Vertiv
Annual Report 2019

Plain-text annual report

ANNUAL REPORT ABN 80 129 643 492  CONTENTS 2 Chairman’s statement 6 Chief Executive’s overview 12 Board of Directors 16 Directors’ report 40 Auditor’s independence declaration 41 Statement of comprehensive income 42 Statement of financial position 43 Statement of changes in equity 44 Statement of cash flows 45 Table of contents 46 Notes to the financial statements 85 Directors’ declaration 86 Independent auditor’s report to the members of Virtus Health Limited 91 Shareholder Information 93 Corporate directory LEADING MINDS LEADING SCIENCE Virtus Health is one of the most successful medical collaborations of its kind in the world. We combine the strength of clinical collaboration with advanced scientific techniques to deliver the best possible outcomes for our patients. 127 FERTILITY SPECIALISTS 20,300 FRESH IVF CYCLES 242 SCIENTISTS 1,046 NURSE, COUNSELLOR AND PATIENT SUPPORT 43 FERTILITY CLINICS 7 DAY HOSPITALS General information The financial report consists of the financial statements, notes to the financial statements and the directors’ declaration. Virtus Health Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 3 176 Pacific Highway Greenwich NSW 2065 A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 20 August 2019. The directors have the power to amend and reissue the financial statements. Management is focused on maximizing return from operational changes being implemented in Australia, business development in our European clinics and the delivery of greater synergies across our six European sites. CHAIRMAN’S STATEMENT The results for the financial year ended 30 June 2019 reflect a challenging year in several individual operations. Group revenue increased 6.1% to $280.1 million. Revenue growth was flat in Australia, impacted by price pressure in a competitive Australian market and a decline in our genetic screening revenue following a change in internal clinical practice. The performance of our Alexandria and Hobart operations were both disrupted in the first half by their relocations to new facilities. International revenue increased by 25.2% supported by a first year contribution from our new Danish clinic, Trianglen and continued growth in Singapore. However, the performance of Aagaard Fertility Clinic, Denmark and Complete Fertility Centre, UK were below expectations, with Aagaard suffering a decline in revenue as doctor resource issues took longer than expected to resolve. These issues have been addressed by management and we will have a stronger complement of specialists by November 2019. For the year ended 30 June 2019, the Directors announce a final dividend of 12.0 cents per share fully franked and this results in a full year dividend payout of 24.0 cents per share fully franked; this is a decrease of two cents per year on the prior year reflecting reduced earnings. Management is focused on maximizing return from operational changes being implemented in Australia, business development in our European clinics and the delivery of greater synergies across our six European sites. The Board continues to work closely with management to identify international development opportunities. Cycle volume in Virtus Australian clinics increased 1.5% over pcp against comparable market growth of 4.9%. Growth in demand for lower priced services continues to increase and Virtus Health lower priced services through our TFC branded clinics increased by over 25% over the pcp. Growth in premium service activities declined by 2.6% but overall we maintained our aggregate EBITDA in our fertility operations in New South Wales, Victoria and Queensland. The Board recognise that the Australian ARS market continues to evolve and we have maintained our focus on service delivery to support patients across a range of social and economic demographics, as well as meeting the full range of clinical demands essential to the sustainability of the Virtus business. An exciting illustration of our commitment to improving patient outcomes is the development of the Artificial Intelligence software, “Ivy”. In April 2019, we were pleased to announce the collaboration and further development of this activity with our technology partners, Vitrolife based in Sweden, the manufacturer of EmbryoScope time-lapse incubators and Harrison.AI, an Australian technology company specialising in AI in healthcare. The relocations in Alexandria and Hobart, which provide long- term capacity and capability improvements to Virtus, affected our profits in FY2019 although management is focused on business development in each location in the new financial year. Changes to federal and territory legislation are an important The Australian ARS market continues to evolve and we have maintained our focus on service delivery to support patients across a range of social and economic demographics. feature of the future landscape for ARS across the world. In Australia the Federal Health department published its review of the Medicare Benefits Schedule; to date there have been no announcements regarding the ARS sector. In Europe, changes to donor services, identified last year, are still expected in Ireland and our European management team continue to assess the opportunities to expand our donor services in our chosen territories. At Board level, we welcomed Shane Solomon as an independent non-executive Director in October 2018. Shane adds to the depth of healthcare operating experience on our Board. I also wish to announce that, after six years as Chairman, I will be stepping down from the Board at the Annual General Meeting in November. I would like to thank Board members for their diligence and support during my time as Chairman. An independent recruitment firm conducted a process with the remaining independent Directors who unanimously nominated Sonia Petering as Chair elect commencing from 20 November 2019. Finally, I would like to thank all our staff, fertility specialists and management teams who contribute daily to the success of Virtus Health. Their flexibility in a changing clinical and business environment is essential to our continued success. PETER MACOURT Chairman 2 3 VIRTUS HEALTHANNUAL REPORT 2019Virtus’ diversified and vertically integrated platform and our recent investment in infrastructure reaffirms our strong position to capture volume in our ARS markets and associated services of day hospitals and diagnostics in FY20 and beyond. CHIEF EXECUTIVE’S OVERVIEW We see a future where everyone in the community has access to the opportunity to create a family. Our ambition is to be the most valued and leading provider of ARS based on extraordinary patient care and clinical and scientific leadership. Results Performance throughout FY19 is indicative of changing market conditions and Virtus Health’s significant investment across our three pillars of fertility, diagnostics and day hospitals to ensure we remain the market-leading Assisted Reproductive Services (ARS) provider in Australia and continue to increase our presence globally. Identifying opportunities to enable future growth, in FY19 we set the foundation for evolving patient services, improving productivity and, ultimately, advancing revenue through the implementation of a number of strategic activities and infrastructure projects. Whilst these investments had an impact on overall financial performance in FY19, we are confident the groundwork laid will facilitate business development opportunities and growth through our competitive service offerings in FY20. Virtus Health teams completed 20,300 fresh IVF cycles in FY19, 37,864 treatments, 32,827 day hospital procedures and more than 200,000 diagnostic referrals. Growth initiatives Throughout FY19 we implemented key strategic initiatives to support future growth across international and domestic ARS markets as well as specialised diagnostics and day hospitals in Australia. We continue to focus on providing a range of services across the ARS value chain from consultation to diagnostics, low cost and full service fertility treatment through to high-end genetics and we are the only ARS organisation in Australia that is delivering this comprehensive fertility care for patients. We also continue to evolve our clinical approach and service models to ensure we remain relevant to the patients we treat and the markets in which we operate, expanding services across our network to meet all patient demographics and market segments. While our targeted response to low cost competition in Australia resulted in overall volume growth, margins were impacted. Revenue diversification through international expansion continues with the full year contribution from Trianglen in Denmark and Complete Fertility in Southampton, UK taking overall revenue contribution from international activities to 21%. Leading minds The Virtus network has remained stable in FY19 with 127 fertility specialists (103 in Australia) supported by over 1300 professional staff including scientists, nurses, researchers and administrators all with the ultimate goal of providing the highest standards of clinical care and patient outcomes. The average age of our fertility specialists is 52 and has remained relatively stable over FY19. All of our fertility specialists are qualified obstetricians and gynaecologists many of whom have subspecialty training in infertility and have achieved the highest possible level of qualification in this field, obtaining a Certificate of Reproductive Endocrinology and Infertility (“CREI”), and its worldwide equivalents. Our two biggest infrastructure projects were commissioned in FY19. Alexandria Specialist Day Hospital commenced operation after the relocation of IVF Australia’s eastern suburbs facilities were completed in August 2018 and whilst the impact on EBITDA from the relocation costs and a slowdown in non-IVF activities is evident in FY19, we expect to see the results of our business development activities, including the recruitment of additional surgeons, deliver revenue growth in FY20. Our second development, Hobart Specialist Day Hospital, commenced operation in late 2018 and achieved full accreditation in February 2019. This purpose-built facility was developed to better cater to the needs of patients and has cemented our competitive position in Tasmania. In FY19 Virtus Diagnostics undertook the relocation of its main pathology lab to new premises in the medical precinct of Revesby, introducing a full suite of state-of-the-art diagnostic equipment and an expanded testing capacity. Virtus’ diversified and vertically integrated platform and our recent investment in infrastructure reaffirms our strong position to capture volume in our ARS markets and associated services of day hospitals and diagnostics in FY20 and beyond. Multiple Sources of Revenue FY12 FY19 80% 13% 7% 21% 63% 8% 8% Australian ARS International/other Day Hospitals Specialised Diagnostics 6 7 VIRTUS HEALTHANNUAL REPORT 2019Leading science The Virtus-developed “Ivy” Artificial Intelligence (AI) system continued to build momentum in FY19 gaining international medical and scientific community interest with publication in Human Reproduction, the prestigious ARS international journal. In April 2019, Virtus entered into transfer and collaboration agreements for the “Ivy” software with Swedish company, Vitrolife, the manufacturer of EmbryoScope time-lapse incubators and Harrison.AI, an Australian technology company specialising in AI in healthcare. “Ivy” analyses the growth of embryos continuously over a five-day period and uses millions of data points from time-lapse imaging to predict the likelihood of an individual IVF embryo leading to a viable pregnancy. The AI technology supports elective single embryo transfer and is anticipated to shorten the time to pregnancy by ranking the most viable embryos for selection and transfer. The collaboration agreements build on existing scientific and commercial relationships and will focus on further innovation in the field of assisted reproductive services. The “One Lab” strategy under the leadership of Professor David Gardner has continued to develop, setting new benchmarks, pursuing process improvements and driving efficiency and consistency across our laboratories. Research continues to remain a key focus for Virtus and we aim to enhance our scientific and clinical research activities with an annual R&D investment of approximately $2.2 million. Throughout FY19 support continued for a number of specific research projects and PhD Scholarships within Virtus. Leading care We remain focused on service delivery of the highest standard across our fertility, day hospital and diagnostics businesses and are committed to supporting our doctors and specialist teams in their delivery of patient care. In FY18 we appointed an HR advisor to develop the Virtus “people plan” with the aim of ensuring both our management teams and frontline staff have the opportunity to develop their careers within Virtus Health. Throughout FY19, we began implementation of the “people plan” which will continue into FY20 ensuring Virtus is an employer of choice within the ARS sector, renowned for professional staff creating exceptional patient experiences. With the aim of ensuring a positive risk culture across the organisation, Virtus management teams continue to utilise our electronic platform RiskMan to enable greater awareness of the risks within our workplaces, analyse incidents and encourage open conversations to continually improve the safety and efficacy of all of our programs of care. Our patient satisfaction survey which measures our Net Promoter Score (NPS) has delivered promising results in FY19 with our overall NPS score lifting to 52, up from 42.8 in FY18. Our focus on the evolution of our service models combined with our significant investment in science and technologies ensures we remain relevant to the markets in which we operate and can deliver the highest quality of care across the full range of reproductive and fertility issues. Looking forward Infertility affects 1 in 6 couples of reproductive age world-wide and demand for Assisted Reproductive Services continues to increase. Virtus Health has a focused strategy to deliver earnings growth in the face of a restructuring market. The key aspects of our strategy are; In Australia we will; • Defend and build services and growth in our Premium business; We expect our focus on harmonisation and process improvement across our three key pillars of fertility, diagnostics and day hospitals to support our future growth, create additional capacity and ensure patients across the world have access to the best treatment and facilities to support their fertility journey. I extend my gratitude to the Virtus Board, the Executive team and all of our doctors and staff around the world for their support and ongoing commitment to the organisation and, importantly, the needs of our patients. Thank you for your continued effort and contribution to the Virtus culture of excellence. • Grow our low price services; • Grow non IVF day hospital revenue; and • Grow diagnostic revenue. In our International markets we will; • Target organic revenue growth in our current international markets; and • Consider acquisition in selected international territories. Margin enhancement will be targeted in all current locations. Our “One Lab” project and ICT projects are key components of our strategy driving improved patient satisfaction through process improvement and efficiency. Our focus on the evolution of our service models combined with our significant investment in science and technologies ensures we remain relevant to the markets in which we operate and can deliver the highest quality of care across the full range of reproductive and fertility issues. As the leading ARS organisation in Australia and Ireland with a growing presence in Europe we are well-positioned to continue to attract the very best clinical and scientific teams to meet the growing needs of the patients we treat. SUE CHANNON Group CEO 8 9 VIRTUS HEALTHANNUAL REPORT 2019 PIONEERING ARTIFICIAL INTELLIGENCE IN IVF The Virtus-developed “Ivy” Artificial Intelligence system has gained significant ground at an international level with a team of leading minds driving the powerful technology forward. Dr Aengus Tran of Harrison.AI, Dr Simon Cooke, Scientific Director of IVFAustralia, A/Prof Peter Illingworth, Medical Director of IVFAustralia and Professor David Gardner, Group Director of ART at Virtus Health led the continued development of Ivy in FY19. With the ability to more accurately and objectively predict the best embryo to select for transfer based on the presence of a fetal heart, early findings of Ivy were published in Human Reproduction in May 2019; the world’s leading peer-reviewed journal in reproductive medicine. Gaining approval from the Therapeutic Goods Administration (TGA), the framework of a Randomized Controlled Trial (RCT) has been approved to further investigate whether embryo selection using Ivy can lead to a higher clinical pregnancy rate after transfer of the first embryo compared to when selection is performed by an embryologist using the standard published criteria. Virtus Health, together with Harrison.AI, also announced a partnership in FY19 with Swedish company Vitrolife, the world’s leader in time-lapse incubation systems, to further refine the pioneering system. BOARD OF DIRECTORS PETER MACOURT Chairman BCom.; ACA; GAICD Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited, he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. Other current directorships: Chairman of SKY Network Television Limited (since August 2002); Director of Prime Media Limited Former directorships (last 3 years): None Special responsibilities: Member of the Audit Committee and the Nomination and Remuneration Committee. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee SUSAN CHANNON Chief Executive Officer Registered Nurse Div1; OR Management Certificate Susan (Sue) has held senior management positions in various Australian healthcare organisations for over 20 years. Before her appointment to Chief Executive Officer ('CEO') of the company in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. GREG COUTTAS Non-Executive Director BCom.; FCA; MAICD Greg spent 40 years with Deloitte including 28 years as partner. In his years at Deloitte he worked in audit across various sectors, specialising in ASX100 clients. Greg’s expertise includes accounting, finance, auditing, risk management, corporate governance, capital markets and due diligence. of the Board of Partners for Deloitte Australia from 2005 to 2016. Greg is also a director of Sydney Water Corporation, Hireup Pty Limited and a member of the Governance Board of The Salvation Army Australia Territory. Other current directorships: None Former directorships (last 3 years): None Additionally, Greg held a number of management roles at Deloitte including being the Managing Partner for NSW from 2005 to 2008, chairing the Audit and Risk Committee for eleven years, and was a member Special responsibilities: Chair of the Audit Committee and a member of the Risk and the Nomination and Remuneration Committees. LYNDON HALE Executive Director MBBS; FRACOG; CREI Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is a board member of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee SONIA PETERING Non-Executive Director LLB; BComm; FAICD Sonia has more than 15 years experience in non executive director and chair roles with listed and unlisted companies and government authorities across financial services, payments, insurance, professional services and healthcare. Sonia is an experienced commercial lawyer who commenced her legal practice in 2001. She holds a current Victorian legal practicing certificate. Sonia previously served as a non executive director on the boards of Transport Accident Commission of Victoria and Rural Finance Corporation of Victoria and as Chair of the Board of Rural Finance Corporation from 2009 - 2016. Sonia is also a non executive director of TAL Dai - ichi Australia Ltd, Qantm IP (ASX:QIP) and Cuscal Ltd. Other current directorships: Qantm IP Limited Former directorships (last 3 years): None Special responsibilities: Chair of the Nomination and Remuneration Committee and member of the Risk Committee. SHANE SOLOMON Non-Executive Director BSW, MA (Public policy), Adjunct Professor UTS Business School Shane is a highly experienced healthcare professional having worked in numerous Executive and Board roles across the public and private health sector over the past 34 years. Shane brings extensive health policy and a strong understanding of operational and clinical governance gained from his roles in the Victorian public health system including the role of Undersecretary for Health, and Chief Executive of the Hong Kong Hospital Authority. Returning to Australia in 2010, Shane became a Partner at KPMG Australia, leading the National Health practice and in 2013, he became founder and Managing Director of Telstra’s eHealth business, Telstra Health. Shane was appointed in 2011 by the Commonwealth Government to be Chairman of the Independent Hospital Pricing Authority. He maintains this role and is on the Board of Silver Chain, one of the largest community based health care service providers in Australia. Shane also chairs the SA Health EMR Project Board. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chair of the Risk Committee and a member of the Audit Committee. 