METHVEN LIMITED. Results for announcement to the market

Transcription

1 METHVEN LIMITED Results for announcement to the market Reporting Period Year ended 31 March 2011 Previous Reporting Period Year ended 31 March 2010 Amount (NZD 000s) Percentage change Sales revenue from ordinary activities $122, % Net Profit attributable to shareholders before impact of UK customer default $6, % Net Profit attributable to shareholders $4, % Gross amount per share Final Dividend (For Year Ended 31 Mar 11) 4.50 cents 1.13 cents Record Date 24 June 2011 Dividend Payment Date 30 June 2011 Imputation tax credit per share Audit Comments: The financial statements attached to this report have been audited. Refer to the following section for commentary. Earnings per Security (EPS) Calculation of basic and fully diluted EPS in accordance with NZ IAS 33: Earnings per Share Current full-year (cents per share) Previous corresponding full- year (cents per share) Basic EPS Diluted EPS Dividends Paid/Payable Date Paid / Payable Cents per share (fully imputed) Final Dividend for the year ended 31 March June Interim Dividend for the year ended 31 March December Net Tangible Assets per share Current full- year Previous corresponding full-year Net Tangible Assets per share $0.18 $

2 PERFORMANCE HIGHLIGHTS (FOR THE YEAR ENDED 31 MARCH 2011) Group Financial Performance Group NPAT down 39.3% from $7.8m to $4.7m, after impact of providing for the loss of $2.0m relating to the UK customer, Focus (DIY) Limited Excluding impact of loss from this UK customer, Group NPAT down 13.7% from $7.8m to $6.7m Net Debt increased only 9.3% from $17.4m to $19.1m, guidance was an increase of 15-20% Group Operating Revenue down 6.0% from $129.8m to $122.1m EBITDA down 13.4% from $16.7m to $14.5m, excluding impact of UK customer loss Highlights Sales in Australia up 12.1% from A$36.6m to A$41.0m EBITDA in Australia up 62% from A$2.4m to A$3.8m, despite A$0.5m bad debt Cumulative Hotel installations for Satinjet showers top 21,000 rooms Second prestigious Red Dot Award won, this time for Tahi Twin Lever tapware system Key management change in UK in November 2010 Launched Methven brand at premium global trade show in Frankfurt, March 2011 New computer system implemented in New Zealand; delivered on time, and, on budget Dividend and Cash Flows Debt and cash flow forecast comply comfortably within banking covenants and headroom Partially imputed final dividend of 4.5 cps to be paid on 30 June 2011, down on June 2010 final dividend of 5.5 cps, to bring total dividend for the year to 10.0 cps (LY cps) - 2 -

3 CHAIRMAN S AND GROUP CEO REVIEW It has been a challenging year with a reduced profit compounded by the effect of our largest UK customer, Focus (DIY) Limited, entering into voluntary administration and the Christchurch earthquakes impacting domestic sales. We ve made some mistakes but we have learned from them and are confident of returning the UK to profit in the coming year. Our underlying margins and cash flow are solid with better debt levels than forecast and we have confidence in our forward strategy allowing us to pay a final dividend. We remain committed to our strategies of: Design-led product differentiation and innovation Growing our UK market presence Developing the luxury hotel market, and Pursuing international distribution opportunities In addition, we have accelerated our drive to improve operational efficiencies in all markets. Group NPAT for the year to 31 March 2011 was 39.3% down on last year at $4.7m, compared to the previous year of $7.8m, mainly as a result of the Focus (DIY) limited loss of $2.0m. Excluding the Focus (DIY) Limited loss, Group NPAT was down 13.7% from $7.8m to $6.7m. Group Net Debt increased only 9.3% from $17.4m to $19.1m and was better than the guidance of up 15-20%, with both Working Capital levels and Capital Expenditure managed better than forecast. Our Australian business produced a pleasing result with sales up 12.1% from A$36.6 million to A$41.0 million and EBITDA up 62.2% from A$2.4 million to A$3.8 million - this after the Enact Energy bad debt of A$0.5 million. The continued roll-out of new products combined with our proven sales methodology has allowed us to successfully grow our market share. New Zealand performance was weaker, as building and renovation activity continued at historic lows, exacerbated by the adverse effect of the Christchurch earthquakes. Sales were down 8.8% from NZ$43.1 million to NZ$39.3 million resulting in EBITDA dropping 4.6% from NZ$

