ANNUAL REPORT 2015 For personal use only CONTENTS Chairman and Managing Director and CEO’s Letter 2 Financial Highlights 3 Business Highlights 4 Review of Operations 6 Board of Directors 10 Corporate Governance Statement 12 Corporate and Social Responsibility 24 Directors’ Report 26 Remuneration Report 34 Auditor’s Independence Declaration 47 Independent Auditor’s Report 48 Directors’ Declaration 50 Financial Statements 51 Notes to the Financial Statements 56 Shareholder Information 83 Corporate Directory 84 Company Store Locator IBC Annual General Meeting The 2015 Annual General Meeting of Dick Smith Holdings Limited will be held at Dick SmithFor personal use only Support Office, 2 Davidson Street Chullora, New South Wales on Wednesday 28 October 2015 at 11.00am II WHO WE ARE Dick Smith is renowned for its convenient store locations, range of leading brands, competitive prices, For personal use only customer service and knowledgeable staff. Dick Smith Holdings Limited ANNUAL REPORT 20142015 I 1 CHAIRMAN’S AND MANAGING DIRECTOR AND CEO’S LETTER Dear fellow shareholders The Australian performance was consistent with the strategic growth initiatives we’ve implemented. Australian sales growth of 10% delivered underlying Two years ago, when Dick Smith embarked on a Australian EBITDA growth of 21.9%. New Zealand was successful road show with investors prior to our IPO, challenging during the year reflecting macro and we conveyed our strategy as becoming ‘the leading competitive pressures. We have implemented initiatives consumer electronics retailer in Australia and New to meet the challenges in the New Zealand market. Zealand, assisting our customers in achieving the most The ubiquitous Dick Smith store network, with 351 stores from technology at the right value’. We identified five in Australia and New Zealand, is the backbone of our strategic growth initiatives to deliver sustainable growth enhanced performance. An expansion of store-in-store over the medium term. Robert Murray concepts and fixtures, new categories and further Chairman Two years later our focus on our strategy is unwavering development in our service model drove the with these initiatives delivering the sustainable growth improvement in Dick Smith’s performance, we anticipated and continuing to position the Company notwithstanding the investment in new stores and for superior future growth. systems. In 2015, we opened 13 Dick Smith stores and Our performance in these five strategic growth initiatives closed seven. We will continue to critically look at our can be summarised as: store base and open or close stores as demographics – New stores: With 393 stores in Australia and and performance dictates – consistent with our focus on New Zealand and opening 15-20 stores annually, improving returns and cost-efficiencies. we provide our customers with unprecedented Our award-winning MOVE format, with 10 stores, convenience wherever they are located. continues to excite consumers which is increasingly – New formats: Our four formats cater for differing benefiting its sales and profit performance. demographics ranging from a traditional Dick Smith In February, we opened four temporary locations within customer to a younger demographic at MOVE, a more Sydney Airport’s International Terminal under the discerning consumer at David Jones and international banner, MOVE by Dick Smith. We are extremely pleased Nick Abboud travellers at MOVE by Dick Smith (at Sydney Airport’s with the results to date and look forward to further Managing Director International Terminal). improvement when we move to our permanent and CEO – Private Label: An integral part of Dick Smith for 45 locations before Christmas 2015. years, Private Label growth continues to provide the Dividends Company with flexibility to trade competitively and Our intention is to pay dividends of between 60% and maintain favourable margins. 70% of NPAT (before significant items). Your Directors Dick Smith – Online/omni-channel: Considered by many as a believe this ratio suitably balances the resources continues to disrupter, we view online as a competitive advantage. required to grow the business with rewarding With all 393 stores offering Pay & Collect and 210 shareholder investment. sustainably deliver stores acting as distribution/fulfilment locations, our The Board has resolved to pay a fully franked final on its strategic low cost model and multiple online platforms allow dividend of 5.0 cents per share. Combined with the growth agenda your Company to offer leading prices. interim dividend, this brings total dividends to be paid – Cost transformation: Having inherited a cost base on the 2015 profit to 12.0 cents per share, fully franked; that was unsustainable, our investment in people, and represents a dividend payout ratio of 65% (before systems and supply chain, combined with the significant