12 VIRTUS HEALTH ANNUAL REPORT 2019 13 BUILDING THE FUTURE OF VIRTUS DIAGNOSTICS In FY19 the Virtus Diagnostics team launched key strategic initiatives to underpin the growth of the business. The relocation of the Virtus Diagnostics pathology lab from Hurstville to Revesby was completed in April 2019 and delivered facilities, equipment and capacity to achieve the goal of expanding operations both in general pathology services and complex genetic testing. To support the growth of the genetics division, a key appointment for the Diagnostics team in FY19 was the introduction of Professor David Coman to the role of Clinical Supervisor, Genetics. The world of genetics is rapidly evolving and, as a highly respected leader in this field of medical science, Professor Coman’s expertise will be invaluable to Virtus staff and clinicians. Additional pathology specialists were also appointed in FY19 in response to new supervisory requirements of the National Pathology Accreditation Advisory Council (NPAAC) regulations. Setting the framework of the future, the Virtus Diagnostics team is well positioned to grow both its operations and service offering to patients in FY20. 14 15 VIRTUS HEALTHANNUAL REPORT 2019DIRECTORS’ REPORT The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Virtus Health Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2019. Directors The following persons were directors of Virtus Health Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Peter Macourt - Chairman Susan Channon Lyndon Hale Peter Turner ( resigned on 21 November 2018) Sonia Petering Greg Couttas Shane Solomon ( appointed on 24 September 2018) Principal activities During the financial year the principal continuing activities of the consolidated entity were the provision of healthcare services which included fertility services, medical day procedure services and medical diagnostic services. Dividends Dividends paid during the financial year were as follows: Interim ordinary dividend for the year ended 30 June 2019 of 12.0 cents (2018: 14.0 cents) per fully paid ordinary share paid in April 2019 Final ordinary dividend for the year ended 30 June 2018 of 12.0 cents (2017: 12.0 cents) per fully paid ordinary share paid in October 2018 Consolidated 2019 $’000 9,647 2018 $’000 11,255 9,647 9,646 19,294 20,901 A final dividend of 12.00 cents per share, fully franked, will be paid on 25 October 2019 to the shareholders on the register at 4 October 2019. Recognition and measurement Dividends are recognised when declared during the financial year. Review of operations The profit for the consolidated entity after providing for income tax and non-controlling interest amounted to $28,426,000 (30 June 2018: $30,753,000). A reconciliation of Segment EBITDA to profit before tax for the year is as follows: Consolidated Segment EBITDA Transfer of Intellectual Property (IP) Share-based payment expense Other non-trading expenses Fair value adjustment to put liabilities and contingent consideration Impairment of goodwill EBITDA (reported) Depreciation and amortisation EBIT Interest Interest on other financial liabilities - non-cash interest Amortisation of bank facility fee Profit before income tax from continuing activities 2019 $’000 71,146 4,110 (1,161) (13,045) 8,261 (5,800) 63,511 (13,628) 49,883 (7,682) (1,464) (563) 40,174 2018 $’000 76,018 - (881) (11,199) 1,089 - 65,027 (12,496) 52,531 (6,479) (981) (207) 44,864 The consolidated entity continued to engage in its principal activities, the results of which are disclosed in the attached financial statements. Key features of the results are: • Revenue increased by 6.1% to $280.1m; • Group EBITDA decreased by 2.3% to $63.5m (Group EBITDA for FY19 includes $4.1m profit on sale of Virtus’ IP in relation to its Artificial Intelligence software “Ivy”); • Segment EBITDA decreased by 6.4% to $71.1m; • Australian segment EBITDA decreased by 8.6% to $61.1m; • • Net profit after tax (“NPAT”) attributable to equity holders decreased by 7.6% to $28.4m; and • Successful refinancing of existing debt facilities (refer to note 15 for details). International segment EBITDA increased by 9.3% to $10.1m; Operating overview Australia Australian fresh cycle activity grew by 4.9% in the markets in which Virtus participates. Volume growth summary by state is as follows: • NSW up by 2.6%, Virtus down by 1.6%; • VIC up by 8.4%, Virtus up by 5.9%; • QLD up by 5.0%, Virtus up by 0.4%; and • TAS down by 2.7%, Virtus up by 8.2% Virtus fresh cycle activity in Australia in FY19 grew by 1.5%. Key aspects of the volume movement compared to pcp were as follows: • Premium service volumes reduced by 2.6%; and • TFC volumes increased by 25.6% the bulk of which arose in VIC through targeted initiatives to drive volume growth. Overall, EBITDA in the Australian segment decreased by 8.6% to $61.1m from pcp with three main factors contributing to this: Revenue Mix Change – ($2.2m) • • $1.7m related to TasIVF arising from a change in revenue mix from premium to more low cost and bulk bill cycles. Whilst this was part of a targeted effort to recover market share from competitors, it significantly affected revenue per cycle; $0.5m related to premium volume softness in key states of NSW and VIC which was partially offset by an increase in premium volumes in QLD and strong growth in TFC activity. 16 17 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) Diagnostics – ($2.3m) • • $1.3m related to decreases in genetic testing utilisation driven by a change in clinical practice and softer cycle revenue as a result of lower IVF activity in the key states of NSW and VIC; and $1.0m due to increase in supervision costs as a result of new regulatory requirements and the appointment of an additional pathologist. Relocation Projects - ($1.5m) • • • $0.9m impact on EBITDA from the relocation costs and disruption to non-IVF activities related to the move to new facilities in Alexandria (NSW). There were delays in the commissioning of the facility which subsequently affected business development opportunities and recruitment of additional surgeons; and $0.4m related to Hobart (Tasmania) as a result of delayed accreditation, additional labour costs and delays in commencement of non-IVF procedures; Balance of $0.2m related to softness in the remaining Day Hospitals in NSW due to lower IVF activity. International Volumes in Ireland decreased slightly by 1.3% from pcp but revenue was up by $1.4m due to an increase in frozen cycles. EBITDA however reduced by $0.5m primarily related to bad debt write offs and restructuring expenses. Volumes in Singapore increased by 2.7% and EBITDA increased by $0.2m over pcp. The Danish clinics delivered mixed results contributing to a net increase of $1.2m to EBITDA. Trianglen, acquired in June 2018 exceeded expectations and produced a strong EBITDA result. This was however partially offset by Aagaard which suffered short term clinical resource issues and this resulted in volume reductions of 23.2% compared to the prior year. In the UK, Complete Fertility achieved a positive EBITDA although below expectations. We completed a planned refurbishment of clinic facilities, which took longer than expected and caused some disruption to operations in the first quarter. Additionally donor cycle activity was lower than anticipated due to a shortage of donor gametes. Overall, EBITDA in the International segment increased by 9.3% to $10.1m. Operating expenses (OPEX) Group OPEX increase was approximately $15.2m, including $5.5m related to additional OPEX from acquisitions. The net increase of $9.7m after adjusting for acquisitions comprised the following major movements. • • • • • • • Employment costs (adjusted for acquisition related increase of $4.2m) increased by $5.8m against pcp and included: $0.5m increase in remuneration/recruitment costs associated with the appointment of a Group Chief Information Officer and a strategic HR role $1.2m relating to cessation of capitalization of IT personnel costs on completion of the Australian patient management software rollout. These resources now support the ongoing maintenance and improvement of our technology platform. This activity is also focused on business process improvement across all activities; $1.0m relates to hiring of an additional pathologist and supervisors in our Diagnostics business to satisfy new compliance requirements $0.6m in termination costs across the group; and Balance relates to wage inflation and EBA increases across the group. Occupancy expenses (adjusted for acquisition related increase of $0.4m) were also up $1.9m and included increased rental costs of the two major facility upgrades at Alexandria and Hobart of $1.5m. Approximately $0.3m of the overall increase is non-recurring as the previous sites are now vacated Debt and interest expense The increase in interest expense over the prior period relates to the additional drawdown of $30m on 30 June 2018 for the acquisition of Fertilitesklinikk Trianglen Aps (“Trianglen”) based in Copenhagen, Denmark. At 30 June 2019, total facilities drawn were $175m in borrowings and $5.0m in guarantees. Unused and available facilities amounted to $82.4m. Following a refinancing of our debt facility during the H1 FY19, $92m of the credit facility expires in September 2021, whilst the remaining $170m expires in September 2023. Cash balances at 30 June 2019 were $18.8m. The company continued to comply with the financial covenants of its facility agreement. A voluntary debt repayment of $7.5m was made in June 2019. Other financial liabilities ($17.2m) The non-controlling interests of Sims Clinic Limited and TasIVF Pty Limited hold put options established at the time of acquisition. In accordance with accounting standards the group is required to recognise liabilities for the estimated consideration to acquire the non-controlling interests. The liabilities have been discounted at the date of acquisition and the corresponding entry is included in the business combinations reserve. The unwinding of the inherent discounting within the liabilities has resulted in a non-cash interest expense in FY19 of $1.1m (FY18: $0.9m). The consolidated entity has reviewed the underlying liabilities and (recognising the actual EBITDA expectations for each of these businesses) has reduced the aggregate fair value of the financial liabilities by $4.5m to $8.6m. This liability has also been classified as a current liability at 30 June 2019 as both put options are expected to be exercised within the next 12 months. The remaining $8.6m of the balance of other financial liabilities relates to contingent consideration ($5.7m) and a vendor loan note ($2.9m) in relation to the acquisition of Trianglen. Based on the most recent forecast trading outlook, the consolidated entity reduced the estimated liability for the contingent consideration by $3.8m to $5.7m at 30 June 2019. (See Note 18 and 19 for details). Impairment of Goodwill Virtus undertakes impairment testing on the carrying value of goodwill on an annual basis, or more frequently if there is a trigger of impairment. Virtus reviewed the assumptions relating to the valuation of the goodwill relating to the acquisition of TasIVF to reflect changes in the competitive landscape and recent delays in business development in relation to its newly commissioned Day Hospital facilities. Based on the review, a goodwill impairment charge of $5,800,000 has been recognised for TasIVF. Further details and sensitivities are provided in Note 11 of the financial report. Amortisation of borrowing costs Amortisation of borrowing cost expense for FY19 was $563,000, (FY18: $207,000). The increase reflects the write off of residual borrowing costs on the previous borrowing facility that was refinanced in September 2018 (refer to note 16 for details of refinance). Taxation The effective tax rate on operating earnings for FY19 was 27.8% (FY18: 28.8%). Earnings per share Basic earnings per share decreased by 7.6% to 35.37 cents per share (FY18: 38.26 cents per share). Diluted earnings per share decreased by 7.9% to 34.97 cents per share (FY18: 37.98 cents per share). Dividend A final dividend of 12.00 cents per share fully franked (2018:12.00 cents per share) will be paid on 25 October 2019 to shareholders on the register at 4 October 2019. Outlook The Board recognises that although general economic conditions have been less than favourable in certain markets, in the last twelve months growth opportunities exist for all Virtus business activities. Relocation and restructure activities in Sydney, Tasmania and the UK have disrupted the financial performance of the business in FY19 and management are focused on business development activities to improve shareholder returns in FY20. Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Likely developments and expected results of operations Based on the long term trend of women in Australia delaying the birth of children and the fertility rate among Australian women aged over 30 continuing to decline as a consequence of a range of social and economic demographic factors, we expect that demand for assisted reproductive services and the associated diagnostic testing and day hospital procedures will continue to increase. We will continue to invest in our network of fertility clinics and also the clinical and scientific services offered to patients to enable the consolidated entity to meet the demand from the Australian market. Recognising that the demographic drivers influencing the demand for fertility services are also prevalent internationally, we will consider further investment in our international network of fertility clinics. Business sustainability risks The consolidated entity is faced with certain material business risks that could have an effect on the financial prospects of the consolidated entity. These include but are not limited to: Change in Commonwealth Government funding/increasing patient out of pocket expenses Australian patients receive partial reimbursement for the consolidated entity’s services through Commonwealth Government programs, including the Medicare Benefits Schedule (‘MBS’) and the Extended Medicare Safety Net (‘EMSN’). A review of the MBS has been undertaken by the Federal Health department and, to date, no changes to the MBS have been proposed. If the level of reimbursement provided by these programs for the consolidated entity’s services were to change, the consolidated entity’s patients may face higher out-of-pocket expenses for Assisted Reproductive Services. This may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. 18 19 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) Availability of fertility specialists The consolidated entity relies on maintaining its relationship with existing fertility specialists, as well as contracting with and growing In-Vitro Fertilisation (‘IVF’) cycles for new fertility specialists to assist in capturing market growth, increasing market share and replacing any retiring fertility specialists. If the consolidated entity cannot successfully maintain its relationship with existing fertility specialists or contract and grow IVF cycles for new fertility specialists, this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. Variability of growth The growth in patient demand and IVF cycles has historically experienced variability over short-term periods notwithstanding the long-term social and demographic trends driving patient demand for Assisted Reproductive Services. Variability in the historic growth in IVF cycles over short-term periods has been attributable to changes in local economic conditions, natural disasters and regulatory changes. Whilst Virtus is diversified across regional and international markets, the consolidated entity’s revenue generation and profitability can be positively and negatively affected in the short term by variability in the growth in IVF cycles in the regional and international markets in which it operates. Increased competition The consolidated entity may face increased competition from new IVF providers and this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. (For further details refer to Corporate Governance Statement at www.virtushealth.com.au/investor-centre/corporate-governance). Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Qualifications Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications Experience and expertise: Peter Macourt Chairman BCom.; ACA; GAICD Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited, he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. Chairman of SKY Network Television Limited (since August 2002); Director of Prime Media Limited None Member of the Audit Committee and the Nomination and Remuneration Committee. 18,485 ordinary shares held directly None Susan Channon Chief Executive Officer Registered Nurse Div1; OR Management Certificate Susan (Sue) has held senior management positions in various Australian healthcare organisations for over 20 years. Before her appointment to Chief Executive Officer ('CEO') of the company in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: None None Member of the Risk Committee 448,633 ordinary shares 132,183 options over ordinary shares Name: Title: Qualifications Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Qualifications Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Greg Couttas Non-Executive Director B Com.; FCA; MAICD Greg spent 40 years with Deloitte including 28 years as partner. In his years at Deloitte he worked in audit across various sectors, specialising in ASX100 clients. Greg’s expertise includes accounting, finance, auditing, risk management, corporate governance, capital markets and due diligence. Additionally, Greg held a number of management roles at Deloitte including being the Managing Partner for NSW from 2005 to 2008, chairing the Audit and Risk Committee for eleven years, and was a member of the Board of Partners for Deloitte Australia from 2005 to 2016. Greg is also a director of Sydney Water Corporation, Hireup Pty Limited and a member of the Governance Board of The Salvation Army Australia Territory. None None Chair of the Audit Committee and a member of the Risk and the Nomination and Remuneration Committees 5,000 ordinary shares None Lyndon Hale Executive Director MBBS; FRACOG; CREI Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is a board member of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. None None Member of the Risk Committee 823,694 ordinary shares None Sonia Petering Non-Executive Director LLB; BComm; FAICD Sonia has more than 15 years experience in non executive director and chair roles with listed and unlisted companies and government authorities across financial services, payments, insurance, professional services and healthcare. Sonia is an experienced commercial lawyer who commenced her legal practice in 2001. She holds a current Victorian legal practicing certificate. Sonia previously served as a non executive director on the boards of Transport Accident Commission of Victoria and Rural Finance Corporation of Victoria and as Chair of the Board of Rural Finance Corporation from 2009 - 2016. Sonia is also a non executive director of TAL Dai - ichi Australia Ltd, Qantm IP (ASX:QIP) and Cuscal Ltd Qantm IP Limited None Chair of the Nomination and Remuneration Committee and member of the Risk Committee 8,066 ordinary shares None 20 21 VIRTUS HEALTHANNUAL REPORT 2019DIRECTORS’ REPORT (continued) Name: Title: Qualifications Experience and expertise: Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Shane Solomon Non-Executive Director BSW, MA (Public policy), Adjunct Professor UTS Business School Shane is a highly experienced healthcare professional having worked in numerous Executive and Board roles across the public and private health sector over the past 34 years. Shane brings extensive health policy and a strong understanding of operational and clinical governance gained from his roles in the Victorian public health system including the role of Undersecretary for Health, and Chief Executive of the Hong Kong Hospital Authority. Returning to Australia in 2010, Shane became a Partner at KPMG Australia, leading the National Health practice and in 2013, he became founder and Managing Director of Telstra’s eHealth business, Telstra Health. Shane was appointed in 2011 by the Commonwealth Government to be Chairman of the Independent Hospital Pricing Authority. He maintains this role and is on the Board of Silver Chain, one of the largest community based health care service providers in Australia. Shane also chairs the SA Health EMR Project Board. None None Chair of the Risk Committee and a member of the Audit Committee None None ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (in the last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretary Glenn Powers joined Virtus as Chief Financial Officer (‘CFO’) and Company Secretary in August 2008. Prior to joining Virtus, Glenn was CFO and Company Secretary of Tower Software Limited. Glenn has a broad range of experience in private equity backed businesses, working in a range of engineering, electronics, software and service businesses. Glenn has also been a Director for both main and AIM market listed businesses in the UK. Glenn is a Chartered Management Accountant (CMA). Meetings of directors The number of meetings of the company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2019, and the number of meetings attended by each director were: Peter Macourt - Chairman Susan Channon Greg Couttas Lyndon Hale Peter Turner Sonia Petering Shane Solomon Peter Macourt - Chairman Susan Channon Greg Couttas Lyndon Hale Peter Turner Sonia Petering Shane Solomon Full Board Nomination and Remuneration Committee Attended Held Attended Held 9 9 9 8 4 9 7 9 9 9 9 4 9 7 4 4 3 - 3 4 - 4 4 3 - 3 4 - Audit Committee Risk Committee Attended Held Attended Held 4 4 4 - 2 - 3 4 4 4 - 2 - 3 - 3 3 3 - 3 3 - 3 3 3 - 3 3 Remuneration report (audited) The directors present