4 million to NZ$9.4 million. We remained committed to our investment in research and development, increasing our spend by 50% year on year. We won our second prestigious Red Dot award for product design, this time for our Tahi Twin Lever tapware system. We commenced new initiatives to turn around the performance of our United Kingdom operation. In October 2010 Group Chief Operating Officer, Matthew Crichton, was seconded to the UK to implement the successful Australian sales model and Methven design-led culture. In November 2010 we employed Steve Lee, the highly regarded and experienced former Chairman and Chief Executive Officer of the Bristan Group, UK s largest tapware company, to run Methven UK. The Methven brand was re-launched in March 2011 and we repositioned the Deva brand and range of products. The loss of our largest United Kingdom customer Focus (DIY) Limited, which entered into voluntary administration on 6 May 2011, resulted in a one-off loss totaling NZ$2.0 million after tax and includes a non-cash customer impairment of NZ$0.4 million after tax. We are aggressively pursuing all avenues to recover the outstanding debt. We have made good progress in the luxury hotel market winning new projects with the Hilton, Marriott, Devere, Holiday Inn, Crowne Plaza and other prestigious hotel chains as well as achieving brand standard with the IHG Group. Total hotel rooms globally, fitted with Satinjet showers, increased 64% on last years cumulative total and now totals 21,255 rooms worldwide. In Australia, where the initiative was first developed, hotel rooms won grew 46% on last year. Although the initiative has taken longer than anticipated to gain traction in the Asian and European markets, good progress has been made with rooms increasing 168% in Asia, albeit from a low base and Europe adding 1,240 rooms in its first year. Our efforts to find new international distributors for our premium shower and tapware range moved to a new level when, for the first time, we exhibited at the premium ISH Kitchen and Bathroom show in Frankfurt in March We are prioritising leads received from more than 29 European and Asian countries. The successful implementation of a new computer system in New Zealand - on time and within budget - gives us the platform from which to generate continuous operational improvements as we roll out to each division with the next cab off the rank being our UK operation

5 As we look to the future, despite the rigours of the past, we are confident our strategy based on design and market leadership, supported by a commitment to continuous operational improvement, will result in profitable growth. Dividend and Cash Flows Debt and cash flow forecasts comply comfortably within banking covenants and headroom. The Directors have exercised due caution in declaring a partially imputed final dividend of 4.5 cps be paid on 30 June 2011, down on the June 2010 final dividend of 5.5 cps. This brings the total dividend for the year to cps compared to cps last year. MARKET REVIEW AUSTRALIA - Significant earnings growth Australia AU $ Operating Revenue 40,967 36,553 EBITDA 3,816 2,352 EBITDA % of revenue 9.3% 6.4% Operating Revenue up 12.1% from A$36.6m to A$41.0m EBITDA up 62.2% from A$2.4m to A$3.8m, despite Enact bad debt of A$486k Trading margins have improved particularly due to weaker USD Tapware sales up 30.4%, showers up 25.1%, Satinjet sales up 8.3%, valve sales down 31.6% Won Bunnings' shower category business Strong growth in domestic hotel sales with hotel rooms up 46% Jemflow technology a winning proposition when combined with Satinjet

