board approval and the key dates for each payment will be confirmed to the ASX. Refer to the Company’s website for any updates. COMPANY DIRECTORY Registered office Tabcorp Holdings Limited Level 21, Tower 2, Collins Square 727 Collins Street Melbourne VIC 3008 Australia Telephone 03 9246 6010 03 9246 6684 Facsimile enquiries@tabcorp.com.au Email 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 Corporate information The Company is a company limited by shares that is incorporated and domiciled in Australia. Stock exchange listing The Company’s ordinary shares are quoted on the Australian Securities Exchange (ASX) under the code ‘TAH’. Copyright 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. Investment warning 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. Privacy Tabcorp respects the privacy of its stakeholders. Tabcorp’s Privacy Policy is available on the Company’s website at www.tabcorp.com.au. Currency References to currency are in Australian dollars unless otherwise stated. Trade marks ® These trade marks are registered in Australia (either across Australia or limited to certain state/s or territory/ies) and are owned by or licensed to a company in the Tabcorp Group. 133 Tabcorp Annual Report 2019 WWW.TABCORP.COM.AU 

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