items). restructures of the Company’s support office and People Australian supply chain, has sustainably transformed During the year there was significant change in the the cost structure. Board. We welcomed three new Board members: Rob 2015 performance Murray, Michael Potts (both in August 2014) and Jamie Our strong performance in 2015 is consistent with Tomlinson (in April 2015). Having been actively engaged delivering on our five strategic growth initiatives. Your throughout the period from acquisition and private Directors are pleased to report that sales grew 7.5%, ownership through our first year as a listed Company, with comparative sales growth of 1% and Australian Phil Cave AM and Bill Wavish stepped down from the sales growth of 10%. Underlying net profit after tax Board in February and March, respectively. We would (NPAT) grew 3.1% to $43.4 million, despite a challenging like to take this opportunity to thank both Phil and Bill for retail environment. At the time of listing on the Australian their mentoring, guidance and dedication during the Stock Exchange, your Directors indicated streamlining to initial acquisition and subsequent restructuring which a sustainable performance structure would continue provides a solid platform for the Company’s growth. For personal use only after we became a listed entity. This year’s statutory Your Board continues to review and revise programs in profit includes restructuring charges of $5.5 million place to ensure we recruit and retain the best people incurred in positioning Dick Smith for continued stronger within the Company. The ongoing evolution of the performance. As a result, Dick Smith’s statutory NPAT is Company has necessitated a commensurate $37.9 million compared to last year’s IPO restructure development of these practices, consistent with impacted NPAT of $19.8 million. long-term shareholder wealth creation. 2 2009 000 2010 000 2011 000 2012 2013 2014 2009 000 This has resulted in changes to the 2010 000 2011 Company’s short-term and long-term 000 2012 incentive schemes, including underlying Sales $m 2013 NPAT being the key driver and implementing 2014 hurdles more consistent with long-term 2012 1,369.5 shareholder wealth creation. These changes 2013 FINANCIAL HIGHLIGHTS 1,280.4 are explained in more detail in the 2014 1,227.6 Remuneration Report section of the 2015 1,319.7 Directors’ Report. 2009 000 2010 Outlook 000 2011 000 The transition from private ownership to a 2012 highly profitable listed consumer electronics 2013 company is not without its challenges. The 2014 Board is cognisant of the significant Sales $m EBITDA $m dedication and considerable effort Sales $m expended by all staff in achieving the 2012 32.6 results to date and would like to thank the 201312 23.4 1,369.5 Managing Director and CEO and all staff for 201413 1,280.474.4 their ongoing contributions and commitment 201415 1,227.6 79.8 to the Company. 2015 1,319.7 We would also like to thank our suppliers and other stakeholders for their support and look forward to further growth in 2016. Fellow shareholders, your Board is pleased NPAT $m Sales $m with the operational performance achieved $m NPAT 2012 1,369.5 by our Company in 2015 particularly given EBITDA $m 2013 1,280.4 the continued high level of investment for 2012 13.2 1,227.6 future growth and we are grateful to you for 2020131214 6.7 32.6 your continued support of Dick Smith. We 2020141315 23.4 42.11,319.7 are confident that our Company will achieve 201415 43.474.4 further growth in 2016, facilitating the 2015 79.8 appropriate rewards for your continued loyalty. EBITDA $m EBITDA $m 2012 32.6 Robert Murray 2013 23.4 $m NPAT Chairman 20201214 13.2 74.4 20201315 6.7 79.8 2014 42.1 2015 43.4 Nick Abboud Managing Director and CEO 2012 2013 2014 $m NPAT 2015 Sydney, 17 August 2015 Sales 1,369.5 1,280.4 1,227.6 1,319.7 2012 13.2 2013 GP 6.7 340.0 303.6 308.0 326.8 2014 CODB 307.4 280.1 42.1 233.6 247.0 2015 43.4 EBITDA 32.6 23.4 74.4 79.8 EBIT 20.1 10.9 61.6 65.0 NPAT 13.2 6.7 42.1 43.4 For personal use only 2014 excludes the impact of the Company reorganisation, 2015 excludes restructure costs. Refer to page 30 for a reconciliation of statutory financial statements to pro forma results. Dick Smith Holdings Limited ANNUAL REPORT 2015 I 3 BUSINESS HIGHLIGHTS GROWTH stores TOTAL SALES1 LAUNCHED NEW opened GREW STORE FORMAT MOVE +7.5% BY DICK SMITH, AT SYDNEY IN 2015 INTERNATIONAL 25 AIRPORT MARKET Online sales Reinvigoration LEADER IN DOUBLED of fitness, audio 934 to over and mobility new Private FITNESS areas – driving Label products CATEGORY introduced 8% 1% market in FY15 of retail sales share growth Online store fulfilment from 210 locations across Australia and New Zealand FUTURE Grow LFL Sales: Online sales Private Label GROWTH to grow to share to grow to For personal use only 1-2% 10% 15% of retail sales of sales by 2017 by 2017 1.