6 NEW ZEALAND - Softening market affected by Christchurch earthquakes New Zealand NZ $ Operating Revenue 39,254 43,050 EBITDA 9,367 9,821 EBITDA % of revenue 23.9% 22.8% Operating revenue down 8.8% from $43.1m to $39.3m Domestic Revenue down 5.8% from $38.6m to $36.4m. Weak second half with Q4 sales impacted by Christchurch earthquakes. New Zealand combined building permits up 1% on prior year. In the second six months down 11.7 per cent EBITDA down 4.6% from $9.8m to $9.4m but EBITDA margin to sales improves Second Red Dot award won, this time for Tahi Twin Lever tapware New computer system implemented in NZ on time and within budget Increased investment in research and development by 50.3%. UNITED KINGDOM - Impact of Focus (DIY) Limited loss, difficult economic conditions persist United Kingdom GB Operating Revenue 14,543 18,663 EBITDA (991) 1,518 EBITDA % of revenue (6.8)% 8.1% Operating Revenue down 22.1% from 18.7m to 14.5m EBITDA down from 1.5m to breakeven before 1m reduction due to the 100% provisioning of receivables and inventory attributed to Focus (DIY) Ltd. Trading margins improved slightly despite competitive market conditions Group COO Matthew Crichton seconded to implement successful Australian sales model and Methven design-led culture in October 2010 Steve Lee the former Chairman and CEO of Bristan, largest UK tapware company, appointed in November 2010 to lead Methven UK Launched Methven brand at Ecobuild London and ISH Frankfurt in March 2011 Repositioning of the Deva product range and brand - 6 -

7 STRATEGIC FOCUS Our strategic objectives remain unchanged and our focus is on their successful execution. We are continuing to: Create innovative and proprietary shower and tapware solutions Set the platform for profitable growth in the UK Increase sales with our luxury hotel market initiative Develop new international distributor opportunities Improve operational efficiency in all Divisions Creating innovative, award-winning and commercially successful products The foundation for our success is based upon our ability to continue to develop award-winning and commercially successful shower and tapware solutions and experiences. With this in mind we will continue to heavily invest in research and product development. In the past year we released two new ranges of shower and tapware as well as a suite of products adapted to meet United Kingdom requirements - a total of 84 new products. The Tahi Twin Lever tapware range was the winner of a prestigious 2011 German Red Dot Award for product design, our second such award. Tahi Twin Lever tapware provides for improved water and energy savings, intuitive operation and design excellence for our Methven range. We have also developed more environmentally-friendly products such as the Kiri Ultra-Low flow shower - a new Satinjet product that uses less than six litres of water a minute. This product won the Gold award in the Sustainable Product Category at the 2010 New Zealand Best Design Awards. In the coming year we plan the international launch of three new Satinjet shower ranges with complementary tapware ranges. This is a total of 59 new Methven branded products that will increase the breadth of our offering and fill the remaining price point gaps for the consumer. Innovative solutions for subsequent years will include digital thermostatic shower technology that eliminates temperature fluctuations, is intuitive and easy to use and provides better water and energy efficiency. In addition further development of the Shower Skincare range (previously - 7 -

8 called HomeSpa) will include additional applications for use of the de-chlorination and shower infusion technology. Setting the platform for profitable growth in our UK business Transforming the UK business continues to be our top priority. The turnaround plan began in October 2010 with many of the foundations now in place. The unforeseen loss of the Focus (DIY) Limited business has put some further risk into meeting our profit objectives and to mitigate this we have accelerated our plans to improve operational efficiency. The key actions for this year include; Rollout of the Methven brand and product range into high end bathroom stores Launch of the new Deva brand and product range Achieve product and supplier rationalisation benefits Implement new computer system using the New Zealand template Relocate to a modern efficient warehouse Improve operating processes We are confident these actions will not only return the UK operation to profit, but provide a sound basis for strong market share growth based upon our differentiated brand and product strategy. Increase Sales in the Luxury Hotel Market This niche market provides exciting opportunities to grow sales and leverage our unique Satinjet/Jemflo proposition that provides hotel guests with a luxurious water and energy-efficient shower experience. After four years of investment in the Australian hotel market, we are now reaping the benefits, resulting in hotel rooms won increasing 46% on the previous year. With two years in the Asian market and one year in European, we have a large pipeline of quotes in place and will be looking to turn these into orders in this coming year. New Satinjet shower products due for release this year will be able to be utilised for specific hotel applications