the 2019 remuneration report prepared in accordance with the requirements of the Corporations Act 2001. The information provided in this remuneration report, which forms part of the Directors’ Report has been audited as required by Section 308(3C) of the Corporations Act 2001. A. Executive summary Key Changes in FY19 There were no significant changes made to the remuneration framework in FY2019, however the LTI performance hurdles were reviewed and updated to average Return on Equity and relative Total Shareholder Return (‘TSR’) against the constituents of the ASX 300 index. Virtus Health Group’s remuneration framework enables the organisation to attract and retain high calibre, talented Executives, management and specialists while ensuring that pay outcomes are aligned to building long term shareholder value. The Board has determined that the Key Management Personnel (‘KMP’), as defined by AASB 124 ‘Related Party Disclosures’ are as follows: Non-Executive Directors Peter Macourt – Chairman, non-executive director Peter Turner – Non-executive director (resigned 21 November 2018) Greg Couttas – Non-executive director Sonia Petering – Non-executive director Shane Solomon – Non-executive director (appointed 27 September 2018) A profile of each director is provided in the Directors’ Report. Executive KMP Sue Channon – Managing Director and Chief Executive Officer Glenn Powers – Chief Financial Officer Lyndon Hale – Executive Director and Medical Director, Victoria Jade Phelan – Managing Director, Victoria Nadia Stankovic – Managing Director, New South Wales (notice of resignation received August 2019) Steve Zappia – Managing Director, Queensland and Virtus Health Diagnostics Dean Cleary – Chief Information Officer (appointed 17 October 2018) Richard Banks – Managing Director, Europe Anthony Walsh – Executive Chairman, Ireland Peter Illingworth – Medical Director, New South Wales David Molloy – Medical Director, Queensland William Watkins – Medical Director, Tasmania Total KMP remuneration for FY19 decreased from FY2018 by $142,881 (4.0%). The short term incentives (‘STI’) and long term incentives (‘LTI’) achieved in FY2019 are set out in further detail below. There are no STI accruals for FY2019 as the EPS hurdle of 5% growth was not met. The performance hurdles tested in FY2019 of the LTIs granted in November 2015 and November 2016 were not achieved and accordingly 125,034 performance rights lapsed during the financial year. B. Role of the Nomination and Remuneration Committee The Board of Directors (‘the Board’) maintains a combined Nomination and Remuneration Committee (the ‘Committee’). The members of the Committee are all independent non-executive Directors: Sonia Petering (Chairman), Peter Macourt and Greg Couttas. Details of the qualifications and experience of the members of the Committee are provided in the ‘Information on directors’ section of the Directors’ Report. The Committee assists and advises the Board on remuneration policies and practices for the Board, the CEO, the CFO, senior executives and other key management personnel whose activities, individually or collectively, affect the financial soundness of the consolidated entity. The responsibilities of the Committee are set out in the Nomination and Remuneration Committee Charter which may be found on the Investor Centre page of the Virtus Health website. The number of Committee meetings held and attended by each member is disclosed in the ‘Meetings of directors’ section of the directors’ report. Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. 22 23 VIRTUS HEALTHANNUAL REPORT 2019DIRECTORS’ REPORT (continued) Use of remuneration consultants When considered necessary, the Committee seeks external advice from independent consultants on the appropriateness of the remuneration practices and arrangements including remuneration levels, independent benchmarking data and incentive structures. The Committee and Board consider this input with several other factors when making decisions regarding remuneration. During FY19, the Committee engaged Mercer to review the long term incentive plan for KMPs. The review also considered the appropriateness of the relative TSR measure and peer group parameters. The Committee concluded that: • • It would retain the measure of 50% of the LTI grant to be linked to Return on Equity; and It would retain relative TSR as a performance measure, but only measured against the constituents of one single comparator group, the ASX300, as this index appears to have the closest correlation to Virtus Health share price volatility. Accordingly, 50% of the performance grant will be linked to the relative TSR of Virtus Health compared to the performance of the ASX300 index. C. Executive remuneration framework Remuneration philosophy and principles The objective of the executive remuneration framework is to ensure that reward for performance is competitive and appropriate for the results delivered. The Board continually monitors the effectiveness of the remuneration framework in terms of alignment with shareholder interests and market practice. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and conforms to market best practice. The Board seeks to ensure that executive reward satisfies the following key criteria for good governance practices: • competitiveness and reasonableness; • acceptability to shareholders; • performance linkage / alignment of executive compensation; and • transparency. The executive remuneration and reward framework has four components: • base pay and non-monetary benefits; • STIs; • LTIs; and • other remuneration such as superannuation and long service leave. The Nomination and Remuneration Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the consolidated entity. The key objective of the remuneration framework is the alignment to shareholder interests and this is achieved by ensuring that: • profit is a major component of the plan’s design; • the framework focuses on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on equity as well as focusing the executive on key non-financial drivers of value; • the remuneration framework attracts and retains high calibre executives; • the framework rewards capability and experience; • the framework reflects competitive reward for contribution to growth in shareholder wealth; and • the framework provides a clear structure for earning rewards. Fixed remuneration Fixed remuneration for Australian employees comprises base salary, superannuation and other benefits such as annual leave and long service leave in accordance with the regulations in the Australian state in which they are employed. Fixed remuneration is targeted to be similar to the median of the market for positions and roles in ASX listed companies of a similar size. Short term incentive plan – STI The STI plan is an annual individual target based scheme aligned to the targets of individual executives respective business units. STI payments are granted to executives based on achievement of specific annual targets and key performance indicators (‘KPIs’). Financial and non-financial KPIs are reviewed and amended annually by the Nomination and Remuneration Committee to ensure STI payments are aligned with the short term objectives of the business. STIs are not made available to the group’s Medical Directors. The STI plan provides for cash settlement where successful performance against KPIs is achieved. Performance is assessed by the immediate manager of the STI participant and for KMPs the cash settlements are approved by the Nomination and Remuneration Committee after completion of the annual group audit. Hence, STI cash settlements are normally paid to recipients in the month following the announcement of the group’s financial results. The STI plan includes an EPS growth target of 5% over prior year that acts as a financial gateway for the payment of STIs, hence the STI remains linked to the performance of the Company and alignment is maintained with shareholder interests. Key features of the STI arrangements for FY19 were as follows: • the maximum potential aggregate payment of STIs for the KMPs in total was $850,000; and • assuming the financial gateway is satisfied, 60% of the maximum opportunity is linked to the achievement of individual financial outcomes and 40% of the maximum opportunity is linked to other individual measures established by the Nomination and Remuneration Committee; The STI KPIs for FY2019, which are set by the Nomination and Remuneration Committee and the CEO, included: • NPAT KPI for CEO and CFO; • Cost reduction targets; • EBIT margin improvement targets; • Segment EBIT KPI for senior state and territory management; and • Individual objectives for all STI participants which may be non-financial in nature. Such objectives could include: o Risk management; o Patient experience and improvement in net promoter score; o Corporate governance objectives; and o Other individual personal goals. The STI KPI structure for FY2020, established by the Nomination and Remuneration Committee, assuming the financial gateway is satisfied is as follows: • • • • Applicable to Sue Channon and Glenn Powers – 40% of the maximum STI opportunity is linked to the achievement of target Net Profit after Tax (‘NPAT’) attributable to the company’s shareholders, 20% of the maximum STI opportunity is linked to the achievement of target consolidated Australian EBIT and 40% of the maximum STI opportunity relates to achievement of individual management objectives set by the Board; Applicable to Jade Phelan and Steve Zappia – 20% of the maximum STI opportunity is linked to the achievement of target consolidated Australian EBIT; 45% of the maximum STI opportunity is linked to the achievement of relevant target State EBIT; and 35% of the maximum STI opportunity is linked to the achievement of individual management objectives; Applicable to Richard Banks - 60% of the maximum STI opportunity is linked to the achievement of target consolidated European EBIT and 40% of the maximum STI opportunity is linked to the achievement of individual management objectives; and Applicable to Dean Cleary - 40% of the maximum STI opportunity is linked to the achievement of target Net Profit after Tax (‘NPAT’) attributable to the company’s shareholders and 60% of the maximum STI opportunity is linked to the achievement of individual management objectives. EBIT and NPAT targets include individual interpolation schedules for national and territory percentage growth over prior year which normally provides for payment of bonus as follows: For achievement of 5% growth, 50% of relevant STI component is payable; For achievement of 10% growth, 100% of relevant STI component is payable; and For achievement of growth between 5% and 10%, straight line interpolation of the relevant STI component is payable. The Nomination and Remuneration Committee has the discretion to apply variations to these targets after consideration of local market conditions. Long term incentive plan – LTI The company has adopted a performance rights plan (‘LTI Plan’) to balance the following key factors in its design: • • • • Participant’s experience, reward, motivation and retention in response to challenging but achievable LTI measures; Recognise the abilities, efforts and contributions of participants to Virtus’ performance and success and provide the participants with an opportunity to acquire or increase their ownership interest in the company; Shareholder expectations and alignment of executive reward outcomes to shareholder experience; and Appropriate cost to the business considering the affordability and quantum of awards for Participants. The Virtus plan objectives are aligned to market practice and the LTI Plan provides participants with grants of performance rights that vest over three year performance periods. Performance rights are granted annually and vested performance rights convert into shares. Holders of unvested performance rights do not receive dividends on those rights until the rights have vested and converted into shares. Generally, vesting conditions attached to grants of options or performance rights made to senior executives will relate to the performance of the consolidated entity over the prior performance period of three years, as well as continued employment. Options or performance rights may also be granted to other employees from time to time subject to consideration by the Board. There is no ability for the company to provide any cash equivalent on exercise. In the event of a future change of control the Board has the discretion to allow for vesting of options or performance rights and in the event of failure to meet vesting hurdles or objectives there is no facility to allow retesting of vesting conditions. 24 25 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) Eligibility to participate in the LTI Plan and the number of options or performance rights offered to each individual participant is determined by the Board. The Board maintains full discretion in administering the grant and vesting of LTI awards. Virtus provides for malus under Board discretion or approval to lapse/vest awards. Currently there are four executive performance grants in operation as follows: 1. Senior executives - FY2016 grant On 10 November 2015, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Anthony Walsh The performance rights vest subject to the following performance hurdles: Relative TSR and average annual return on equity attributable to shareholders (‘ROE’). Each hurdle applies to 50% of the grant. TSR is measured on the company’s TSR relative to a peer group of companies in both the S&P ASX 200 Index and the S&P ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. Calculations of the company’s TSR and ROE are determined at the end of the three year vesting period by the Board with verification performed by an external party. Relative TSR S&P ASX 200 Relative TSR S&P ASX 200 Health Rights Vesting % Notes FY2016 STI Grant Performance Hurdle Percentile less than Percentile at Percentile range 50 50 50-75 TSR Base share price $5.13 % ROE less than % ROE at % ROE range 3 Year average ROE 15.0% 15.0% 15.0-17.5% 50 50 50-75 $5.13 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range The TSR performance hurdles, tested on 15 September 2018 were not achieved and the ROE performance hurdle, tested on 30 June 2018 was not achieved. 2. Senior executives - FY2017 grant On 10 November 2016, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Anthony Walsh The performance rights vest subject to the same performance hurdles as the FY2016 grant, and the TSR base share price is $8.05. As at 30 June 2019, it is expected that the TSR performance hurdles, to be tested on 15 September 2019 will not be met. The ROE performance hurdle, tested on 30 June 2019 was not met. The annual AASB 2 accounting charge of this scheme is currently $33,540 and the maximum earnings dilution to existing shareholders is 0.06%. 3. Senior executives - FY2018 grant On 10 November 2017, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Jade Phelan Richard Banks The performance rights vest subject to the same performance hurdles as the FY2016 grant, and the TSR base share price is $5.58. The annual AASB 2 accounting charge of this scheme is currently $58,641 and the maximum earnings dilution to existing shareholders is 0.22%. 4. Senior executives - FY2019 grant On 21 November 2018, performance rights were granted to the following members of the executive management team: Sue Channon Glenn Powers Nadia Stankovic Steve Zappia Jade Phelan Richard Banks The Nomination and Remuneration Committee changed the performance hurdles for the FY2019 grant as follows: • • Recognising the change in the S&P Index classification for the company, the TSR performance hurdles were amended to ASX300 and ASX 300 Healthcare Index; and The ROE hurdle had been set at a higher level in previous years and given the changing nature of the Company’s Australian market, the Nomination and Remuneration Committee reset the hurdle to a more realistic level. It should be noted that the minimum average annual ROE remains above the level achieved in the previous two years and the Nomination and Remuneration Committee believes this maintains the aspirational aspect of the new hurdle. Relative TSR S&P ASX 300 Relative TSR S&P ASX 300 Health Rights Vesting % Notes FY2019 STI Grant Performance Hurdle Percentile less than Percentile at Percentile range 50 50 50-75 TSR Base share price $5.70 % ROE less than % ROE at % ROE range 3 Year average ROE 12.0% 12.0% 12.0-14.0% 50 50 50-75 $5.70 0% 12.5% 12.5-25% 0% 25% 25-50% For each hurdle Progressive pro-rata vesting for the range for each hurdle Progressive pro-rata vesting for the range Calculations of the company’s TSR and ROE will be determined at the end of the three year vesting period by the Board with verification performed by an external party. The annual AASB 2 accounting charge of this scheme is currently $88,117 and the maximum earnings dilution to existing shareholders is 0.22% 26 27 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) D. Link between remuneration and consolidated entity performance Accordingly the actual proportion of remuneration linked to performance and the fixed proportion in FY2019 is as follows: Consolidated entity performance and link to remuneration Remuneration for certain individuals is directly linked to performance of the consolidated entity. Non-executive Directors receive only fixed remuneration. STI payments are dependent on a defined earnings per share target being met. Assuming that all performance conditions are met, the proportion of remuneration linked to performance and the fixed proportion is as follows: Name Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers J Phelan N Stankovic S Zappia D Cleary R Banks A Walsh P Illingworth D Molloy W Watkins Fixed remuneration At risk - STI At risk - LTI 2019 2018 2019 2018 2019 2018 48% 100% 48% 100% 48% 58% 58% 58% 78% 52% 100% 100% 100% - 48% 58% 58% 58% - 88% 100% 100% 100% - 24% - 24% 18% 18% 18% 22% 13% - - - - 24% - 24% 18% 18% 18% - 9% - - - - 28% - 28% 24% 24% 24% - 35% - - - - 28% - 28% 24% 24% 24% - 3% - - - - The proportion of the cash bonus paid/payable or forfeited is as follows: Name Executive Directors: S Channon Other Key Management Personnel: G Powers J Phelan S Zappia N Stankovic D Cleary R Banks Cash bonus paid/payable Cash bonus forfeited 2019 2018 2019 2018 - - - - - - - 51% 100% 49% 79% 51% 23% - - 40% 100% 100% 100% 100% 100% 100% 21% 49% 77% 100% - 60% Name Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers J Phelan N Stankovic S Zappia D Cleary R Banks A Walsh P Illingworth D Molloy Fixed remuneration At risk - STI At risk - LTI 2019 2018 2019 2018 2019 2018 86% 100% 70% 100% 85% 93% 100% 100% 100% 93% 91% 100% 100% 65% 84% 89% 85% - 88% 84% 100% 100% - - - - - - - - - - - 18% - 14% - 12% - 25% 13% - 6% - 9% - - - 15% 7% - - - 7% 9% - - 10% 3% 11% 9% - 3% 16% - - The earnings of the consolidated entity that are considered to affect total shareholders return (‘TSR’) for the five years to 30 June 2019 are summarised below: Revenue EBITDA EBIT Profit after income tax NPAT attributable to Virtus shareholders Share price at financial year end ($) Total dividends paid (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) EPS Growth on prior year 2019 $’000 280,069 63,511 49,883 28,990 28,426 2019 4.50 24.00 35.37 34.97 (7.6%) 2018 $’000 263,916 65,027 52,531 32,009 30,753 2018 5.75 26.00 38.26 37.98 9.3% 2017 $’000 256,518 64,834 50,799 30,004 28,103 2017 5.38 28.00 35.00 34.79 (15.0%) 2016 $’000 261,210 68,916 57,736 34,865 32,918 2016 6.87 28.00 41.18 40.79 11.7% 2015 $’000 234,142 61,355 51,361 30,441 29,434 2015 5.37 27.00 36.86 36.54 (5.0%) Remuneration outcomes for FY2019 Total KMP remuneration for FY2019 decreased by $142,881 (4.0%). Included in the net decrease, $374,896 relates to reduced STI performance accruals. STI Outcomes for FY2019 Participants in the STI plan receive a payment based on the performance of the Australian and European segments respectively and their own individual territory or functional responsibility (Europe, New South Wales, Victoria, Queensland, Tasmania or Diagnostics) subject to the group achieving 5% growth in EPS on prior year. Based on the financial results of the consolidated entity the Committee determined that as a consequence of the decrease in EPS, no STIs are payable to any KMP for FY19. LTI outcomes for FY2019 In FY2019 the following performance hurdles were tested in respect of the performance rights grant dated 11 November 2016 and 10 November 2015: • Performance rights grant dated 11 November 2016: from a potential total of 50% of the performance rights available, 0% of available rights vested in respect of average ROE over the three year performance period; accordingly 49,746 of the performance rights granted on 10 November 2016 did not vest and have lapsed. As at 30 June 2019, it is expected that the remaining 50% of the performance rights which are to be tested against the TSR performance hurdles on 15 September 2019 will not vest; and 28 29 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) • Performance rights grant dated 10 November 2015: from a potential total of 50% of the performance rights available, 0% of available rights vested in respect of relative TSR over the three year performance period; accordingly 75,288 of the performance rights granted on 10 November 2015 did not vest and have lapsed. The other 50% of these performance rights were tested by reference to the average ROE over the three year performance period to 30 June 2018, did not vest and accordingly lapsed in the prior year. E. Executive