Pacific Brands Report+Accounts 2005
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R+A PACIFIC BRANDS REPORT+ACCOUNTS 2005 PACIFIC BRANDS LIMITED AND ITS CONTROLLED ENTITIES ABN 64 106 773 059 All over Australia and New Zealand people not only wear our brands, they sleep on our brands and accessorise their homes with our brands. They play sport in our brands. They go to work in our brands. They dress their children in our brands. And they relax in our brands. In other words, virtually every aspect of their lifestyle incorporates our brands. Every day. Every week. Every month. That’s the power of everyday essential brands. A strategic platform for building shareholder value. 4 million pillows 4 million a year tennis balls a year 26 million pairs of shoes every year 2.6 million pairs of Holeproof Explorer socks a year Contents> Management Discussion Chairman’s message 02 Financial highlights 03 CEO’s report 04 Brands A brand-driven strategy 07 Building leadership brands 08 People Highly talented, creative people Our competitive advantage is our people 10 Products Talented design teams are now at work in all our businesses helping differentiate our products 12 Process The scale of Pacific Brands’ business demands a more sophisticated, more agile operational model 16 Business Review Review of Operations 17 Underwear and Hosiery 18 Outerwear and Sport 19 26.5 million Home Comfort 20 Dunlop Volleys 7.2 million Footwear 21 made since Corporate Social Responsibility 22 Chesty Bonds 1939 singlets with a change in Annual Accounts a year design in mid Board of Directors 24 1970s Senior Management 26 Corporate Governance 28 Director’s Report 36 Remuneration Report 40 Statements of Financial Performance 52 Statements of Financial Position 53 Statements of Cash Flows 54 Notes to Financial Statements 55 Shareholder information 96 Report+Accounts 2005 1 CHAIRMAN’S REVIEW Dear Fellow Shareholders, Our first full financial year since the float was a good, solid year. We continued to improve the performance of your company by focusing on our brand driven strategy of ‘everyday essential brands’, ongoing operational efficiencies and strong, disciplined financial management. By every measure, we either met or exceeded our publicly stated goals for the year. Our results show the fundamental strategy of the business is the correct one, especially in a retail environment which is softer than was expected a year ago. The strategy described more fully in this report should continue to see us through this cycle and well into the future. The results of this year confirm to us that we are consistently demonstrating an improving approach to capturing the potential of our everyday essential brands. This was accomplished by focusing our efforts on innovative product designs as well as delivering better advertising, marketing and distribution. Equally important was our continuing emphasis on operational efficiencies, the effects of which were improved flexibility, speed and ways we take our branded products to market. Your company is fortunate to have a range of talented, energetic people working together as a team to continually improve the performance for you and our customers. In addition, we are continually striving to make Pacific Brands an exciting place for our employees to build their careers. We have a diverse board of directors where each one brings different levels of skills and expertise to bear on the issues facing us. We also have a depth of experience in our management team and employee base to which all the credit for our performance is due to their combined efforts to serve our customers well. We also believe our company cannot do well without doing its part in the community. In the past year we have developed long term partnerships with both World Vision and the Breast Cancer Network of Australia. Many of our employees give of themselves in these endeavours and we encourage their involvement. In preparing this letter, I reflected back to what I wrote to you a year ago. I said Pacific Brands had a wealth of experience to drive a branded strategy. I also said we would continue to grow our category leading positions across ‘everyday essential brands’. Both statements were true then and now. In fact, the branded strategy is one of the key elements of our success and is the basis for our optimism for the future. On behalf of all of us at Pacific Brands, thank you for your continued support. Pat Handley Chairman A consistent financial performance achieved through growth in branded sales combined with effective management of the costs of doing business Highlights 2005 This financial year was the first full year that we have traded as a public company. Solid earnings growth was achieved through the focus on branded profitable