9 Improve Operational Efficiency With sales growth expected to remain challenging in the current global economic climate, we will look to significantly improve productivity levels and reduce costs in all Divisions. Product and supplier rationalisation across the Group will enable us to reduce the total cost and investment in stock levels. The implementation of new computer systems, warehousing and processes will generate further operational improvements. OUTLOOK As a result of all the actions underway that support our strategic objectives, we are forecasting profit will rise significantly on last year to give a Net Profit After Tax in excess of $8.5 million, up more than 25% on prior year profit before the impact of the major UK customer failure (up more than 80% on prior year reported profit). We will continue to invest in our future. Our commitment to research and development remains and will not be cut, thus ensuring we maintain our vision of being the leading shower brand with design-led product differentiation. Australia s economic conditions are expected to soften. We expect modest top line growth and will focus on improving operational efficiencies to ensure we maintain our current profit growth rate. In New Zealand weak building and retail sectors have been compounded by the Christchurch earthquakes. The New Zealand operation is expected to be static until the Christchurch re-build fully gets underway, The UK market remains challenging. Our focus will be on rationalisation and executing our turnaround strategy. We expect to return to profit for the 2012 financial year and have a sustainable base for growth

10 ACKNOWLEDGEMENTS We are confident that, despite what has been a tough year coupled with some setbacks, we have taken heed of the lessons we have learned and can achieve our vision of being the leading shower brand that delivers life-enhancing shower experiences. The Directors wish to thank Group CEO Rick Fala and the global Methven team for their tireless efforts to grow our brand and market presence in what has been the most challenging market conditions we have faced. We will continue to keep the market and shareholders regularly updated on our progress, particularly in regards to the turnaround of our UK operation

11 Income statements Income statements FOR THE YEAR ENDED 31 MARCH 2011 NZ $000 Notes Sales revenue 6 122, ,822 39,255 43,050 Cost of sales (72,430) (80,030) (20,067) (23,668) Gross profit 49,657 49,792 19,188 19,382 Other income ,365 4,688 Expenses 7 Research, design and engineering (2,840) (1,890) (2,840) (1,890) Sales, distribution, marketing & brand development (30,409) (28,415) (6,168) (6,718) Administration and other expenses (8,383) (7,451) (3,981) (4,791) Finance costs (1,276) (1,029) (689) (335) Profit before income tax 6,789 11,027 9,875 10,336 Income tax expense 8 (2,040) (3,207) (2,240) (2,230) Net profit attributable to shareholders of the parent 4,749 7,820 7,635 8,106 Earnings per share for profit attributable to the shareholders of the parent: Basic earnings per share (cents) Diluted earnings per share (cents) The above income statements should be read in conjunction with the accompanying notes. -11-

12 Statements of comprehensive income Statements of comprehensive income FOR THE YEAR ENDED 31 MARCH 2011 NZ $000 Notes Profit for the year 4,749 7,820 7,635 8,106 Movement in foreign currency translation reserve (4,110) - - Movement in cashflow hedge reserve 19 (730) (1,610) (88) (453) Deferred tax on hedge reserve Movement in share-based payments reserve Other comprehensive income for the year net of tax (184) (5,192) (65) (281) Total comprehensive income for the year attributable to the shareholders of the parent 4,565 2,628 7,570 7,825 The above statements of comprehensive income should be read in conjunction with the accompanying notes. -12-

13 Balance sheets As at 31 March 2011 Balance sheets AS AT 31 MARCH 2011 NZ $000 Notes Assets Current assets Cash and cash equivalents 4,484 4, Trade receivables 9 21,613 24,024 7,023 7,072 Inventories 10 25,742 24,113 6,353 6,356 Derivative financial instruments Income tax receivable Inter-company advances ,289 13,282 Prepayments and other assets 1,298 1, Total current assets 53,580 53,451 34,411 27,601 Non-current assets Investments in subsidiaries ,937 27,701 Property, plant and equipment 12 7,027 7,535 4,334 5,035 Deferred tax assets 13 1,048 1, Intangible assets 14 38,315 38,306 5,588 4,326 Derivative financial instruments Total non-current assets 46,419 47,507 38,054 37,906 Total assets 99, ,958 72,465 65,507 Liabilities Current liabilities Trade creditors 14,607 11,555 2,658 1,628 Interest bearing liabilities ,478-7,086 Derivative financial instruments 11 1, Income tax payable Provisions Other creditors and accruals 6,037 8,763 2,063 2,801 Employee accruals 3,153 2, ,145 Inter-company payables Total current liabilities 25,379 45,755 6,173 13,479 Non-current liabilities Interest bearing liabilities 16 23,536-13,988 - Derivative financial instruments Deferred tax liabilities , Non-current employee accruals Total non-current liabilities 24,073 1,894 14, Total liabilities 49,452 47,649 20,322 13,607 Net assets 50,547 53,309 52,143 51,900 Equity Share capital 18 46,986 46,986 46,986 46,986 Reserves 19 (5,881) (5,626) (111) 25 Retained earnings 19 9,442 11,949 5,268 4,889 Total equity 50,547 53,309 52,143 51,900 The above balance sheets should be read in conjunction with the accompanying notes. -13-