service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Lyndon Hale Executive Director and Medical Director, Victoria 11 June 2013 No fixed end date The Executive may terminate the fertility specialist contract by giving a minimum of 6 months’ notice or maximum of 12 months’ notice in writing. The company may terminate by giving 12 months’ notice in writing. Upon the termination of the fertility specialist contract, the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Susan Channon Chief Executive Officer 11 June 2013 No fixed end date The Executive may terminate the employment contract by giving 3 months’ notice in writing. The company may terminate by giving 12 months’ notice in writing or by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, the company may terminate the employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of the employment contract, the Executive will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Name: Title: Agreement commenced: Term of agreement: Details: Glenn Powers Chief Financial Officer and Company Secretary 11 June 2013 No fixed end date The Executive’s contract is similar to that of Sue Channon except the company may terminate by giving 6 months’ notice in writing or by making a payment in lieu of notice. Other Key Management Personnel Jade Phelan, Steve Zappia, Nadia Stankovic, Dean Cleary, Richard Banks and Anthony Walsh are employed under individual executive services agreements; these agreements include provisions for: • total compensation including a base salary, superannuation contribution and incentive arrangements; • variable notice and termination provisions of up to six months; • • restraint provisions; and • confidentiality provisions. leave entitlements, as a minimum, as per the National Employment Standard (applicable to Australian based employees); The company’s remaining Australian state Medical Directors, Peter Illingworth, David Molloy and William Watkins are contracted under fertility specialist agreements. The individual may terminate their fertility specialist contract by giving a minimum of six months’ notice or maximum of twelve months’ notice in writing. The company may terminate by giving 12 months’ notice in writing and upon the termination of the fertility specialist contract the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. F. Remuneration, share and option disclosures for FY2019 Amounts of remuneration – accruals basis Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The first two tables are calculated in accordance with Australian accounting standard AASB 2 on an accruals basis and therefore take account of movements in leave accruals and provisions. Short-term benefits Post- employment benefits Long-term benefits Share-based payments Salary, leave and fees $ Non- monetary and termination $ STI $ Super- annuation $ Long Service Leave $ Equity- settled $ Total $ 135,803 42,743 91,001 91,477 65,525 504,348 163,171 344,870 256,690 258,454 258,943 207,337 279,361 44,230 189,422 119,554 - 3,052,929 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,901 4,061 8,645 8,690 6,225 20,531 7,103 20,531 24,649 16,333 22,759 15,399 18,477 - - 11,358 - - - - - - - - - - - 148,704 46,804 99,646 100,167 71,750 10,815 - 89,584 - 625,278 170,274 6,895 5,326 1,660 5,412 172 - - - - - 63,587 (70,626) 19,918 31,997 - 20,769 4,359 - - - 435,883 216,039 296,365 319,111 222,908 318,607 48,589 189,422 130,912 - 197,662 30,280 159,588 3,440,459 2019 Non-Executive Directors: P Macourt P Turner S Petering G Couttas S Solomon Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia D Cleary R Banks A Walsh P Illingworth D Molloy W Watkins 30 31 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) Short-term benefits Post- employment benefits Long-term benefits Share-based payments STI $ Non- monetary $ Super- annuation $ Long Service Leave $ Equity- settled $ Total $ 2018 Non-Executive Directors: P Macourt P Turner S Petering G Couttas Salary, leave and fees $ 133,562 92,104 86,986 86,986 - - - - Executive Directors: S Channon L Hale 475,203 161,697 132,865 - Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia R Banks A Walsh P Illingworth D Molloy W Watkins 344,594 250,092 252,426 264,126 279,308 42,638 189,428 119,554 - 146,677 - 44,193 19,896 31,265 - - - - 2,778,704 374,896 - - - - - - - - - - - - - - - - 12,688 8,750 8,264 8,264 - - - - - - - - 146,250 100,854 95,250 95,250 20,049 6,962 9,329 - 84,495 - 721,941 168,659 20,049 24,320 27,583 26,210 15,921 - - 11,358 - 190,418 15,546 (21,541) 477 3,742 - - - - - 60,429 30,909 8,668 30,340 9,018 7,910 - - - 587,295 283,780 333,347 344,314 335,512 50,548 189,428 130,912 - 7,553 231,769 3,583,340 Shane Solomon joined the Board in September 2018 so the total benefit in FY2019 does not represent a full year of fees. Similarly, Peter Turner retired from the Board in November 2018 hence the total benefit in FY2019 does not represent a full year of fees. Richard Banks joined the group in August 2017 so the total benefit in FY2018 does not represent a full year salary. The value of share-based payments and the employee leave represents the accounting charge or accrual and not the cash benefit received by the KMP. Long term leave benefits are the long service leave accruals calculated in accordance with state entitlements. The value of share-based payments during the financial year also includes performance rights which lapsed during the year. Share-based payments expense in respect of performance rights granted to the Medical Directors is not included in these tables because these performance rights were granted to the medical directors for the provision of fertility services (refer Section H) and do not constitute remuneration paid in respect of their roles as KMP. STI represents the accrual in respect of a KMP’s performance in the financial year and this is normally paid in the month following the publication of the consolidated entity’s financial statements. The next two tables show the actual cash payments made to KMPs in the relevant financial years: 32 2019 Non-Executive Directors: P Macourt P Turner S Petering G Couttas S Solomon Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia D Cleary R Banks A Walsh P Illingworth D Molloy W Watkins 2018 Non-Executive Directors: P Macourt P Turner S Petering G Couttas Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers N Stankovic J Phelan S Zappia R Banks A Walsh P Illingworth D Molloy W Watkins Salary, leave and fees $ 135,803 42,743 91,001 91,477 65,525 STI $ Super- annuation $ - - - - - 12,901 4,061 8,645 8,690 6,225 Total $ 148,704 46,804 99,646 100,167 71,750 511,022 156,940 132,865 - 20,531 5,327 664,418 162,267 355,491 259,466 259,466 263,843 205,385 293,174 44,230 189,422 119,554 - 3,084,542 Salary, leave and fees $ 133,562 92,104 86,986 86,986 503,051 161,697 351,251 256,000 256,000 259,963 279,308 42,638 189,428 119,554 - 2,818,529 146,677 - 44,193 19,896 - 32,581 - - - - 376,212 20,531 24,649 20,531 24,649 15,399 18,477 - - 11,358 - 522,699 284,115 324,190 308,388 220,784 344,232 44,230 189,422 130,912 - 201,974 3,662,728 STI $ Super- annuation $ - - - - - - - - 47,671 - - - - - - 47,671 Total $ 146,250 100,854 95,250 95,250 12,688 8,750 8,264 8,264 20,049 6,962 523,100 168,659 20,049 24,320 27,914 24,320 15,921 - - 11,358 - 371,300 280,320 331,585 284,283 295,229 42,638 189,428 130,912 - 188,858 3,055,058 33 VIRTUS HEALTHANNUAL REPORT 2019 Balance at the end of the year 18,485 448,633 8,066 5,000 823,694 - 50,000 114,150 272,040 400,628 DIRECTORS’ REPORT (continued) Additional disclosures relating to key management personnel: Shareholding The number of ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at the start of the year Received as part of remuneration Additions Disposals/ other Peter Macourt Susan Channon Sonia Petering Greg Couttas Lyndon Hale Shane Solomon Peter Turner Glenn Powers Peter Illingworth David Molloy 18,485 448,633 8,066 5,000 823,694 - 50,000 114,150 324,020 400,628 2,192,676 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (51,980) - (51,980) 2,140,696 Option holding The number of options and performance rights over ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at the start of the year Granted Exercised/ cancelled Expired/ forfeited/ other Balance at the end of the year 124,648 88,477 20,095 44,528 44,619 20,908 8,867 17,921 32,258 402,321 56,441 40,061 20,086 20,086 20,086 20,980 - - - 177,740 - - - - - - - - - - (48,906) (34,715) - (17,469) (17,559) - (6,383) - - 132,183 93,823 40,181 47,145 47,146 41,888 2,484 17,921 32,258 (125,032) 455,029 Options over ordinary shares Susan Channon Glenn Powers Jade Phelan Nadia Stankovic Steve Zappia Richard Banks Anthony Walsh Peter Illingworth William Watkins Share based compensation Issue of shares There were no shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2019. Options or performance rights The terms and conditions of each grant over ordinary shares affecting remuneration of Executive directors and other key management personnel in this financial year or future reporting years are as follows: Grant date 10 November 2015 11 November 2016 22 November 2017 21 November 2018 Vesting date and exercisable date 10 November 2018 11 November 2019 22 November 2020 21 November 2021 Expiry date Exercise price 10 November 2025 11 November 2026 22 November 2027 21 November 2028 $0.00 $0.00 $0.00 $0.00 Fair value per right at grant date $4.41 $4.52 $3.79 $2.77 The number of options or performance rights over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the years ended 30 June 2019 and 30 June 2018 are set out below: Name Susan Channon Glenn Powers Jade Phelan Nadia Stankovic Steve Zappia Richard Banks Anthony Walsh Peter Illingworth William Watkins Number of rights granted during the year 2019 Number of rights granted during the year 2018 Number of rights vested during the year 2019 Number of rights vested during the year 2018 56,441 40,061 20,086 20,086 20,086 20,980 - - - 56,247 39,925 20,095 20,095 20,095 20,908 - 17,921 32,258 - - - - - - - - - - - - - - - - - - Fair values of options and performance rights over ordinary shares granted, exercised and lapsed for directors and other key management personnel as part of compensation during the year ended 30 June 2019 are set out below: Name Susan Channon Glenn Powers Nadia Stankovic Steve Zappia Richard Banks Jade Phelan Anthony Walsh Peter Illingworth William Watkins Fair value of rights granted during the year $ Net market value of rights exercised during the year $ Number of rights lapsed during the year 156,059 110,769 55,538 55,538 58,010 55,538 - - - - - - - - - - - - 48,907 34,715 17,469 17,560 - - 6,383 - - Note: Of the options lapsing 75,288 were granted on 10 November 2015 and 49,746 were granted on 11 November 2016. G. Non-executive director remuneration Overview of non-executive director remuneration In accordance with best practice corporate governance, the structure of non-executive directors and executive remuneration is different. Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non- executive directors fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his remuneration. Non-executive directors do not receive share options or other incentives. In FY2019 the Committee elected to increase remuneration for non-executive directors .The Chairman of the Committee is satisfied that the recommendation relating to non-executive director fees, including the fees for the Chairman, has not been subject to any undue influence by the Chairman or other independent directors. Under the Constitution, the directors decide the total amount paid to each director as remuneration for their services as a director to the company. However, under the listing rules of the ASX (‘ASX Listing Rules’), the total amount paid to all non- executive directors for their services must not exceed in aggregate in any financial year the amount approved by the shareholders. Aggregate annual directors’ fees paid to non-executive directors for the financial year ended 30 June 2019 were $467,071. The maximum authorised amount payable including superannuation to all non-executive directors in total for their services approved by the shareholders is currently $600,000 per annum. Non-executive director fees comprise a base director fee of $81,864 (including superannuation) and an additional payment to reflect a director’s involvement in Board committees as follows: Options or performance rights do not carry any voting or dividend rights. Shares issued or transferred to participants on exercise of an option carry the same rights and entitlements as other issued shares, including dividend and voting rights. • Chairman of Audit Committee receives an additional fee of $15,000; • Chairman of Risk Committee receives an additional fee of $15,000; 34 35 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) • Chairman of Nomination and Remuneration Committee receives an additional fee of $10,000; • Member of Audit or Risk Committee receives an additional fee of $7,500 per committee; and • Member of Nomination and Remuneration Committee receives an additional fee of $5,000. Other information about directors’ remuneration Directors may be reimbursed for expenses reasonably incurred in attending to the company’s affairs. Non-executive directors may be paid such additional or special remuneration as the directors decide is appropriate where a director performs extra work or services which are not in the capacity as a director of the company or a subsidiary. There is no contractual redundancy benefit for directors. H. Fertility specialist performance rights incentives Grants of performance rights - fertility specialists The fertility specialist incentive schemes applicable for FY19 and FY20 are as follows: initial and performance rights granted to specialists before 1 September 2016; initial and performance rights granted to specialists after 1 September 2016; • • • high performance rights granted to specialists up to 1 July 2018; and • a loyalty share scheme; Performance rights are granted on an annual basis to existing fertility specialists who achieve a benchmark level of IVF cycles above a base or adjusted base number of IVF cycles established in one of the financial years ending after June 2008 up to 30 June 2017. All incentive schemes are administered in accordance with the plan rules established in the Virtus Health Limited Specialist Option Plan approved by the Board in June 2013. Details of each type of scheme are set out below: Grants made before 1 September 2016 Vesting is dependent on achievement of performance and share price hurdles. Upon the satisfaction of the vesting conditions and any other conditions to exercise, each performance right will be exercisable into a variable number of shares based on the terms of issue of the performance rights. The number of shares to be issued will be calculated by multiplying the applicable component of the grant offer value by the amount of the increase in the share price between the share price at vesting compared to the share price at grant date all divided by the share price at vesting. At 30 June 2019 the potential number of unvested initial and performance rights subject to these grants is estimated to be 68,510. Grants made after 1 September 2016 Grants of rights are made twice a year as follows: • • Grants in March each year to new fertility specialists contracting in the six month period ending 31 December and grants in September each year to new fertility specialists contracting in the 6 month period ending 30 June. These performance rights vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the performance rights, subject to the fertility specialist achieving the relevant benchmark (currently 50 IVF cycles) in a twelve month period during the two years post commencement of the contractual relationship with the consolidated entity; Grants in September each year of performance rights to existing fertility specialists in relation to achievement of incremental increases in practice cycles in the 12 month period ending 30 June. These performance rights are awarded for incremental increases in practice cycles of 50, up to a limit of 200 cycles and rights will generally vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the performance rights, conditional upon the fertility specialist performing a number of IVF cycles in the immediately preceding year not less than 75% of the relevant benchmark in the year pursuant to which the performance rights were awarded; and • In all cases the number of performance rights granted to a fertility specialist is derived using the average closing share price for the previous 15 business days immediately following the announcement of the Company’s results to the ASX for the financial periods ending 31 December and 30 June and accordingly the number of performance rights granted is fixed at grant date. At 30 June 2019 the potential number of unvested performance rights subject to these grants is estimated to be 654,606. High performance rights – fertility specialists The Board recognises those fertility specialists that achieve a high level of fresh cycles over a defined period acknowledging the value they generate for shareholders. The High Performer Share Incentive Scheme (‘HPSIS’) rewards fertility specialists who consistently deliver more than 299 cycles per annum. There are two issues of HPSIS tranches outstanding, details of which are as follows: • • HPSIS Issue three commenced on 1 July 2016 and runs for a four year period ending 30 June 2020 with the first year being the qualifying period. There is no share price hurdle applicable to this grant; and HPSIS Issue four commenced on 1 July 2017 and runs for a four year period ending 30 June 2021 with the first year being the qualifying period. There is no share price hurdle applicable to this grant. The key performance features of the outstanding issues of HPSIS are as follows: • a specialist can only participate in one HPSIS grant at any point in time; and • award values converting into Virtus Health Limited ordinary shares are as follows: • $80,000 of performance rights for > 299 average cycles per annum over 4 year period; or • $100,000 of performance rights for > 324 average cycles per annum over 4 year period; or • $120,000 of performance rights for > 349 average cycles per annum over 4 year period; or • $140,000 of performance rights for > 374 average cycles per annum over 4 year period; or • $160,000 of performance rights for > 399 average cycles per annum over 4 year period; or • $180,000 of performance rights for > 424 average cycles per annum over a 4 year period. In FY17, 11 fertility specialists qualified for HPSIS Issue three. In FY18, 2 fertility specialists qualified for HPSIS Issue four. At 30 June 2019 the potential number of unvested performance rights subject to these grants is estimated to be 275,307. Vesting conditions of High Performance Rights High performance rights will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may include conditions relating to continuous service and the individual performance of the participant in the Plan. Participants are not required to pay cash to be granted performance rights under the Plan. No further grants are planned under this structure. Loyalty share scheme – fertility specialists The Loyalty Share Scheme (‘LSS’) is designed to recognise the sustained contribution of the top quartile of specialists on an annual basis and replaced the High Performance Share Incentive Scheme in FY19. The key features of the LSS are as follows: • value of award is variable and dependent on individual number of personal cycles delivered adjusted by a loading factor to recognise a higher award for specialists making a higher contribution to the business. • award per loaded cycle for FY19 and FY20 is $50, hence awards are as follows: o 200 cycles, = 200 *1.0 * $50 = $10,000 worth of shares; o 250 cycles, = 250 *1.1 * $50 = $13,750 worth of shares; o 300 cycles, = 300 *1.2 * $50 = $18,000 worth of shares; o 350 cycles, = 350 *1.3 * $50 = $22,750 worth of shares; o 400 cycles, = 400 *1.4 * $50 = $28,000 worth of shares; • Loading factors per cycle: o >399 cycles, 1.4 o >349 cycles, 1.3 o >299 cycles, 1.2 o >249 cycles, 1.1 o >199 cycles, 1.0 • Annual Qualifying hurdle is 200 cycles; • Annual vesting, no waiting period, no escrow arrangements; • Other considerations; o annual loyalty award replaces all standard performance awards for improvement above 200 cycles; o awards are payable in shares; conversion from award value is at the Virtus share price on the 15th business day following the group’s annual result announcement (normally mid-September); and o annual pool value for FY19 is capped at $500,000 (assessed annually by the Nomination and Remuneration Committee); this cost is consistent with the annual cost of the HPSIS. This concludes the remuneration report which has been audited. 