2018 Annual Report
2018
Scales Corporation Limited
Annual Report
We've been active in
research and development
within the agribusiness
sector during the last
100 years.
Introduction 04
Key 2018 Highlights 06
Managing Director and Chair’s Report 08
Sustainability Report 18
Divisional Overview 26
Leadership Profiles 38
Financial Statements 42
Independent Auditor’s Report 81
Corporate Governance 84
Director Disclosures 97
Directory 103
04
Scales Corporation Limited
In its 107
th
year, Scales is
showing that it is continuing to
evolve to capitalise on: global
and local markets, environmental
and governmental matters.
2018 commenced a period of change for the Scales group. We
provided details of a refreshed strategy in our 2017 annual report,
adopting a greater focus on pure agribusiness to take advantage of
changes and opportunities in the sector. Accordingly, during 2018,
we divested 2 of our storage businesses (one subject to Overseas
Investment Office (OIO) approval) and acquired a controlling stake
in a US based petfood ingredient manufacturer. As we go to print
in 2019, we have also been able to announce a further partnership
within our petfood business.
While we undergo the change and refresh, shareholders can be
assured that our day-to-day focus, on managing our ongoing core
businesses, does not diminish.
In its 107
th
year, Scales is showing that it is continuing to evolve
to capitalise on: global and local markets, environmental and
governmental matters. With the skills and passion of our team,
we will continue to work towards our vision of being the foremost
investor in, and grower of, New Zealand agribusiness.
Introduction
Vertically integrated apple grower,
packer & marketer
Apple marketer
a
Horticulture
Air & sea freight
Temperature controlled storage
b
Storage & Logistics
a
Scales owns 73 per cent of Fern Ridge Produce Limited (Fern Ridge).
b
Sold, subject to Overseas Investment Office approval.
c
On 7 March 2019, Alliance Group acquired a 50 per cent stake in Meateor New Zealand.
d
Scales owns 60 per cent of Shelby Foods.
e
Profruit is a 50 per cent owned joint venture.
Introduction
Petfood ingredient
procurer, processor
and marketer
c
Juice manufacturer
e
MEATEOR
FOODS LTD
Food Ingredients
Australia
Petfood ingredient
procurer, processor
and marketer
d
USA
Annual Report - Year Ended 31 December 2018
05
06
Scales Corporation Limited
6.2m
$67.1m
32.2c
$35.8m
8% increase on 2017
(2017: 22.5 cents)
9% increase on 2017
370+
5.83m
of apples exported,
up 4%
undertaken to maintain
our certifications
TCEs
Underlying
EBITDA
Underlying
Net Profit
earnings per
share (EPS)
audits
litres of juice
sold
up 10%
third-party
safety reporting
staff engagement
survey
Key 2018 highlights
The numbers
at-hand
79%
85%
increase in
response rate in the inaugural
Key 2018 highlightsKey 2018 highlights
handled, up 49%
9,251
airfreight tonnes
Annual Report - Year Ended 31 December 2018
07
Key 2018 highlights
New record Underlying Revenue
TCEs
1
Business
Continuity Plan
35,210
up 19%
TEUs
5
shipped
Key 2018 highlights
$
4 6 4 .7m
9.5c
17%
18% increase on 2017
700+
100%
(ROCE) maintained at
process undertaken
3
of companies with an updated
increasing to over
2,500 total staff
members at the
height of the apple
harvest season
4
3
contracts signed
permanent
staff members
per share declared
(2017: 9.0 cents)
Return on
Capital Employed
2
certification
First
1
Tray Carton Equivalent.
2
Calculated as Underlying EBIT divided by the average of opening and closing capital employed.
3
Certified Emissions Measurement And Reduction Scheme, undertaken by Enviro-Mark Solutions Limited.
4
Including Polarcold, excluding Liqueo and Shelby.
5
Twenty-foot equivalent unit.