14 Statements of changes in equity Statements of changes in equity FOR THE YEAR ENDED 31 MARCH 2011 Share-based Currency Share Hedge payments translation Retained Total NZ $000 Notes capital reserve reserve reserve earnings equity Balance at 1 April , (1,348) 11,321 58,008 Movement in foreign currency translation reserve (4,110) - (4,110) Movement in cashflow hedge reserve 19 - (1,610) (1,610) Deferred tax on hedge reserve Movement in share-based payments reserve (99) Profit for the year ,820 7,820 Total comprehensive income - (1,118) (99) (4,110) 7,955 2,628 Dividends (7,327) (7,327) Balance at 31 March ,986 (249) 81 (5,458) 11,949 53,309 Balance at 1 April ,986 (249) 81 (5,458) 11,949 53,309 Movement in foreign currency translation reserve Movement in cashflow hedge reserve 19 - (730) (730) Deferred tax on hedge reserve Movement in share-based payments reserve (71) Profit for the year ,749 4,749 Total comprehensive income - (520) (71) 336 4,820 4,565 Dividends (7,327) (7,327) Balance at 31 March ,986 (769) 10 (5,122) 9,442 50,547 Share-based NZ $000 Notes Share capital Hedge reserve payments reserve Retained earnings Total equity Balance at 1 April , ,975 51,402 Movement in cashflow hedge reserve 19 - (453) - - (453) Deferred tax on hedge reserve Movement in share-based payments reserve (99) Profit for the year ,106 8,106 Total comprehensive income - (317) (99) 8,241 7,825 Dividends (7,327) (7,327) Balance at 31 March ,986 (56) 81 4,889 51,900 Balance at 1 April ,986 (56) 81 4,889 51,900 Movement in cashflow hedge reserve 19 - (88) - - (88) Deferred tax on hedge reserve Movement in share-based payments reserve (71) 71 - Profit for the year ,635 7,635 Total comprehensive income - (65) (71) 7,706 7,570 Dividends (7,327) (7,327) Balance at 31 March ,986 (121) 10 5,268 52,143 The above statement of changes in equity should be read in conjunction with the accompanying notes. -14-

15 Cash flow statements Cash flow statements FOR THE YEAR ENDED 31 MARCH 2011 NZ $000 Notes Cash flows from operating activities Receipts from customers 123, ,090 40,412 42,859 Payments to suppliers (82,506) (82,008) (20,658) (24,337) Payments to employees (26,615) (25,800) (10,277) (9,140) 13,879 22,282 9,477 9,382 Dividends received ,547 3,286 Interest received Interest paid (1,248) (1,370) (651) (246) Income taxes paid (3,252) (4,491) (2,219) (2,132) Net cash inflow from operating activities 27 9,419 16,441 9,864 10,738 Cash flows from investing activities Payments for property, plant and equipment, patents, trademarks and software (3,659) (2,189) (2,500) (1,693) Payment for option - (285) - (285) Loans to subsidiaries - - (7,107) (3,013) Proceeds from sale of property, plant and equipment Capitalisation of subsidiary - - (236) (316) Net cash outflow from investing activities (3,530) (2,466) (9,714) (5,299) Cash flows from financing activities Proceeds from borrowings 1,814-6,865 1,876 Repayment of borrowings - (6,104) - - Dividends paid 20 (7,327) (7,327) (7,327) (7,327) Net cash outflow from financing activities (5,513) (13,431) (462) (5,451) Net increase / (decrease) in cash and cash equivalents (312) (12) Cash and cash equivalents at the beginning of the financial year 4,032 3, Foreign currency translation adjustment 76 (244) - - Cash and cash equivalents at end of year 4,484 4, The above cash flow statements should be read in conjunction with the accompanying notes. -15-