36 37 VIRTUS HEALTHANNUAL REPORT 2019 DIRECTORS’ REPORT (continued) Shares under option Unissued ordinary shares of Virtus Health Limited under option at the date of this report are as follows: Grant date Expiry date 03 October 2014* 13 May 2015* 13 May 2015* 13 May 2015* 13 May 2015* 21 August 2015* 28 October 2015* 16 December 2015* 21 September 2016* 21 September 2016* 11 November 2016 21 June 2017* 24 October 2017* 24 October 2017* 24 October 2017* 24 October 2017* 22 November 2017* 22 November 2017* 10 October 2018* 10 October 2018* 10 October 2018* 10 October 2018* 21 November 2018* 03 October 2024 13 May 2025 13 May 2025 13 May 2025 13 May 2025 21 August 2025 28 October 2025 16 December 2025 21 September 2026 21 September 2026 11 November 2026 21 June 2027 24 October 2027 24 October 2027 24 October 2027 24 October 2027 22 November 2027 22 November 2027 10 October 2028 10 October 2028 10 October 2028 10 October 2028 21 November 2028 Number under option or shares to be issued Exercise or base price $8.57 $7.16 $7.53 $7.94 $7.94 $5.67 $5.01 $6.17 $8.05 $8.05 $0.00 $5.35 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 45,415 1,536 617 712 329 7,434 8,231 4,236 8,616 3,969 49,745 3,129 177,365 72,580 116,128 43,548 243,728 136,508 241,581 31,579 14,336 14,211 177,740 1,403,273 * The consolidated entity grants performance rights to fertility specialists as a dollar value; for the purpose of calculating the estimated number of shares under option, estimates of the share price at the time of vesting are forecast to facilitate an estimate of the number of shares to be issued at vesting. No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. Shares issued on the exercise of options During the financial year nil ordinary shares were issued on the exercise of options. No share options were cancelled during the financial year. There were no shares of Virtus Health Limited issued on the exercise of options from 1 July 2019 up to and including the date of this report. Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. It is a condition of the insurance contract that its limits of indemnity, the nature of the liability indemnified, and the amount of the premium, not be disclosed. Indemnity and insurance of auditor The company has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 38 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 38 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. Officers of the company who are former partners of PricewaterhouseCoopers There are no officers of the company who are former partners of PricewaterhouseCoopers. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 follows this report. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors Peter Macourt Chairman 20 August 2019 Sydney 38 39 VIRTUS HEALTHANNUAL REPORT 2019 AUDITOR’S INDEPENDENCE DECLARATION STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2019 Consolidated 2019 $’000 2018 $’000 Note Auditor’s Independence Declaration As lead auditor for the audit of Virtus Health Limited for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been: (a) (b) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit other than as noted below. A partner in the lead audit engagement office held an immaterial investment in Virtus Health Limited. The investment was immediately disposed of when the matter was identified. The partner did not provide any services to the entity and the audit team were not aware of the investment. On this basis I do not believe this matter has impacted the objectivity of PricewaterhouseCoopers in relation to the audit. This declaration is in respect of Virtus Health Limited and the entities it controlled during the period. Mark Dow Partner PricewaterhouseCoopers Sydney 20 August 2019 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 40 280,069 263,916 510 8,890 570 1,844 Revenue Share of profits of associates accounted for using the equity method Other income Expenses Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Impairment of goodwill Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Basic earnings per share Diluted earnings per share 4 4 5 5 5 6 22 23 3 3 (76,170) (98,972) (13,628) (5,800) (19,936) (4,259) (2,601) (3,653) (14,456) (9,820) 40,174 (11,184) 28,990 (1,383) 2,561 1,178 30,168 564 28,426 28,990 456 29,712 30,168 Cents 35.37 34.97 The above statement of comprehensive income should be read in conjunction with the accompanying notes (71,717) (89,044) (12,496) - (17,694) (4,427) (2,213) (2,562) (13,510) (7,803) 44,864 (12,855) 32,009 306 2,833 3,139 35,148 1,256 30,753 32,009 1,040 34,108 35,148 Cents 38.26 37.98 41 VIRTUS HEALTHANNUAL REPORT 2019 STATEMENT OF FINANCIAL POSITION As at 30 June 2019 STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2019 Consolidated 2019 $’000 2018 $’000 Note Consolidated Issued capital $’000 Reserves $’000 Retained profits $’000 Non- controlling interest $’000 Total equity $’000 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Total current assets Non-current assets Investments accounted for using the equity method Property, plant and equipment Intangibles Deferred tax Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Income tax Provisions Other financial liabilities Unearned income Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax Provisions Other financial liabilities Other payables Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Equity attributable to the owners of Virtus Health Limited Non-controlling interest Total equity 8 9 12 11 6 37 10 16 6 13 18 15 17 6 14 19 20 22 23 24 18,831 14,842 1,256 2,876 37,805 1,489 38,036 459,576 7,143 287 506,531 544,336 24,856 764 1,121 4,642 9,397 16,306 57,086 173,678 1,738 1,065 6,722 7,750 1,684 192,637 249,723 294,613 241,890 5,159 37,111 284,160 10,453 294,613 21,713 12,491 752 3,035 37,991 1,489 34,477 465,436 5,468 517 507,387 545,378 24,468 420 4,337 4,169 397 14,779 48,570 180,773 107 866 6,415 23,757 1,340 213,258 261,828 283,550 242,251 2,837 27,979 273,067 10,483 283,550 Balance at 1 July 2017 242,001 (11,416) Profit after income tax expense for the year Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Non-controlling interest on acquisition of subsidiary Dividends payable by subsidiaries to non- controlling interests Put option exercise Settlement of partly paid shares Share-based payments Dividends paid (note 21) Balance at 30 June 2018 Consolidated Balance at 1 July 2018 Profit after income tax expense for the year Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends payable by subsidiaries to non- controlling interests Issue of shares pursuant to share based payment schemes (note 20) Share based payment expense Settlement of partly paid shares Purchase of treasury shares (note 20) Dividends paid (note 21) Balance at 30 June 2019 - - - - - - 250 - - 242,251 Issued capital $’000 242,251 - - - - 125 - 225 (711) - 241,890 - 3,355 3,355 - - 10,017 - 881 - 2,837 18,127 30,753 - 30,753 19,659 1,256 (216) 1,040 268,371 32,009 3,139 35,148 - 1,013 1,013 - - - - (20,901) (1,212) (10,017) - - - (1,212) - 250 881 (20,901) 27,979 10,483 283,550 Reserves $’000 Retained profits $’000 Non- controlling interest $’000 Total equity $’000 2,837 - 1,286 1,286 - (125) 1,161 - - - 5,159 27,979 28,426 - 28,426 10,483 564 (108) 456 283,550 28,990 1,178 30,168 - (486) (486) - - - - (19,294) - - - - - 37,111 10,453 - 1,161 225 (711) (19,294) 294,613 The above statement of changes in equity should be read in conjunction with the accompanying notes The above statement of financial position should be read in conjunction with the accompanying notes 42 43 VIRTUS HEALTHANNUAL REPORT 2019 STATEMENT OF CASH FLOWS For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Other revenue Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payment of acquisition of non-controlling interest Final payment for prior period’s business acquisition Payments for acquisition of subsidiaries and businesses, net of cash acquired Payments for property, plant and equipment and intangibles Proceeds from release of security deposits Interest received Associate distributions received Net cash used in investing activities Cash flows from financing activities Proceeds from partly paid shares Payment of dividends Dividend paid to non-controlling interest in subsidiaries Repayment of borrowings Proceeds from borrowings Payment of finance facility fees in relation to refinancing Purchase of treasury shares Net cash from/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year Consolidated 2019 $’000 2018 $’000 Note 273,095 (217,696) 260,757 (191,637) 55,399 69,120 6,481 (7,793) (15,797) 38,290 - - - (14,553) 243 111 665 2,502 (6,615) (10,040) 54,967 (10,220) (4,152) (36,402) (15,500) 14 136 875 (13,534) (65,249) 225 (19,294) (486) (7,500) 1,500 (1,628) (711) (27,894) (3,138) 21,713 256 18,831 250 (20,901) (2,112) (6,000) 33,000 - - 4,237 (6,045) 27,337 421 21,713 33 20 20 8 The above statement of cash flows should be read in conjunction with the accompanying notes TABLE OF CONTENTS Notes to the Financial Statements Notes to the financial report Notes to the financial report Financial performance overview Operating segments Earnings per share Revenue Expense Income Tax Business combinations Balance sheet items Current assets- cash and cash equivalent Current assets- trade and other receivables Current liabilities- trade and other payables Non-current assets- intangibles Non-current assets- property, plant and equipment Current liabilities- provisions Non-current liabilities- provisions Capital structure and risk management Non- current liabilities- borrowings Current liabilities- derivative financial instruments Non- current liabilities- derivative financial instruments Current liabilities- other financial liabilities Non- current liabilities- other financial liabilities Equity- issued capital Equity- dividends Equity- reserves Equity- retained profits Equity- non-controlling interest Financial risk management Fair value measurement Group structure Interest in subsidiaries Deed of cross guarantee Parent entity information Other notes to the financial statements Share based payments Related party transactions Key management personnel disclosure Reconciliation of profit after income tax to net cash from operating activities Events after the reporting period Commitments Contingent liabilities Non-current assets- other Remuneration of auditors Other accounting policies 46 48 50 51 52 53 56 57 57 58 58 61 62 63 64 65 66 66 66 66 68 68 69 69 70 73 74 76 78 78 80 81 81 81 82 83 83 83 84 44 45 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS 30 June 2019 Note 1. Notes to the financial report Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Virtus Heath Limited is a for-profit entity for the purpose of preparing the financial statements. The consolidated financial statements of the Virtus Health Limited group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). At 30 June 2019 the consolidated entity’s current liabilities exceeded its current assets by $19,281,000 (June 2018: $10,579,000). The current liabilities include unearned income of $16,306,000 as well as employee leave liabilities of $10,591,000. Whilst, the leave liabilities are required to be disclosed as a current liability, a large portion of this liability is expected not to be settled within 12 months. The consolidated entity also has unused and available debt facilities of $82,402,000 which has a combination of a 3 year and 5 year maturity period to September 2021 and September 2023. The Directors continually monitor the group’s working capital position, including forecast working capital requirements and have ensured that there are appropriate refinancing strategies and adequate committed funding facilities in place to accommodate financial obligations as and when they fall due. The financial report therefore has been prepared on a going concern basis. Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss, investment properties and derivative financial instruments. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 29. Principles of consolidation In preparing these financial statements, subsidiaries are consolidated from the date the Group gains control until the date on which control ceases. The Group’s share of results of equity accounted investments is included in the consolidated financial statements from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. All intercompany transactions are eliminated. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of comprehensive income, statement of financial position and statement of changes in equity of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deficit balance. Foreign currency translation The financial statements are presented in Australian dollars, which is Virtus Health Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency translation reserve in equity. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New or revised accounting standards As outlined below, the consolidated entity has adopted all amendments to Australian Accounting Standards which became applicable for the consolidated entity from 1 July 2018. AASB 15 Revenue from Contracts with Customers (‘AASB15’) The consolidated entity as adopted AASB 15 from 1 July 2018 which resulted in changes in accounting policies. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer, that is, the ‘notion of control’ replaces the existing ‘notion of risks and rewards’. Refer to note 4. AASB 9 Financial Instruments (‘AASB9’) The consolidated entity has adopted all of the phases of the new financial instruments standard, including; classification and measurement of financial assets and liabilities, impairment including expected credit losses and hedge accounting, which resulted in changes to accounting policies. The adoption of both of the above standards has not materially impacted the financial report of the consolidated entity. New standards not yet applicable Other than AASB 16 Leases, standards not yet applicable are not expected to have a material impact on the consolidated entity. Refer to note 35 for further disclosure on the impact of AASB 16 Leases. Critical accounting judgements and key sources of estimation uncertainty The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. These are based on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The judgements and estimates that have the most significant effect on the amounts recognised in the financial statements are detailed in the notes below: Judgement/Estimation Business combinations Goodwill and other indefinite life intangible assets Share-based payments Notes to the financial reports The notes are organised into the following sections. Note 7 11 30 Financial performance overview: provides a breakdown of individual line items in the statement of financial performance, and other information that is considered most relevant to users of the annual report. Balance sheet items: provides a breakdown of individual line items in the statement of financial position that are considered most relevant to users of the annual report. Capital structure and risk management: provides information about the capital management practices of the consolidated entity and shareholder returns for the year. This section also discusses the consolidated entity’s exposure to various financial risks, explains how these affect the consolidated entity’s financial position and performance and what the consolidated entity does to manage these risk. Group structure: explains aspects of the Virtus group structure and the impact of this structure on the financial position and performance of the consolidated entity. Other: • provide information on items which require disclosure to comply with Australian Accounting Standards and other regulatory pronouncements; and provide information about items that are not recognised in the financial statements but could potentially have a significant impact on the consolidated entity’s financial position and performance. • 46 47 VIRTUS HEALTHANNUAL REPORT 2019 Consolidated - 2018 Revenue Sales to external customers Other revenue Interest revenue Total revenue Segment EBITDA Share based payment expense Corporate costs Transaction costs Fair value adjustments to put liabilities and contingent consideration Depreciation and amortisation expense Net interest Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets Healthcare Services Australia $’000 Healthcare Services International $’000 Intersegment eliminations/ unallocated $’000 215,969 1,747 123 217,839 46,064 - - 46,064 66,822 9,196 1,489 14,675 - 53,824 - - 13 3 - - - Total $’000 262,033 1,747 136 263,916 76,018 (881) (10,168) (1,031) 1,089 (12,496) (7,667) 44,864 (12,855) 32,009 1,489 68,499 Accounting policy for operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 2. Operating segments Identification of reportable operating segments AASB 8 ‘Operating Segments’ requires operating segments to be identified on the basis of internal reports about components of the consolidated entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The board of directors and senior management are identified as the chief operating decision makers in assessing performance and in determining the allocation of resources. The consolidated entity currently has six operating segments being New South Wales, Queensland, Victoria, Tasmania, Australian Diagnostics and International. The consolidated entity has determined that the disclosure of two segments, being an Australian aggregated healthcare services segment and an International healthcare services segment is most appropriate. Disclosure of an aggregated segment for Australia is considered appropriate due to the similar economic characteristics faced by the operating segments and the similar nature of the products and services being delivered to a similar customer base. Segment revenue Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties reported to the Board of Directors is measured in a manner consistent with that in the statement of comprehensive income. Revenue from external customers is derived from the provision of healthcare services. A breakdown of revenue and results is provided below: Segment EBITDA Segment performance is assessed on the basis of Segment EBITDA. Segment EBITDA comprises expenses which are incurred in the normal trading activity of the segments and excludes the impact of corporate costs, depreciation, amortisation, goodwill impairment, interest, share-based payments and other items which are determined to be outside of the control of the respective segments. Consolidated - 2019 Revenue Sales to external customers Other revenue Interest revenue Total revenue Segment EBITDA Transfer of IP Share based payment expense Corporate costs Transaction costs Fair value adjustments to put liabilities and contingent consideration Depreciation and amortisation expense Impairment of goodwill Net interest Foreign exchange Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets Healthcare Services Australia $’000 Healthcare Services International $’000 Intersegment eliminations/ unallocated $’000 216,429 5,853 108 222,390 57,676 - - 57,676 61,091 10,055 1,489 12,580 - 1,973 - - 3 3 - - - Total $’000 274,105 5,853 111 280,069 71,146 4,110 (1,161) (12,693) (196) 8,261 (13,628) (5,800) (9,709) (156) 40,174 (11,184) 28,990 1,489 14,553 Australian segment revenue includes $4,110,000 for the transfer of Virtus’ IP in relation to its Artificial Intelligence software “Ivy”. Corporate cost increase of $2,525,000 over pcp reflects key investments to support the ongoing development of the business and comprised mostly of the employment related costs for a CIO, strategic HR and IT noted earlier in the operating and financial review under employment costs. 48 49 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 3. Earnings per share Note 4. Revenue Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Virtus Health Limited Add: interest savings on conversion of options Consolidated 2019 $’000 28,990 (564) 28,426 118 2018 $’000 32,009 (1,256) 30,753 97 Profit after income tax attributable to the owners of Virtus Health Limited used in calculating diluted earnings per share 28,544 30,850 Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options over ordinary shares Number Number 80,373,944 80,388,866 1,248,839 828,823 Weighted average number of ordinary shares used in calculating diluted earnings per share 81,622,783 81,217,689 Revenue from contracts with customers Rendering of services Other revenue Rent Transfer of IP Interest Revenue Cents 35.37 34.97 Cents 38.26 37.98 Other income Fair value gain on put liabilities Fair value gain on contingent consideration Other income Other income Basic earnings per share Diluted earnings per share Recognition and measurement Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Virtus Health Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Consolidated 2019 $’000 2018 $’000 274,105 262,033 1,743 4,110 111 5,964 1,747 - 136 1,883 280,069 263,916 Consolidated 2019 $’000 4,484 3,778 628 8,890 2018 $’000 891 198 755 1,844 Recognition and measurement From 1 July 2018, Virtus adopted AASB 15 Revenue from Contracts with Customers. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer, that is, the ‘notion of control’ replaces the existing ‘notion of risks and rewards’. The impact of this change in accounting standard is not material to Virtus as the ‘notion of control’ is closely aligned to the ‘notion of risks and rewards’ for Virtus revenue streams. Rendering of services: revenue from the rendering of services is recognised upon the delivery of the service to a patient or customer. Revenue is recognised on completion of a medical procedure, on supply of drugs, or on completion of an analytical test. If payments received from patients exceed the revenue recognised the difference is disclosed as deferred revenue. Unearned revenue: fees for fertility treatment cycles paid in advance are recognised as unearned revenue ( recognised in balance sheet) until the service has been provided whereupon the fees are recognised as revenue. Transfer of IP: the transfer of IP was recognised at a point in time as the customer is able to direct the use of and obtain substantially all of the benefits from the IP at the time that control of the IP was transferred to the customer. 