29,028
of petfood ingredients sold, up 5%
of own-grown
apples exported,
up 9%
tonnes
CEMARS®
3.87m
Key 2018 highlights
Increased interim
dividend of
acquisition
or disposal
Commitment
to excellence
Managing Director
and Chair’s Report
Annual Report - Year Ended 31 December 2018
09
2018
$’000
2017
$’000
(Restated)
Variance
Underlying Revenue464,707393,09318%
Underlying EBITDA67,05762,0078%
Underlying Net Profit35,81432,7309%
Net Profit45,49931,61744%
On behalf of the Board, we are
delighted to present Scales’ Annual
Report for the year ended 31
December 2018.
Tim Goodacre and Andy Borland
It has been a record breaking year with the Group
delivering record Underlying
6
Revenue of $464.7
million together with Underlying EBITDA of $67.1
million and Underlying Net Profit of $35.8 million.
This was a very satisfying result, supported by strong
performances across all divisions, and which reflected
the attention to detail and commitment to excellence
throughout the Scales team.
Underlying EBITDA (our preferred profitability
metric) has increased by 68 per cent since 2014
at a compounding annual growth rate (CAGR) of
14 per cent.
Underlying EBITDA
$67.9m
$61.4m
$39.8m
20182017201620152014
$67.1m
$62.0m
CAGR 14%
$32.7m
$38.6m
$34.8m
$19.8m
Underlying NPAT
CAGR 16%
20182017201620152014
$35.8m
Managing Director and Chair’s Report
6
Underlying results are considered by Management and the Board to be the best financial measures to describe the ongoing performance of Scales. Underlying results exclude
some New Zealand International Financial Reporting Standards (NZ IFRS) non-cash adjustments (namely, change in fair value gain on apple inventory, cash-settled and
equity-settled share-based payments and change in gross liability for non-controlling interests). Management and the Board believe that Underlying Results more accurately
demonstrate the change in operational performance of the Group. Underlying Results include earnings from Polarcold (full year) and Liqueo (up until sale). A reconciliation of
Underlying to reported EBITDA and Net Profit is provided on page 15.
Shelby
In December 2018, Scales acquired a controlling 60 per
cent stake in Shelby Foods (Shelby), a large independent
US buyer, processor and seller of ingredients for the
petfood industry. The remaining 40 per cent stake
continues to be held by Brett Frankel, the Founder and
President of Shelby.
As outlined later, this is an
important first step by Scales in
further securing raw material
supply and also introducing us to a
new suite of ingredients buyers.
Shelby is one of the largest US-
based independent buyers and
processors of offal for the petfood
industry, handling approximately
80,000 MT of petfood ingredients annually in 7 processing
locations throughout America. With Meateor, this brings
total petfood ingredient volumes handled by Scales’ Food
Ingredients division to over 107,000 MT, making it a significant
independent, global petfood ingredients processor. Shelby’s
revenue in 2018 was around US$54 million (NZ$78 million).
The majority of Shelby’s production uses pork and beef
proteins, complementing Meateor’s production of New
Zealand lamb and venison products. Shelby and Meateor
share a number of customers with Shelby sourcing raw
material from America’s largest meat companies. As a result,
opportunities exist to extract synergies through the increased
breadth of proteins, customer and supplier networks and
know-how.
The transaction has a strong strategic rationale for our Food
Ingredients division. We believe the petfood ingredients sector
continues to be an attractive industry for investment for a
number of reasons:
• The pet care industry is undergoing a positive growth trend
as the world pet population continues to expand and the
pet ‘humanisation’ trend deepens (source: Euromonitor).
• Globally, the petcare market was projected to reach sales
of US$110 billion in 2017, having grown 3 per cent on
average over the preceding 5 years (source: Euromonitor).
Of this, it was estimated that around US$70 billion was
spent in the United States and that growth in 2018
would be around 3.7 per cent (source: American Pet
Products Association).
• China, third in the world for dog ownership, is also
demonstrating strong growth. The China petfood market
was valued at US$1.9 billion in 2017 and is expected
to grow at a CAGR of 9.7 per cent for the next 5 years
(source: Mordor Intelligence).
• Petfood ingredients provide broad exposure to this trend.
Scales’ objective is to be a key provider to a wide range of
brand owners.
The purchase of Shelby accelerates the development of our
petfood ingredients business and its growth strategy:
• It extends Meateor’s source of supply and range of
proteins offered.