16 1 General information (the Company or the Parent ) and its subsidiaries (together Methven or the Group ) designs, manufactures and supplies showerware, tapware and water control valves. The Company is a limited liability company incorporated and domiciled in New Zealand. The address of its registered office is 447 Rosebank Road, Avondale, Auckland. These financial statements have been approved for issue by the Board of Directors on 30 May Summary of significant accounting policies These financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP), New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS). These policies have been applied consistently to all years previously presented unless otherwise stated. (a) Basis of preparation Entities reporting The financial statements are for and the consolidated economic entity comprising and its subsidiaries. Statutory base is a company registered under the Companies Act 1993 and an issuer in terms of the Securities Act The financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act The Company and Group are designated as profit oriented entities for financial reporting purposes. Measurement base These financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets as identified in specific accounting policies below. Critical accounting estimates The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group s accounting policies. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined in note 4. (b) Group financial statements The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of as at balance date and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries which form part of the Group are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases

17 2 Summary of significant accounting policies (continued) The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are eliminated unless the transaction provides evidence of the impairment of the asset transferred. Subsidiaries' accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. (c) Segment reporting An operating segment is a component of an entity that engages in business activities which earns revenue and incurs expenses and for which the chief operating decision maker (CODM) reviews the operating results on a regular basis and makes decisions on resource allocation. The Group has determined its CODM to be the Group Board of Directors, Group Chief Executive Officer and Group Chief Financial Officer on the basis that it is this group that determines the allocation of resources to segments and assesses their performance. The reportable operating segments of the Group have been determined based on the components of the Group that the CODM monitors in making decisions about operating matters. Such components have been identified on the basis of internal reports that the CODM reviews regularly in order to allocate resources and to assess the performance of the entity. A description of each operating segment within the Group is outlined in note 5. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated and parent financial statements are presented in New Zealand dollars, which is the Company's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. (iii) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity

18 2 Summary of significant accounting policies (continued) On consolidation, exchange differences arising from the translation of any net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is partially disposed of or sold exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of foreign entities are treated as assets and liabilities of the foreign entities and translated at the closing rate. (e) Revenue recognition Revenue comprises the fair value of the sale of goods and services in the ordinary course of the Group s activities. Revenue is shown, net of goods and service tax, rebates and discounts and after eliminating sales within the Group. Revenue is recognised as follows: (i) Sales of goods Sales of goods are recognised when a Group entity has dispatched the goods sold. This is the point where risks and rewards associated with ownership of the goods have been transferred and collectibility of the related receivables is reasonably assured. (ii) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. (iii) Royalty income Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. (iv) Dividend income Dividend income is recognised when the right to receive payment is established. (v) Management fees Management fee income is recognised when the Company has provided the services. (f) Inventories Raw materials, work-in-progress and finished goods are stated at the lower of cost and anticipated net realisable value. Cost is determined using the first in, first out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventories includes the transfer from equity of any gains/losses on qualifying cash flow hedges. (g) Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as separate assets, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the costs of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land is not depreciated. Depreciation of property, plant and equipment is calculated using the straight-line method to allocate the cost of each asset to its residual value over its estimated useful life, as follows: Buildings years Motor vehicles 5-10 years Plant and equipment 3-20 years Fixtures, fittings and office equipment 3-13 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is less than its estimated recoverable amount