50 51 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 5. Expenses Note 6. Income tax Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Furniture and fittings Office equipment Medical equipment Total depreciation Amortisation Software Brand names Total amortisation Total depreciation and amortisation Impairment Impairment of goodwill Finance costs Interest and finance charges paid/payable Interest on other financial liability - non-cash interest Amortisation of bank facility fees Finance costs expensed Rental expense relating to operating leases Minimum lease payments Superannuation expense Defined contribution superannuation expense Research costs Research costs Share-based payments expense Share-based payments expense - fertility specialists Share-based payments expense - employee benefits Total share-based payments expense Consolidated 2019 $’000 2018 $’000 3,492 486 2,588 3,406 9,972 2,174 1,482 3,656 13,628 3,025 409 2,439 2,879 8,752 2,167 1,577 3,744 12,496 5,800 - 7,793 1,464 563 9,820 6,615 981 207 7,803 15,589 13,677 6,606 5,885 2,200 2,000 1,009 152 1,161 625 256 881 Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Deferred tax included in income tax expense comprises: Increase in deferred tax assets Decrease in deferred tax liabilities Deferred tax - origination and reversal of temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Impairment of goodwill Fair value gain on Put Liabilities and Contingent Consideration Tax losses utilised/(recognised) Other Difference in overseas tax rates Adjustment recognised for prior periods Income tax expense Amounts charged/(credited) directly to equity Deferred tax assets Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 17% Consolidated 2019 $’000 12,580 (1,234) (162) 11,184 (1,082) (152) (1,234) 40,174 12,052 1,740 (2,421) - 861 12,232 (886) (162) 11,184 2018 $’000 13,933 (1,072) (6) 12,855 (1,048) (24) (1,072) 44,864 13,459 - (327) (311) 995 13,816 (955) (6) 12,855 Consolidated 2019 $’000 2018 $’000 (593) 131 1,397 237 1,106 188 The above potential tax benefit for tax losses has not been recognised in the statement of financial position. These tax losses relate to Singapore and can be utilised in the future. 52 53 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 6. Income tax (continued) Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Employee benefits Tax losses Intangible assets Other Amounts recognised in equity: Other Deferred tax asset Amount expected to be recovered within 12 months Amount expected to be recovered after more than 12 months Movements: Opening balance Credited to profit or loss Credited/(charged) to equity Closing balance Consolidated 2019 $’000 2018 $’000 3,337 283 (165) 2,937 6,392 751 7,143 3,154 3,989 7,143 5,468 1,082 593 7,143 3,198 370 (347) 2,089 5,310 158 5,468 2,951 2,517 5,468 4,551 1,048 (131) 5,468 Deferred tax liability Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Intangible assets Other Deferred tax liability Amount expected to be settled within 12 months Amount expected to be settled after more than 12 months Movements: Opening balance Credited to profit or loss Additions through business combinations Closing balance Provision for income tax Provision for income tax Consolidated 2019 $’000 2018 $’000 1,079 (14) 1,065 151 914 1,065 866 (152) 351 1,065 855 11 866 468 398 866 585 (24) 305 866 Consolidated 2019 $’000 2018 $’000 1,121 4,337 Recognition and measurement Income tax is payable on profits after allowing for expenses assessable and deductions exempt under tax laws. The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Virtus Health Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. 54 55 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 7. Business combinations Note 8. Current assets - cash and cash equivalents Fertilitesklinikken Trianglen Aps On the 28 June 2018, Virtus Health Europe Limited acquired 100% of the ordinary share capital in Fertilitesklinikken Trianglen Aps (Trianglen), based in Copenhagen Denmark details of which were disclosed in the 2018 Financial report. During the year ended 30 June 2019, the following adjustments were made to the provisional purchase price allocation and purchase price: Cash at bank and on hand Consolidated 2019 $’000 18,831 2018 $’000 21,713 Brands Other asset/liabilities Working capital adjustment to purchase price Total Fair Value and working capital adjustments Fair value $’000 1,820 78 133 2,031 These adjustments resulted in an equivalent decrease in Goodwill of $2,031,000 Based on the most recent forecast trading outlook for Trianglen, the consolidated entity reduced the estimated contingent consideration in June 2018 by $3,800,000, and took this amount to profit and loss. This adjustment has no impact on the underlying carrying value of the related assets. Recognition and measurement The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non- controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Critical accounting estimates - provisional and fair value assessments As discussed above, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the consolidated entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. The determination of the liability relating to put options and contingent consideration linked to business combinations requires estimations to be made of the future profitability of the acquired entity and the discount rates used, refer to note 26 for details. Recognition and measurement Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Note 9. Current assets - trade and other receivables Trade receivables Less: Allowance for expected credit losses Other receivables Consolidated 2019 $’000 12,552 (1,859) 10,693 4,149 14,842 2018 $’000 11,994 (1,470) 10,524 1,967 12,491 Allowance for expected credit losses The consolidated entity has recognised an expense of $546,000 (2018: $746,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2019. The ageing of the impaired receivables provided for above is as follows: 3 to 6 months overdue Over 6 months overdue The nominal value of the impaired receivables is $2,159,621 (2018: $1,765,000). Movements in the allowance for expected credit losses are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Unused amounts reversed Closing balance Consolidated 2019 $’000 300 1,559 1,859 2018 $’000 295 1,175 1,470 Consolidated 2019 $’000 1,470 800 (157) (254) 1,859 2018 $’000 1,944 803 (1,220) (57) 1,470 Recognition and measurement Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. 56 57 VIRTUS HEALTHANNUAL REPORT 2019NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 9. Current assets - trade and other receivables (continued) Virtus has adopted AASB 9 Financial instruments, which requires an expected credit loss (‘ECL’) model as opposed to an incurred credit loss model under AASB 139 Financial instruments: recognition and Measurement . The ECL model requires Virtus to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial assets. AASB 9 also requires a simplified approach for measuring the loss allowance at an amount equal to lifetime ECL for trade receivables, contract assets and lease receivables in certain circumstances. Accordingly, Virtus allowance for doubtful debts calculation applies the expected loss model and takes into consideration the likely level of bad debts ( based on historical experience) as well as any known ‘at risk’ receivables. Bad debts are written off against the allowance account and any other changes in the allowance account is recognised in the statement of financial performance. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Note 10. Current liabilities - trade and other payables Trade payables Other payables Consolidated 2019 $’000 8,395 16,461 24,856 2018 $’000 10,341 14,127 24,468 Refer to note 25 for further information on financial risk management. Recognition and measurement Trade and other payables are recognised when Virtus becomes obliged to make future payments resulting from purchase of goods and services. Payables are stated at their amortised cost. Note 11. Non-current assets - intangibles Goodwill - at cost Software - at cost Less: Accumulated amortisation Brand names - at cost Less: Accumulated amortisation Consolidated 2019 $’000 2018 $’000 448,198 453,437 23,100 (18,728) 22,053 (16,553) 4,372 5,500 19,493 (12,487) 7,006 17,504 (11,005) 6,499 459,576 465,436 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Additions Additions through business combinations Exchange differences Amortisation expense Balance at 30 June 2018 Additions Disposals Exchange differences Impairment Transfers Amortisation expense Balance at 30 June 2019 Recognition and measurement Goodwill $’000 Software $’000 399,707 - 50,748 2,982 - 453,437 - - 2,592 (5,800) (2,031) - 448,198 5,437 2,201 - 29 (2,167) 5,500 1,108 (83) 21 - - (2,174) 4,372 Brand names $’000 6,339 - 1,511 226 (1,577) 6,499 - - 169 - 1,820 (1,482) 7,006 Total $’000 411,483 2,201 52,259 3,237 (3,744) 465,436 1,108 (83) 2,782 (5,800) (211) (3,656) 459,576 Intangible assets Intangible assets including brand names acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Goodwill Goodwill arise on the acquisition of a business and represents the excess of the cost of acquisition over the fair value of the identified assets and liabilities acquired. Goodwill is not amortised, but tested annually and whenever there is an indicator of impairment. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Software Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 3 to 5 years. Brand names Brand names are amortised over a defined useful life of 10-15 years and subsequently carried net of accumulated amortisation. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. 58 59 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 11. Non-current assets - intangibles (continued) Critical accounting estimates- impairment tests of goodwill Goodwill is allocated to the group’s cash generating units (‘CGUs’) identified according to operating segment: New South Wales Victoria Queensland Tasmania Australian Diagnostics International Consolidated 2019 $’000 111,807 122,294 66,626 14,661 26,719 106,091 448,198 2018 $’000 111,807 122,294 66,626 20,461 26,719 105,530 453,437 The recoverable amount of a CGU is determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by the board covering a one year period. Cash flows beyond the one year period use management estimates covering a period not exceeding four years to determine income, expenses, capital expenditure and cash flows for each CGU. In determining these forecasts senior management developed a view on the future revenue growth, and the mix of the consolidated entities service offerings as well as margin per customer and the capital and operational expenditure requirements. These determinations were based on past experience and expectations of the future. Cash flows beyond the five year forecast period are extrapolated using estimated long-term growth rates (“terminal growth rate”). The terminal growth rates used do not exceed the long term average growth rates for the business. Each of the above factors is subject to significant judgement about future economic conditions and the ongoing structure of the assisted reproductive services industry. Management have applied their best estimates to each of the variables and cannot warrant their outcome. New South Wales Victoria Queensland Tasmania International Australia Diagnostics Terminal Growth Rate Pre-tax discount rate 2019 2.5% 2.5% 2.5% 1.0% 2.5% 2.0% 2018 2.5% 2.5% 2.5% 1.0% 2.5% 2.0% 2019 10.6% 10.6% 10.6% 10.6% 9.3% 10.6% 2018 12.0% 12.0% 12.0% 14.0% 10.3% 12.0% Tasmania: The consolidated entity as part of its budgeting process reviewed the assumptions relating to the Tasmanian business to reflect changes in the competitive landscape and recent delays in business development in relation to its newly commissioned Day Hospital facilities. Based on its review, a goodwill impairment charge of $5,800,000 has been recognised for Tasmania. The reduction in the pre-tax discount rate to 10.6% reflects the current discount rate calculations and also takes into account the risk adjustment to assumptions in relation to the expected cash inflows resulting from management’s review discussed above. If there are any further negative changes in the key assumptions on which the recoverable amount of goodwill is based for Tasmania, this would result in a further impairment charge for the Tasmanian CGUs goodwill. 60 Adjusting revenue growth in the budget and future years: Downwards Upwards Adjusting discount rate: Upwards Downwards Change in Impairment (Increase)/ Decrease $’000 (4,400) 4,400 (2,165) 2,883 Adjustment 5.00% 5.00% 1.00% 1.00% Each of the sensitivities above assumes that the specific assumption moves in isolation, whilst all other assumptions are held constant. In reality, a change in one of the aforementioned assumptions may accompany a change in other assumptions. Action is also usually taken to respond to adverse changes in economic assumptions that may mitigate the impact of such changes. Queensland: Queensland remains a price sensitive market and remains sensitive to annual projected growth rates and discount rates used disclosed above. Management believes that a review of pricing and its efforts to manage costs during the new financial year will help the business achieve its revenue and growth targets for FY2020 and beyond. Should this judgement of future EBITDA estimates not occur, the goodwill carrying amount may become impaired. The key sensitivities for the Queensland cash-generating unit are as follows: • • If forecast EBITDA that drives the terminal value decreases by more than 14% for the Queensland division, goodwill would need to be impaired, with all other assumptions remaining constant; or If the discount rate increases more than 1% for the Queensland division, goodwill would need to be impaired, with all other assumptions remaining constant. Reasonable changes in key assumptions on which the recoverable amount of the other cash generating units is based will not cause the cash generating unit’s carrying amounts to exceed their recoverable amount. Note 12. Non-current assets - property, plant and equipment Consolidated Leasehold improvements - at cost Less: Accumulated depreciation Furniture and fittings - at cost Less: Accumulated depreciation Office equipment - at cost Less: Accumulated depreciation Medical equipment - at cost Less: Accumulated depreciation 2019 $’000 51,941 (30,310) 21,631 3,926 (2,505) 1,421 19,865 (14,751) 5,114 35,660 (25,790) 9,870 38,036 2018 $’000 48,220 (28,932) 19,288 3,510 (2,006) 1,504 17,581 (12,137) 5,444 30,695 (22,454) 8,241 34,477 61 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 12. Non-current assets - property, plant and equipment (continued) Accounting policy for employee benefits Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Additions Additions through business combinations Exchange differences Depreciation expense Balance at 30 June 2018 Additions Disposals Exchange differences Depreciation expense Balance at 30 June 2019 Leasehold improvements $’000 Furniture and fittings $’000 Office equipment $’000 Medical equipment $’000 13,470 8,534 254 55 (3,025) 19,288 5,833 (51) 53 (3,492) 21,631 1,536 350 - 26 (409) 1,503 394 - 11 (486) 1,422 5,765 2,086 - 32 (2,439) 5,444 2,237 - 21 (2,588) 5,114 8,218 2,329 486 88 (2,879) 8,242 4,981 (1) 53 (3,406) 9,869 Total $’000 28,989 13,299 740 201 (8,752) 34,477 13,445 (52) 138 (9,972) 38,036 Recognition and measurement Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Furniture and fittings Office equipment Medical equipment Shorter of the useful and the expected life of the lease 2 to 10 years 2 to 5 years 2 to 5 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Note 13. Current liabilities - provisions Employee benefits - long service leave Consolidated 2019 $’000 4,642 2018 $’000 4,169 Amounts not expected to be settled within the next 12 months The current provision for long service leave includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Long service leave obligation expected to be settled after 12 months 62 Consolidated 2019 $’000 4,178 2018 $’000 3,752 Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave where there is no unconditional right to defer settlement of the liability are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities for wages and salaries (including non- monetary benefits and annual leave) is included in Note 10 Current liabilities - trade and other payables. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Note 14. Non-current liabilities - provisions Employee benefits - long service leave Lease make good Consolidated 2019 $’000 1,424 5,298 6,722 2018 $’000 1,454 4,961 6,415 Lease make good The provision represents the present value of the estimated costs to make good the premises leased by the consolidated entity at the end of the respective lease terms. Movements in provisions Movements in each class of provision during the current financial year, other than employee benefits, are set out below: Consolidated - 2019 Carrying amount at the start of the year Additional provisions recognised Disposal provision recognised Exchange differences Unwinding of discount Carrying amount at the end of the year Lease make good $’000 4,961 147 (127) 35 282 5,298 Accounting policy for provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Accounting policy for other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 63 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 15. Non-current liabilities - borrowings Bank loans (net of borrowing costs) Refer to note 25 for further information on financial risk management. Consolidated 2019 $’000 2018 $’000 173,678 180,773 Assets pledged as security The bank loans above are secured by guarantees by all Australian group companies and fixed and floating charges over the consolidated entity’s assets. Guarantees are not provided by subsidiaries which are not based in Australia and there are no fixed or floating charges over the assets of the international subsidiaries of the consolidated entity. However, the shares representing the ownership interest in the international subsidiaries are included in the charges over the consolidated entity. The carrying amounts of assets pledged as security for current and non-current borrowings are: Consolidated 2019 $’000 7,992 7,313 790 2,245 81,465 29,761 3,804 6,456 64 2018 $’000 10,856 7,726 529 2,098 81,465 28,732 5,451 4,711 56 Cash and cash equivalents Receivables Inventories Other current assets Investments Plant and equipment Intangible assets (excluding goodwill) Deferred tax assets Other financial assets Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans ( excluding capitalised borrowing costs) Working capital facilities Used at the reporting date Bank loans ( excluding capitalised borrowing costs) Working capital facilities Unused at the reporting date Bank loans ( excluding capitalised borrowing costs) Working capital facilities Borrowings-Financial Arrangements The consolidated entity completed refinancing its existing debt facilities maturing in September 2019, with a combination of 3-year and 5-year debt financing on 28 September 2018. Following the early refinancing, the consolidated entity has total commitments of $262,403,000 through its syndicated debt facilities. At 30 June 2019, total facilities drawn were $175,000,000 in borrowings and $5,001,000 (FY18: $4,718,000) in guarantees. Unused and available facilities amounted to $82,402,000. The consolidated entity complied with the financial covenants of its borrowing liabilities during the financial year ended 30 June 2019. Subject to the continued compliance with debt covenants, the bank facilities may be drawn at any time and have an average maturity of 3 years (30 June 2018: 1 year). $92,403,000 of the facility expires in September 2021, while the remaining $170,000,000 expires in September 2023. Recognition and measurement Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Note 16. Current liabilities - derivative financial instruments Interest rate swap contracts - cash flow hedges Refer to note 25 for further information on financial risk management. Refer to note 26 for further information on fair value measurement. Consolidated 2019 $’000 764 2018 $’000 420 139,890 141,624 Recognition and measurement Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to cover the consolidated entity’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Consolidated 2019 $’000 2018 $’000 252,403 10,000 200,000 10,000 262,403 210,000 175,000 5,001 180,001 77,403 4,999 82,402 181,000 4,718 185,718 19,000 5,282 24,282 64 65 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 17. Non-current liabilities - derivative financial instruments Movements in ordinary share capital Interest rate swap contracts - cash flow hedges Refer to note 25 for further information on financial risk management. Refer to note 26 for further information on fair value measurement. Note 18. Current liabilities - other financial liabilities Other financial liability Loan note Consolidated 2019 $’000 1,738 2018 $’000 107 Consolidated 2019 $’000 8,582 815 9,397 2018 $’000 - 397 397 The other financial liability represents the fair value of the put options held by the non-controlling interests in Sims Clinic Limited and TasIVF Pty Limited. Loan note reflects the current portion of a loan owing to the vendors of Trianglen. Note 19. Non-current liabilities - other financial liabilities Details Date Shares Issue price $’000 Balance Settlement of partly paid shares Settlement of partly paid shares Share issued- exercise of options Balance Settlement of partly paid shares Settlement of partly paid shares Balance 1 July 2017 11 October 2017 17 April 2018 28 March 2018 30 June 2018 12 October 2018 18 April 2019 30 June 2019 80,388,494 - - 1,444 80,389,938 - - 80,389,938 $0.00 $0.00 $0.00 $0.00 $0.00 242,001 115 135 - 242,251 115 110 242,476 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. All shares on issue are fully paid apart from 1,919,869 shares which are partly paid. The 1,919,869 shares were issued at $4.71 per share and are unpaid up to the extent of $2.39 per share at 30 June 2019. Treasury Shares Treasury shares are shares in Virtus Health Limited that are held by the Virtus Health Limited Employee Share Trust (‘VHLEST’) for the purpose of providing shares under selected Group equity plans. Other financial liabilities Loan note Consolidated 2019 $’000 5,656 2,094 7,750 2018 $’000 20,975 2,782 23,757 On market acquisitions during the period Distribution of shares during the period to employees Balance at 30 June 2019 Share buy-back There is no current on-market share buy-back. Number of shares $ 177,394 (30,626) 146,768 711,029 (124,901) 586,128 Refer to note 26 for other information on financial instruments. The other financial liabilities represents the fair value of the contingent consideration arising from the acquisition of Trianglen. In the prior year it also included the fair value of the put options held by the non-controlling interests in Sims Clinic Limited and TasIVF Pty Limited, now classified as current liabilities. Loan note reflects the non-current portion of a loan owing to the vendors of Trianglen. Note 20. Equity - issued capital Ordinary shares - fully paid Treasury Shares Consolidated 2019 Shares 2018 Shares 80,389,938 (146,768) 80,389,938 - 80,243,170 80,389,938 2019 $’000 242,476 (586) 241,890 2018 $’000 242,251 - 242,251 Capital risk management The consolidated entity’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current parent entity’s share price at the time of the investment. Recognition and measurement Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. When the company reacquires its equity instruments (treasury shares) their cost is deducted from equity. No gain or loss is recognised in the profit or loss on the purchase, sale, issue or cancellation of treasury shares. Any difference between the cost of acquisition and the consideration when reissued is recognised in the Share based payments reserve. 