• It provides opportunities to provide additional services to
our customers.
• It allows Meateor to leverage Scales’ existing experience
with export markets, in particular China, where the market
metrics for petfood growth are considerable and proteins
available from offshore are highly sought after.
Overall, we are excited to partner with Shelby, a well-respected
operation with excellent customer and supplier relationships.
Managing Director and Chair’s Report
10
Scales Corporation Limited
Meateor
New Zealand
Whilst not impacting our 2018 results, on 7 March
2019 we were excited to announce that Scales had
entered into a 50/50 petfood joint venture with
Alliance Group Limited (Alliance), a leading farmer co-
operative and supplier of raw materials to the petfood
sector. Meateor’s New Zealand petfood business and
operations will be transferred to a joint venture that will
be run jointly between Scales and Alliance.
The joint venture brings together two of New Zealand’s leading
agribusinesses, allowing them to deliver their respective unique
capabilities including a focus on health and safety, excellence
in operating complex food plants and a global sales network.
We believe this transaction provides a number of benefits to
the New Zealand petfood industry:
• It is an avenue for the industry to improve scale and
participate in associated efficiencies.
• We expect improved relationships with customers by
engaging with them on long term programmes.
• The joint venture expects to consider opportunities for
added value growth in petfood (including petfoods that are
more nutritious and functional), positioning New Zealand
as the premier supplier of petfood proteins. The joint
venture can leverage the combined resources of its partners
to evaluate, test and progress growth opportunities.
• Customer and supplier networks should be extended.
We look forward to providing further information on this
partnership throughout 2019.
Shareholder
Returns
We continue to be mindful of the long term returns
to our shareholders. Those shareholders who invested
in our IPO in July 2014 have achieved a 242 per cent
7
return on funds invested to the end of February 2019.
By comparison, an investment in the S&P NZX50 would
have delivered an 80 per cent return on funds invested
over the same period.
Scales’ Team
Our results would not be possible without the
diligence, persistence and attitude of all members of
the Scales family.
This year has been a period of transition for some of our
group companies - we said farewell to the Liqueo team and,
assuming receipt of OIO approval, we will also say goodbye to
our Polarcold team. We wish everyone well within their new
organisations. However, we are excited to welcome the team
from Shelby and very much look forward to working with
them, as we are with our new joint venture partner, Alliance.
The Board would like to acknowledge and thank every
member of the team for their efforts. Without them Scales
would not be the organisation that it is.
Strategic and
Operational
Highlights
At the end of 2017 we refreshed our strategy to adopt
a greater focus on pure-agribusiness. As a result, the
2018 year has proved to be a busy but exciting period
in the Group’s history:
• Significant progress was made against our Strategy
Refresh with the sale of Liqueo, the conditional sale of
Polarcold and the acquisition of a controlling interest in
Shelby Foods.
• Substantial investment was made in new proprietary
premium apple varieties.
• Continued progress was made in sustainability and
governance ensuring that, in particular, our people and
their safety are our highest priority.
Managing Director and Chair’s Report
7
Calculated as the percentage change between the closing share price on 28 February 2019 plus all net dividends paid (a total of $0.725 per share) and the IPO listing
price of $1.60.
The Board would like to acknowledge and thank
every member of the team for their efforts. Without
them Scales would not be the organisation that it is.
Annual Report - Year Ended 31 December 2018
11
AGRICULTURE
FORESTRY
HORTICULTURE
INNOVATIVE
PROCESSED FOOD
FISHERIES/
AQUACULTURE
VITICULTURE
APICULTURE
Our definition of agribusiness
encompasses the following sectors
Appropriately Incentivising our Team
Whilst strategic input and governance is provided by
the Board, the management team continues to be
accountable for implementing those strategies. As a
result, Scales has a strong incentive based remuneration
scheme aligned to positive personal performance and to
retaining and developing excellent team members over
the long term.