19 2 Summary of significant accounting policies (continued) Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. (h) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. The Group allocates goodwill to the Australian, UK and the New Zealand entities (note 14). (ii) Patents and trademarks The registration cost of patents and trademarks are capitalised from the date of application. They have a definite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of patents and trademarks over their estimated useful lives (6-20 years). Capitalised costs relating to applications that are turned down are expensed immediately into the income statement. (iii) Research and development Research expenditure is recognised as an expense as incurred. Development costs are recognised as assets if they meet the recognition criteria. Otherwise, the costs of development activities are expensed as incurred. Development costs recognised as assets are amortised over their estimated useful lives (5 years) on a straight line basis. (iv) Computer software Acquired computer software and licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (3-7 years) on a straight line basis. Costs associated with maintaining computer software programs are recognised as an expense when incurred. (v) Customer relations Customer relations acquired due to a business acquisition are capitalised based on the fair value of cash flows forecast to be derived from the relationship. The relationships are deemed to have a finite useful life and are carried at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight line method to allocate the cost of the asset over its useful life (10 years). (i) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. (j) Income tax The income tax expense recognised for the period is the tax payable on the current period s taxable income based on the income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss

20 2 Summary of significant accounting policies (continued) Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments of operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. (k) Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. An estimate is made for doubtful receivables based on a review of all outstanding amounts at period end. Bad debts are written off during the period in which they are identified. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision and any write off of trade receivables is recognised in the income statement within 'Sales, distribution, marketing & brand development'. (l) Cash and cash equivalents Cash and cash equivalents includes cash in hand and at bank. (m) Share capital 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. (n) Interest bearing liabilities Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowing using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. (o) Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. i) Warranty A liability is recognised for the expected value of claims on product sales that are still under warranty at balance date. Expected costs are based on historical data relating to product returns

21 2 Summary of significant accounting policies (continued) ii) Deferred maintenance A liability was recognised to cover a contractual obligation to perform remedial work at the Auckland premises. The provision was based on third party quotations and was released as and when expenditure was incurred. (p) Trade and other creditors These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. Trade and other creditors are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. The amounts are unsecured and are usually paid within 30 days of recognition. (q) Goods and Services Tax (GST) The income statement and statement of cash flows have been prepared so that all components are stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and payables which include GST invoiced. (r) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The rental obligations, net of finance charges, are recognised in the balance sheet. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset s useful life and the lease term. Leases where the lessor effectively retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives from the lessor) are charged to the income statement on a straight line basis over the period of the lease. (s) Investments Investments in subsidiaries are stated at cost in the balance sheet of the Parent. (t) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave are recognised in the provision for employee benefits 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. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave Provision for long service leave is calculated and accrued from the date of employment to the extent that it is probable that the leave entitlement will vest. In addition, the provision for sick leave, being an accumulating compensated absence, is recognised based on the expectation the Group will pay sick leave as a result of the unused entitlement that has accumulated at the balance sheet date. (iii) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to a termination when the entity has a detailed formal plan to terminate the employment of current employees without possibility of withdrawal. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value

22 2 Summary of significant accounting policies (continued) (iv) Equity-settled share-based compensation The Group operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to 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. (u) Dividends Dividend distribution to the Company shareholders is recognised as a liability in the Company's and the Group's financial statements in the period in which the dividends are approved by the Directors and notified to the Company's shareholders. (v) Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company and Group by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. (w) Statement of cash flows The following are the definitions of the terms used in the statement of cash flows: (a) Operating activities include principle revenue producing activities and all transactions and other events that are not investing or financing activities. (b) Investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment and investments. Investments can include securities not falling within the definition of cash. (c) Financing activities are those activities that result in changes in the size and composition of the capital structure. This includes both equity and debt not falling within the definition of cash. Dividends paid in relation to the capital structure are included in financing activities. (x) Financial instruments Financial instruments comprise derivative financial instruments, trade and other receivables, cash and cash equivalents, intercompany loans, intercompany advances, interest bearing liabilities and trade creditors. Financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition financial instruments are measured as described below. A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group's contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group's obligations specified in the contract expire or are discharged or cancelled. The carrying amount of financial instruments approximates their fair value. Trade and other receivables are stated initially at fair value and subsequently measured at amortised cost less provision for impairment. Interest-bearing borrowings are classified as other non-derivative financial instruments. Trade and other creditors are stated initially at fair value and subsequently measured at amortised cost