66 67 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 21. Equity - dividends Dividend type 2017 Final 2018 Interim 2018 Final 2019 Interim Cents per share Franking $’000 Date paid 12.0 14.0 12.0 12.0 100% 100% 100% 100% 9,646 11,255 9,647 9,647 13/10/2017 17/04/2018 12/10/2018 18/04/2019 A final dividend of 12.00 cents per share, fully franked, will be paid on 25 October 2019 to the shareholders on the register at 4 October 2019. Recognition and measurement Dividends are recognised when declared during the financial year. Franking account balance Consolidated 2019 $’000 24,008 2018 $’000 20,534 Recognition and measurement The above amounts are calculated from the balance of the franking account as at the end of the reporting period, adjusted for franking credits and debits that will arise from the settlement of income tax liabilities after the end of the year. Note 22. Equity - reserves Foreign currency translation reserve Cash flow hedges reserve Share-based payments reserve Put option business combination reserve Nature and purpose of reserves Consolidated 2019 $’000 6,218 (1,755) 14,504 (13,808) 5,159 2018 $’000 3,549 (372) 13,468 (13,808) 2,837 • • • • Foreign currency translation reserve: this reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Cash flow hedge reserve: the reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that are determined to be an effective hedge. Share-based payments reserve: the reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Put option business combination reserve: the reserve is used to recognise the impact of the non-controlling interest put options relating to the Sims Clinic Limited and TasIVF Pty Limited acquisitions. The reduction is for the exercise of the first put option in relation to both these entities. Issued capital Reserves Retained profits Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Revaluation - net Foreign currency translation Option expense Put option exercise Balance at 30 June 2018 Revaluation - net Foreign currency translation Option expense Issue of shares pursuant to share based payment schemes Balance at 30 June 2019 Foreign currency translation reserve $’000 Cash flow hedges reserve $’000 Share-based payments reserve $’000 Put option business combination reserve $’000 501 - 3,048 - - 3,549 - 2,669 - - 6,218 (678) 306 - - - (372) (1,383) - - - 12,586 - - 882 - 13,468 - - 1,161 (125) (23,825) - - - 10,017 (13,808) - - - - (1,755) 14,504 (13,808) Total $’000 (11,416) 306 3,048 882 10,017 2,837 (1,383) 2,669 1,161 (125) 5,159 Note 23. Equity - retained profits Retained profits at the beginning of the financial year Profit after income tax expense for the year Dividends paid (note 21) Retained profits at the end of the financial year Note 24. Equity - non-controlling interest Consolidated 2019 $’000 27,979 28,426 (19,294) 2018 $’000 18,127 30,753 (20,901) 37,111 27,979 Consolidated 2019 $’000 1,842 5,315 3,296 10,453 2018 $’000 1,842 5,423 3,218 10,483 68 69 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 25. Financial risk management Financial risk management objectives The group has exposure to the following risks in the course of its activities: • Market risk; • Credit risk; and • Liquidity risk. This note presents information about the Group’s exposure to each of the above risks, its objectives, policies and procedures for measuring and managing risk and the management of capital. Further quantified disclosures are included throughout this financial report. The consolidated entity’s financial risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity. Derivative financial instruments such as forward foreign exchange contracts are used to hedge certain risk exposures. Risk management is carried out by senior finance executives (‘finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the consolidated entity’s operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The group operates internationally and is exposed to foreign currency risk from various currency exposures, primarily with respect to the Euro, GBP, Singapore dollars and Danish Krone. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. Price risk The consolidated entity is exposed to changes in Commonwealth Government funding for the healthcare services the consolidated entity provides which may impact patient out-of-pocket expenses and thus demand. Interest rate risk The consolidated entity’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The policy is to maintain approximately 30% of borrowings at fixed rate using interest rate swaps to achieve this when necessary. As at the reporting date, the consolidated entity had the following variable rate borrowings and interest rate swap contracts outstanding: Consolidated Bank loans Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2019 2018 Weighted average interest rate % 3.46% - Weighted average interest rate % 3.85% - Balance $’000 175,000 (110,000) 65,000 Balance $’000 181,000 (50,000) 131,000 An analysis by remaining contractual maturities is shown in the ‘liquidity and interest rate risk management’ section below. Basis points increase Basis points decrease Consolidated - 2019 Basis points change Profit after tax $’000 Equity $’000 Basis points change Profit after tax $’000 Bank loans 100 (455) (455) 100 455 Basis points increase Basis points decrease Consolidated - 2018 Basis points change Profit after tax $’000 Equity $’000 Basis points change Profit after tax $’000 Bank loans 100 (917) (917) 100 917 Equity $’000 455 Equity $’000 917 Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity does not hold any collateral. The consolidated entity has adopted an expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the consolidated entity based on recent sales experience, historical collection rates and forward-looking information that is available. Receivables balances and ageing analysis are monitored on an on-going basis. In order to minimise the consolidated entity’s exposure to bad debts, processes are in place to send reminder notices, demands for repayment and ultimately to refer to debt collection agencies. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans ( excluding capitalised borrowing costs) Working capital facilities Consolidated 2019 $’000 78,725 4,999 83,724 2018 $’000 19,227 5,282 24,509 The consolidated entity has borrowing facilities totalling $262,403,000. $92,403,000 of the facility expires in September 2021,whilst the remaining $170,000,000 expires in September 2023 70 71 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 25. Financial risk management (continued) Note 26. Fair value measurement Remaining contractual maturities The following tables detail the consolidated entity’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Fair value hierarchy The following tables detail the consolidated entity’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Weighted average interest rate % Between 1 and less than 2 years $’000 1 year or less $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 Consolidated - 2019 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Other financial liabilities Loan note Total non-derivatives - - 3.46% 3.46% 4.00% Derivatives Derivative financial instruments - Total derivatives 8,395 16,461 6,060 8,582 921 40,419 764 764 - - 6,060 5,983 888 - - 185,353 - 1,271 12,931 186,624 534 534 1,204 1,204 - - - - - - - - 8,395 16,461 197,473 14,565 3,080 239,974 2,502 2,502 Consolidated - 2019 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities Consolidated - 2018 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 - - - 2,502 - 2,502 - 14,238 14,238 Level 1 $’000 Level 2 $’000 Level 3 $’000 - - - 527 - 527 - 20,975 20,975 Total $’000 2,502 14,238 16,740 Total $’000 527 20,975 21,502 Weighted average interest rate % Between 1 and less than 2 years $’000 1 year or less $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 Consolidated - 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Other financial liabilities Loan note Total non-derivatives - - 4.28% 3.85% 4.00% 10,341 14,127 7,393 - 461 - - 182,848 - 898 - - - 20,516 2,106 32,322 183,746 22,622 Derivatives Derivative financial instruments - Total derivatives 420 420 107 107 - - - - - - - - - - 10,341 14,127 190,241 20,516 3,465 238,690 527 527 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. 72 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of other financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. Other financial liabilities have been valued using a forecast earnings model, discounted using specific borrowing rates. Level 3 assets and liabilities Movements in level 3 assets and liabilities during the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Additions Foreign exchange impact Amounts paid during the period Amounts paid in exercise of put option Interest on unwinding Fair value adjustment Balance at 30 June 2018 Interest on unwinding Foreign exchange impact Fair value adjustment Balance at 30 June 2019 Contingent Consideration $’000 Put Option $’000 Total $’000 4,022 8,817 223 (4,152) - 105 (198) 8,817 363 254 (3,778) 5,656 21,777 - 669 - (10,220) 823 (891) 12,158 689 219 (4,484) 8,582 25,799 8,817 892 (4,152) (10,220) 928 (1,089) 20,975 1,052 473 (8,262) 14,238 73 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 26. Fair value measurement (continued) Recognition and measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Note 27. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1: Ownership interest Name IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Melbourne I.V.F. Pty. Ltd. The Heptarchy Trust North Shore Specialist Day Hospital Pty Ltd Queensland Fertility Group Pty. Ltd. Spring Hill Specialist Day Hospital Pty Limited The QFG Day Theatres Unit Trust Hunter Fertility Pty Limited Hunter Fertility Unit Trust Bremiera Pty Limited Queensland Fertility Group Gold Coast Pty Ltd Gold Coast Obstetrics & Gynaecology Specialist Services Pty Ltd Mackay Specialist Day Hospital Pty Limited Maroubra Day Surgery Trust City East Specialist Day Hospital Pty Ltd Virtus Health Singapore Pte Ltd Virtus Health Europe Limited Virtus Health Ireland Limited SIMS Clinic Limited Xentra Pharm Limited IVF Sunshine Coast Limited Human Assisted Reproduction Ireland (HARI) Limited TasIVF Pty Limited Virtus Andrology Laboratory Singapore Pte. Ltd Virtus Fertility Centre Singapore Pte Limited Virtus Health Specialist Diagnostics Pty Limited Lab Services Pty Limited Lab Services Unit Trust Aagaard Fertilitetsklinik Aps Complete Fertility Limited Fertilitesklinikken Trianglen Aps Virtus Innovation Pty Ltd Principal place of business / Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore United Kingdom Ireland Ireland Ireland Australia Ireland Australia Singapore Singapore Australia Australia Australia Denmark United Kingdom Denmark Australia 2019 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 85.00% 85.00% 100.00% 85.00% 85.00% 70.00% 70.00% 100.00% 100.00% 100.00% 100.00% 90.00% 100.00% 100.00% 2018 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 85.00% 85.00% 100.00% 85.00% 85.00% 90.00% 90.00% 100.00% 100.00% 100.00% 100.00% 90.00% 100.00% - 74 The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries with non-controlling interests in accordance with the accounting policy described in note 1: Name Principal place of business /Country of incorporation Sims Clinic Limited and its controlled entities Ireland TasIVF Pty Limited Australia Virtus Fertility Centre Singapore Pte Limited and its controlled entities Singapore Complete Fertility Limited United Kingdom Principal activities provision of healthcare services provision of healthcare services provision of healthcare services provision of healthcare services Parent Non-controlling interest Ownership interest 2019 % Ownership interest 2018 % Ownership interest 2019 % Ownership interest 2018 % 85.00% 85.00% 15.00% 15.00% 85.00% 85.00% 15.00% 15.00% 70.00% 90.00% 30.00% 10.00% 90.00% 90.00% 10.00% 10.00% Summarised financial information Set out below is the summarised financial information of the non-controlling interests that are material to the consolidated entity. The amounts disclosed are before inter-company eliminations. SIMS Clinic Limited Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of comprehensive income Revenue Expenses Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Total comprehensive income Statement of cash flows Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Other financial information Profit attributable to non-controlling interests Dividends paid to non-controlling interests Accumulated non-controlling interests at the end of reporting period 2019 $’000 6,783 12,504 19,287 5,198 1,169 6,367 12,920 2018 $’000 5,365 12,245 17,610 4,978 1,161 6,139 11,471 34,893 (30,099) 34,991 (29,580) 4,794 (675) 4,119 - 4,119 5,307 (689) (3,240) 1,378 631 486 7,124 5,411 (680) 4,731 - 4,731 6,498 (293) (6,345) (140) 899 1,212 6,207 75 VIRTUS HEALTHANNUAL REPORT 2019NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 27. Interests in subsidiaries (continued) Transactions with non-controlling interests Dividends paid/payable to non-controlling interest Consolidated 2019 $’000 (486) 2018 $’000 (1,212) Equity - retained profits Retained profits at the beginning of the financial year Profit after income tax expense Dividends paid Retained profits at the end of the financial year Note 28. Deed of cross guarantee The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Virtus Health Limited IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Queensland Fertility Group Pty. Ltd. Virtus Health Specialist Diagnostics Pty Limited Lab Services Pty Limited By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare audited financial statements and directors’ report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Virtus Health Limited, they also represent the ‘Extended Closed Group’. Set out below is a consolidated statement of comprehensive income and statement of financial position of the ‘Closed Group’. Statement of comprehensive income Revenue Share of profits of associates accounted for using the equity method Trust distributions received Other income Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Impairment charge Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income/(loss) Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year 2019 $’000 2018 $’000 126,083 510 22,561 5,678 (32,424) (50,303) (7,418) (8,930) (3,270) (1,133) (1,422) (6,541) (8,763) (5,800) 28,828 (10,624) 18,204 (1,383) (1,383) 16,821 125,439 570 22,835 2,151 (32,149) (48,263) (7,312) (7,895) (3,437) (942) (949) (6,240) (7,218) - 36,590 (11,508) 25,082 306 306 25,388 Statement of financial position Current assets Cash and cash equivalents Trade and other receivables Prepayments Non-current assets Investments accounted for using the equity method Other financial assets Property, plant and equipment Intangibles Deferred tax Other Total assets Current liabilities Trade and other payables Derivative financial instruments Income tax Provisions Unearned income Non-current liabilities Borrowings Derivative financial instruments Provisions Other financial liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 76 2019 $’000 29,508 18,204 (19,294) 28,418 2019 $’000 4,387 17,809 1,977 24,173 1,489 215,315 18,993 204,961 5,275 217 2018 $’000 25,327 25,082 (20,901) 29,508 2018 $’000 6,189 18,840 1,782 26,811 1,489 221,776 22,002 206,615 3,530 77 446,250 455,489 470,423 482,300 6,224 765 2,008 2,866 5,582 17,445 173,803 1,738 3,282 1,451 180,274 197,719 272,704 241,890 2,396 28,418 272,704 8,776 420 3,058 2,661 5,005 19,920 180,743 107 2,941 3,695 187,486 207,406 274,894 242,251 3,135 29,508 274,894 77 VIRTUS HEALTHANNUAL REPORT 2019NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 29. Parent entity information Set out below is the supplementary information about the parent entity. Statement of comprehensive income Profit after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Issued capital Share-based payments reserve Retained profits Total equity Parent 2019 $’000 30,283 30,283 2018 $’000 26,669 26,669 Parent 2019 $’000 41,557 2018 $’000 41,642 299,712 293,750 3,574 3,647 6,992 8,341 296,065 285,409 241,890 7,513 46,662 242,251 7,485 35,673 296,065 285,409 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2019 and 30 June 2018 apart from being a party to the deed of cross guarantee as detailed in note 28. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. Set out below are summaries of options and performance rights granted under the plans: 2019 Effective grant date 01/07/2013 03/10/2014 13/05/2015 13/05/2015 13/05/2015 13/05/2015 10/11/2015 21/08/2015 28/10/2015 16/12/2015 21/09/2016 21/09/2016 11/11/2016 21/06/2017 24/10/2017 24/10/2017 24/10/2017 24/10/2017 22/11/2017 22/11/2017 10/10/2018 10/10/2018 10/10/2018 10/10/2018 21/11/2018 Expiry date 21/01/2024 03/10/2024 13/05/2025 13/05/2025 13/05/2025 13/05/2025 10/11/2025 21/08/2025 28/10/2025 16/12/2025 21/09/2026 21/09/2026 11/11/2026 21/06/2027 24/10/2027 24/10/2027 24/10/2027 24/10/2027 22/11/2027 22/11/2027 10/10/2028 10/10/2028 10/10/2028 10/10/2028 21/11/2028 Exercise or base price Balance at the start of the year Exercised/ cancelled/ other Expired/ forfeited/ other Balance at the end of the year Granted $6.40 $8.57 $7.16 $7.53 $7.94 $7.94 $0.00 $5.67 $5.01 $6.17 $8.05 $8.05 $0.00 $5.35 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 29,448 71,029 2,757 912 794 343 87,763 7,434 11,491 5,509 8,616 4,332 99,491 3,129 171,199 72,580 116,128 43,548 229,391 136,508 - - - - - - - - - - - - - - - - - - - - - - - - - 241,581 31,579 14,336 14,211 177,740 - - - - - - - - - - - - - - 6,166 - - - 14,337 - - - - - - (29,448) (25,614) (1,221) (295) (82) (14) (87,763) - (3,260) (1,273) - (363) (49,746) - - - - - - - - - - - - - 45,415 1,536 617 712 329 - 7,434 8,231 4,236 8,616 3,969 49,745 3,129 177,365 72,580 116,128 43,548 243,728 136,508 241,581 31,579 14,336 14,211 177,740 1,102,402 479,447 20,503 (199,079) 1,403,273 The weighted average exercise price is $0.48 (2018: $0.99). The weighted average remaining contractual life of options and performance rights outstanding at the end of the financial year was 8.5 years (2018: 8.7 years). For the options and performance rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Capital commitments - property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018. Grant date Expiry date Share price at grant date Exercise price or base price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date Note 30. Share-based payments Virtus Health Limited Executive Option Plan and Specialist Option Plan (‘Virtus Health Limited Share Option Plan’) The Virtus Health Limited Share Option Plan was adopted by the Board on 11 June 2013. The Virtus Health Limited Share Option Plan was established to reward, retain and motivate fertility specialists and senior executives. Participation in the Virtus Health Limited Share Option Plan is at the Board’s discretion and no individual has a contracted right to participate in the Virtus Health Limited Share Option Plan or to receive any guaranteed benefits. Further details are provided in the remuneration report. 