sales. • $176.1 million EBITA, up 13.5% on previous year • $102.5 million net profit after tax (pre goodwill amortisation) up 16.0% • Earnings per share (pre goodwill amortisation) up 16.0% to 20.4 cents • $75.1 million net operating cashflow, $110.5 million generated in second half • Inventory of $255.4 million in line with expectations after raising levels at the first half in preparation of China entering the World Trade Organisation Financial Performance 2005 2005 2004 PF1 Change $m $m % Branded net sales 1,381.1 1,361.3 1.5 Unbranded net sales 140.6 173.8 (19.1) Total sales revenue 1,521.7 1,535.1 (0.9) Gross margin 630.3 589.1 7.0 EBITA 176.1 155.2 13.5 EBITA margin 11.6 10.1 NPAT (pre-goodwill amortisation) 102.5 88.4 16.0 A strong year. EPS (pre-goodwill amortisation) (cents per share)2 20.4 17.6 16.0 A successful Dividends declared per share (cents per share)3 15.0 3.54 year. We 1 Pro forma 2004. To ensure investors can compare the earnings, these are pro forma results for the year ended 30 June. pushed hard The company only commenced trading on the ASX/NZX on 6 April 2004. 2 This has been calculated from an issued capital base of 503,000,003 ordinary shares. during the year 3 Interim and Final dividend – both franked to 100% for Australian residents on tax paid at 30%. to sharpen our 4 Dividend only for 3 months as company only commenced trading on the ASX/NZX on 6 April 2004. focus on our Five years financial comparison ($ million) core strengths % that support 1600 200 200 80 1500 75% our long-term 160 1400 150 70% 120 direction 1300 65% 80 1200 100 60% 40 1100 55% 1000 50 0 50% ’01 ’02 ’03 ’04 í05 ’01 ’02 ’03 ’04 ’05 ’01 ’02 ’03 ’04 ’05 Sales EBITA Gross Operating Cashflow Cost of Doing Business to (Note – Given change in company Gross Profit % structure on listing, this is gross (Costs include freight, distribution, IT, operating cash flow post capital sales & marketing, advertising and expenditure, but before net administration) borrowing costs and income tax). Report+Accounts 2005 3 CEO’S REPORT TO SHAREHOLDERS Dear fellow investors, Pacific Brands’ strength lies in our ability to create leadership brands and the infrastructure to support them. I am pleased to say that this is again evident in this year’s result. Here’s how we measured up It’s been a good year – we’ve had solid increases in our key measures – and in challenging retail conditions your Pacific Brands’ team achieved a significant and respectable performance. Our achievements for 2005: • group EBITA was up 13.5% to $176.1 million; • net profit after tax (pre goodwill amortisation) rose 16.0% to $102.5 million; • earnings per share (pre-goodwill amortisation) was up 16.0% to 20.4 cents; • branded net sales grew 1.5% even though total sales declined by 0.9%; • sales growth in Footwear was up 6.3%; Home Comfort up 4.8%; • our strong growth in branded net sales and continuing improvements in operational efficiencies, together contributed to EBITA margins of 11.6%; • our inventory, in line with forecasts, was steady at $255.4 million; 4 Pacific Brands Everyday essential brands – understand the power of this positioning and you understand the value of our brand-driven strategy • we generated strong net operating cash flows of Building leadership brands $75.1 million for the year, with the strong and expected Clearly brands win. Our branded sales are up from 88.7% second half result of $110.5 million; and of sales in 2004 to 90.8% in 2005. In Bonds, Berlei, Jockey, Holeproof, Dunlop, Tontine, KingGee, Hush Puppies and • our final dividend for the year was 7.5 cents per share. Grosby, we have some of the most compelling brands in These are strong results. Our focus on building leadership Australian retailing. brands, our people and innovative processes and capabilities, Our job as professional brand managers, is building and has enabled us to deliver a strong performance. managing leadership brands for the greatest return. Our strong business model Our brands have to be either number 1, or a very close How is it that Pacific Brands achieved solid results in what number 2, in their respective categories. is considered by many to be a challenging environment, an This means focusing our talents, our resources and our environment of fluctuating retail and consumer confidence? processes on the brands that have the greatest potential The foundation lies in our differentiated strategy: ‘everyday for return and brand extension. essential brands’. Understand this positioning and One of the great strengths of Pacific Brands is our ability you understand the value of our brand-driven strategy. to marry innovative design and marketing capabilities with Our strategy is based on the belief that consumers respond equally strong business processes.