10/10/2018 10/10/2018 10/10/2018 10/10/2018 21/11/2018 10/10/2028 10/10/2028 10/10/2028 10/10/2028 21/11/2028 $5.47 $5.47 $5.47 $5.47 $4.91 $0.00 $0.00 $0.00 $0.00 $0.00 30.00% 30.00% 30.00% 30.00% 30.00% 4.59% 4.59% 4.59% 4.59% 4.59% 2.16% 2.16% 2.16% 2.16% 2.13% $4.42 $4.42 $4.42 $4.42 $2.77 Grants of options and performance rights - fertility specialists Details of the grant of options and performance rights to fertility specialists is included in Section H of the remuneration report which forms part of the Directors’ report. Vesting Conditions Options and performance rights will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may include conditions relating to continuous employment or service, the individual performance of the participant in the Plan or the company’s performance. The Board has the discretion to set the terms and conditions on which it will offer options and performance rights under the Plan, including the vesting conditions and different terms and conditions which apply to different participants in the Plan. 78 79 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 30. Share-based payments (continued) Upon the satisfaction of the vesting conditions and any other conditions to exercise, each option and performance right will be exercisable into a variable number of shares based on the terms of issue of the options or performance rights. Recognition and measurement Equity settlement: the fair value determined at the grant date of the equity settled share-based payments is expensed on a straight-line basis over the vesting period (with a corresponding increase to the share-based payments reserve), based on the estimate of shares that will eventually vest. Critical accounting estimate - valuation of share based payments The consolidated entity measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using a hybrid option-pricing model provided by Hoadley, taking into account the terms and conditions upon which the instruments were granted. Note 31. Related party transactions Parent entity Virtus Health Limited is the parent entity and ultimate controlling party. Subsidiaries Interests in subsidiaries are set out in note 27. Key management personnel Disclosures relating to key management personnel are set out in note 32 and the remuneration report included in the directors’ report. Transactions with related parties The following transactions occurred with related parties: Other revenue: Rental income (i) Other transactions: Provider fees (ii) Share based payments (iii) Consolidated 2019 $’000 2018 $’000 278,726 285,004 2,892,025 137,862 3,062,921 63,226 (i) (ii) The following key management personnel paid rent for the use of leased space in Virtus : Lyndon Hale, Peter Illingworth and David Molloy. The following key management personnel received provider fees for IVF services delivered to patients: Lyndon Hale, Peter Illingworth, David Molloy and William Watkins (30 June 2018: Lyndon Hale, Peter Illingworth, David Molloy and William Watkins). (iii) The following key management personnel received performance rights for the provision of IVF services delivered to patients: Lyndon Hale, Peter Illingworth, David Molloy and William Walkins (30 June 2018: Peter Illingworth and William Watkins). Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables: Trade receivables from associates Other receivables Current payables: Other payables for provider fees Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Consolidated 2019 $’000 2018 $’000 517,025 17,821 675,245 11,062 358,808 377,048 Note 32. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2019 $’000 3,052,929 197,662 30,280 159,588 2018 $’000 3,153,600 190,418 7,553 231,769 3,440,459 3,583,340 Note 33. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Impairment of intangibles Write off of non-current assets Share-based payments Amortisation of bank facility fees Net fair value gain on other financial liabilities Other non-cash items Interest on other financial liabilities - non-cash interest Change in operating assets and liabilities: Increase in trade and other receivables Decrease/(increase) in inventories Increase in deferred tax assets Increase in trade and other payables Increase/(decrease) in provision for income tax Increase/(decrease) in other provisions Increase in other operating liabilities Net cash from operating activities Consolidated 2019 $’000 2018 $’000 28,990 32,009 13,628 5,800 135 1,161 563 (8,261) (30) 1,464 (2,963) (504) (1,476) 380 (3,137) 780 1,760 38,290 12,496 - - 881 207 (1,089) (1,029) 981 (592) 6 (941) 5,043 3,756 (428) 3,667 54,967 Note 34. Events after the reporting period No matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. 80 81 VIRTUS HEALTHANNUAL REPORT 2019 NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 Note 35. Commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Consolidated 2019 $’000 2018 $’000 13,160 39,150 33,332 85,642 12,748 32,330 26,132 71,210 Operating lease commitments includes contracted amounts for various offices and medical centres under non-cancellable operating leases expiring within 2 to 8 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases may be renegotiated. Excess office space is sub-let to third parties also under non-cancellable operating leases. These leases have future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases of $154,470 (2018: $286,874) Recognition and measurement Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Impact of new standards not yet applicable: AASB 16 Leases In February 2016 the AASB issued AASB 16, ‘Leases’, which replaces the current guidance in AASB 117 ‘Leases’. The standard requires lessees to bring all leases on balance sheet as the distinction between operating and finance leases has been eliminated. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are in respect of short term leases and leases of low value assets. Lessor accounting remains largely unchanged. The standard will affect primarily the accounting for the consolidated entities operating leases. As at reporting date, the consolidated entity’s non-cancellable operating lease commitments are $85,642,000, see note 35. The present value of the consolidated entities operating lease payments as defined under the new standard will be recognised as lease liabilities on the balance sheet and included in net debt. The Segment EBITDA, as disclosed in note 3 will increase as the operating lease cost is charged against EBITDA under AASB 117 whilst under AASB 16 the charge will be included in depreciation and interest expense which are excluded from EBITDA (although included in overall earnings). Operating cash flows will increase under AASB 16 as the element of cash paid attributable to the repayment of principal will be included in financing cash flows. The overall increase/decrease in cash and cash equivalents will however remain the same. The consolidated entity has implemented a lease contract management system solution to electronically manage its lease portfolio and perform lease calculations as required by the new lease standard. The standard will be first applicable for the year commencing 1 July 2019 and the group is currently in the final stages of determining the impact on the consolidated financial statements. To date the most significant impact identified is in respect of the right to use (ROU) asset and lease liability for property leases. Under either of the alternative approaches to transition allowed under the accounting standard, the impact at the date of transition will be an estimated increase in new ROU assets in the range of $70-90m and lease liabilities in the range of $90-110m. Capital Commitments The consolidated entity had $Nil (FY18:$4,707,000) in capital commitments for property, plant and equipment as at 30 June 2019. Note 36. Contingent liabilities Claims The consolidated entity is currently involved in litigations which may result in future liabilities and legal fees up to an insurance excess of $25,000 to $175,000 per claim. The consolidated entity has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these claims but advice indicates that any liability that may arise in the unlikely event that the claims are successful will not materially affect the financial position of the entity and it is expected that the claims will be covered by the consolidated entity’s insurance policies. Guarantees Drawdowns of $5,001,000 (2018:$4,718,000) in the form of financial guarantees have been made against the working capital facility. Subject to the continued compliance with debt covenants, the bank facilities may be drawn at any time and have an average maturity of 3 years (2018:1 year). Note 37. Non-current assets - other Security deposits Consolidated 2019 $’000 287 2018 $’000 517 Note 38. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the company, and its network firms: Audit services - PricewaterhouseCoopers Audit or review of the financial statements Other services - PricewaterhouseCoopers Due diligence Tax compliance services Audit services - network firms Audit or review of the financial statements Other services - network firms Tax services Other Consolidated 2019 $’000 2018 $’000 480,000 467,300 20,000 - 20,000 208,500 7,500 216,000 500,000 683,300 141,513 119,692 52,584 103,991 156,575 68,792 20,782 89,574 298,088 209,266 It is the consolidated entity’s policy to utilise appropriate accounting and consulting resource for other services which may include tax advice and due diligence reporting on acquisitions, and it is the consolidated entity’s policy to seek competitive tenders for such assignments as appropriate. 82 83 VIRTUS HEALTHANNUAL REPORT 2019NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2019 DIRECTORS’ DECLARATION Note 39. Other accounting policies In the directors’ opinion: Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. • • • • • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the financial year ended on that date; there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group will be able to meet any obligations or liabilities to which they are, or may become liable, subject by virtue of the deed of cross guarantee described in note 28 to the financial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Peter Macourt Chairman 20 August 2019 Sydney 84 85 VIRTUS HEALTHANNUAL REPORT 2019 INDEPENDENT AUDITORS REPORT Independent auditor’s report To the members of Virtus Health Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Virtus Health Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2019 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises:       the statement of financial position as at 30 June 2019 the statement of comprehensive income for the year then ended the statement of changes in equity for the year then ended the statement of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality  For the purpose of our audit we used overall Group materiality of $2.0 million, which represents approximately 5% of the Group’s profit before tax.  We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.  We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured.  We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope   Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The Group comprises businesses in New South Wales, Queensland, Victoria, Tasmania, Denmark, United Kingdom, Ireland and Singapore, with the most financially significant operations being those in Australia and Europe. Accordingly we structured our audit as follows: - - - - - - The Group audit was led by our team from the Australian PwC firm (“Group audit team”). The Group audit team conducted an audit of the special purpose financial information of selected Australian businesses used to prepare the consolidated financial statements. The component auditor in Ireland, under instruction from the Group audit team, performed an audit of the special purpose financial information for specified entities within that country, used to prepare the consolidated financial statements. The component auditor in Denmark, under instructions from the Group audit team, performed a review of the special purpose financial information for a specified entity within that country, used to prepare the consolidated financial statements. The Group audit team decided on their level of involvement needed in the work performed by the component auditors, to be satisfied that sufficient appropriate evidence had been obtained for the purpose of our opinion. Review of the work undertaken by the component teams and regular dialogue between the teams up to the reporting date supplemented the specific direct written instruction provided by PwC Australia and augmented the reporting provided by the component auditors. The Group audit team undertook the remaining audit procedures, including over significant financial statement items controlled at the Group level, the Group consolidation and the audit of the financial report and remuneration report. The combination of all these procedures provided us with sufficient and appropriate audit evidence to express an opinion on the Group’s financial report as a whole. 86 87 VIRTUS HEALTHANNUAL REPORT 2019INDEPENDENT AUDITORS REPORT (continued) Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Estimated recoverable amount of goodwill assets (Refer to note 11) Goodwill of $448 million is recognised on the consolidated statement of financial position. Under Australian Accounting Standards, the Group is required to test the goodwill annually for impairment, irrespective of whether there are indicators of impairment. This assessment is inherently complex and judgemental. It requires judgement by the Group in forecasting the operational cash flows of its cash generating units, and determining discount rates and terminal value growth rates to be used in the discounted cash flow models used to assess impairment (the models). The current year assessment performed by the Group: - - identified an impairment of $5.8 million against the goodwill recognised in the Tasmanian cash generating unit (CGU); and did not identify the need for an impairment in any of the other CGUs. The recoverable amount of goodwill was a key audit matter given the: - - financial significance of the intangible asset to the statement of financial position and the impairment recognised in the statement of comprehensive income; and judgement applied by the Group in completing and concluding upon the impairment assessment. We focused our efforts on developing an understanding and testing the overall calculation and methodology of the Group’s impairment assessment, including identification of the cash generating units (CGUs) of the Group for the purposes of impairment testing, and the attribution of net assets, revenues and costs to those CGUs. In obtaining sufficient audit evidence, our procedures included, amongst others: - - - - - - - assessing the cash flow forecasts included in the models with reference to actual historical earnings; testing the mathematical calculations within the models; assessing the terminal value growth rates by comparing to external information sources; assessing if the discount rate assumptions were reasonable by comparing them to market data and comparable companies, with the assistance of our valuation specialists; performing sensitivity analyses over the key assumptions used in the models; considering the allocation and presentation of the impairment charge recognised; and assessing the related financial statement disclosures for consistency with Australian Accounting Standards requirements. Accounting for financial liabilities relating to put options (Refer to note 4, 18 and 25) Financial liabilities of $8.6 million in respect of the put option arrangements exercisable in the year ended 30 June 2020 relating to the acquisitions of the SIMS Clinic Limited and TasIVF Pty Ltd are recognised on the statement of financial position. to note 4, 18 and 25) Our procedures included evaluating the analysis conducted by the Group for judgements made in respect of the ultimate amounts expected to be paid in respect of the put option arrangements. In obtaining sufficient audit evidence, our procedures included, amongst others: The financial liabilities are based upon a multiple of earnings before interest, tax, depreciation and amortisation. The Group’s re-assessment of the fair value of the put options reduced the associated liabilities by $4.5 million and resulted in a fair value gain of $4.5 million being recognised in other income. The accounting for these financial liabilities was assessed as a key audit matter given: - - the financial significance of the liability to the statement of financial position; and the judgement applied by the Group in assessing the assumptions deriving the liabilities. - - - - - reading the agreed underlying terms of the option arrangements and checking that the basis and composition of the liabilities recognised was consistent with the accounting principles applied to derive the liabilities; assessing the liability valuation models and the process by which they were developed; compared current year trading performance to the forecasted performance of the businesses; tested the mathematical accuracy of the calculations; and assessing the appropriateness of the Group’s disclosure in the financial report in light of the requirements of the Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Directors’ report, the Chairman’s Statement, the Chief Executive’s Overview, the Corporate Governance Statement and the Corporate directory. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. 88 89 VIRTUS HEALTHANNUAL REPORT 2019INDEPENDENT AUDITORS REPORT (continued) Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 23 to 37 of the directors’ report for the year ended 30 June 2019. In our opinion, the remuneration report of Virtus Health Limited for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Mark Dow Partner Sydney 20 August 2019 SHAREHOLDER INFORMATION 30 June 2019 The shareholder information set out below was applicable as at 13 September 2019. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Size of Holding 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Distribution of Options The distribution of unquoted options on issue are: Size of Holding 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of Shareholders Ordinary Shares % of Issued Capital 61 337 658 3,420 3,536 56,495,716 8,606,689 4,914,245 8,569,187 1,804,101 70.3 10.7 6.1 10.7 2.2 8,012 80,389,938 100.0 Number of Holders Unlisted Options % of Issued Capital 2 38 2 13 6 61 301,900 1,051,111 16,810 30,078 3,374 21.5 74.9 1.2 2.1 0.3 1,403,273 100.0 90 91 VIRTUS HEALTHANNUAL REPORT 2019SHAREHOLDER INFORMATION (continued) 30 June 2019 Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Allan Gray Investment Mgt Dimensional Fund Advisors Vinva Investment Mgt Merlon Capital Partners Auscap Asset Mgt Renaissance Smaller Companies Norges Bank Investment Mgt BlackRock Investment Mgt - Index NovaPort Capital Realindex Investments Vanguard Group Vanguard Investments Australia Mr Lyndon G Hale Morgan Stanley Mr Francis Quinn JPMorgan Securities Acadian Asset Mgt (Australia) Mr Jim Tsaltas & Ms Chryssa Anagno Mr Andew KS Kan & Ms Cynthia ST C BlackRock Investment Mgt (Australia) Total Unquoted equity securities There are no unquoted equity securities. Number of Fully paid Ordinary Shares % of Issued Capital 7,917,195 4,264,414 3,616,800 3,380,966 2,930,000 2,874,702 2,185,844 2,124,059 2,104,857 2,038,192 1,582,023 1,392,078 823,694 758,216 684,663 638,883 629,188 583,424 542,837 526,003 9.8 5.3 4.5 4.2 3.6 3.6 2.7 2.6 2.6 2.5 2.0 1.7 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.7 41,598,038 51.7 Substantial holders The names of the Substantial Shareholders listed in the Company’s Register as at 13 September 2019: Allan Gray Investment Mgt Dimensional Fund Advisors Voting rights The voting rights attached to ordinary shares are set out below: Number of Ordinary Fully Paid Shares 7,917,195 4,264,414 % of Issued Capital 9.8 5.3 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 7,980,990 shares are held under Escrow arrangements with variable release dates linked to the age and retirement dates of the fertility specialists. There are no other classes of equity securities. Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 20 August 2019 and can be found at www.virtushealth.com.au/investor-centre/corporate-governance CORPORATE DIRECTORY Directors Peter Macourt - Chairman Susan Channon Lyndon Hale Peter Turner ( resigned on 21 November 2018) Sonia Petering Greg Couttas Shane Solomon ( appointed on 24 September 2018) Company secretary Glenn Powers Notice of annual general meeting The details of the annual general meeting of Virtus Health Limited are: Wednesday, 20 November 2019 at the Hilton Hotel Sydney at 2pm 488 George Street Sydney NSW 2000 Registered office Level 3 176 Pacific Highway Greenwich NSW 2065 Phone: (02) 9425 1722 Fax: (02) 9425 1633 Solicitors Minter Ellison Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000 Bankers Westpac Banking Corporation Level 3, 275 Kent Street, Sydney NSW 2000 Commonwealth Bank of Australia Ground floor, Tower 1, 201 Sussex Street Sydney NSW 2000 Siemens Financial Services Inc 170 Wood Avenue, South Iselin New Jersey 08830, United States of America National Australia Bank Level 19, NAB House, 255 George Street, Sydney NSW 2000 HSBC UK Bank Plc Sixth Floor, 71 Queen Street, London, EC4V 4AY Principal place of business Level 3 176 Pacific Highway Greenwich NSW 2065 Stock exchange listing Virtus Health Limited shares are listed on the Australian Securities Exchange (ASX code: VRT) Share register Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Phone: 1300 554 474 Auditor PricewaterhouseCoopers One International Towers Sydney Watermans Quay,Barangaroo NSW 2000 Website www.virtushealth.com.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 20 August 2019 and can be found at www.virtushealth.com.au/investor-centre/corporate-governance 92 93 VIRTUS HEALTHANNUAL REPORT 2019

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