The balance between shorter term incentives and long
term business interests continues to be a key feature of the
positive Scales business culture. The retention and continued
development of the incentive based remuneration schemes
are an important part of the Board and Managing Director’s
objectives. During 2018, the Board agreed to a number of
enhancements to the existing Long Term Incentive Scheme (LTI
Scheme). The current scheme was extended for a further 3 year
period for all nominated executives and the Total Shareholder
Return (TSR) gross hurdle rate was increased to 20.0 per cent. In
addition, selected executives were provided with a new one-off
opportunity to increase their participation in the LTI Scheme with
additional shares being allocated over the next 3 year period.
Scales’ remuneration philosophy, a breakdown of executive
remuneration and the amendments made during 2018 is
outlined in more detail in the Corporate Governance section.
12
Scales Corporation Limited
Scales’ Vision
To be the foremost investor in, and grower of, New
Zealand agribusinesses by leveraging its unique insights,
experience, and access to collaborative synergies.
Scales’ Long Term Goal
To generate a long-run average 15 per cent ROCE
across the portfolio.
Strategy
Strategy Update
During 2018, we have focused on opportunities that play well
to our strengths:
• Fully-vertically integrated.
• Export-led.
• Add value from our China relationships.
• Strong corporate brand and long term relationships with
customers and suppliers.
Successful implementation of our refreshed strategy will
ultimately result in a meaningful rebalance of our portfolio
of businesses:
• Our storage businesses (Polarcold and Liqueo) have either
been, or are expected to be, sold. These businesses were
less aligned with our core strengths and generated returns
that were below those of our other businesses.
• Our initial investment focus has been on our Food
Ingredients division, with the objective of creating a business
with the potential to generate EBITDA of $25 million. To
date we have acquired a controlling interest in Shelby and,
in 2019, entered into a partnership with Alliance, and
continue to investigate a range of other projects.
We will continue to focus on opportunities that complement
our strengths, seeking and investigating appropriate
acquisitions and partnerships.
Managing Director and Chair’s Report
Annual Report - Year Ended 31 December 2018
13
Managing Director and Chair’s Report
Specific Strategic Targets
DivisionTargetStatus
Group
SustainabilitySignificant Progress
• Further develop and evolve our reporting and
measuring of key sustainability aspects affecting
Scales’ businesses.
• Develop best-in-class sustainability reporting.
• Demonstrate improvements in sustainability.
Carbon footprint certification process
commenced and waste audits completed.
Inaugural group-wide staff engagement
survey undertaken.
Increased safety reporting.
Financial and operationalSignificant Progress
• Maintain financial returns in line with, or above,
industry returns.
• Continue to seek acquisitive and organic growth
to expand the business.
Excellent return achieved.
Two divestments and one acquisition made,
and a large number of opportunities reviewed.
Shareholder returnsOn Track
• Continue to provide shareholders with an
attractive yield on dividends.
• Deliver capital gains and shareholder liquidity
through careful strategic execution.
Interim dividend increased to 9.5 cents
per share.
Share price stable.
Horticulture
Brand and Intellectual Property developmentOn Track
• Continue to develop the Mr Apple brand,
particularly within our key markets of Asia and
Middle East.
Continuing the development of sales collateral
and marketing strategies.
VolumesExcellent Progress
• Reach 4 million TCEs of our own grown apples.3.87 million TCEs exported, up 9 per cent
on 2017.
SalesOn Track
• Continue to increase market penetration
into Asia through services company Primary
Collaboration New Zealand (PCNZ) and strategic
partner China Resources Ng Fung Limited (China
Resources Ng Fung).
Continued development of branding and
marketing specific to the Asia market.
Plant VarietiesExcellent Progress
• Acquire new Plant Variety Rights (PVRs) to meet
emerging needs.
• Redevelop lower-performing orchards and
varieties into higher value crops.
Commercial sales of premium apples Dazzle
TM
and Posy
TM
imminent.
Significant orchard development in new
premium varieties.
Storage &
Logistics
Rebalance our portfolio of businesses Excellent Progress
• Review investment in Storage & Logistics in line
with Strategy Refresh.
Storage businesses (Polarcold and Liqueo)
have either been, or are expected to be, sold.
Expand logistics offeringsExcellent Progress
• Develop scale to utilise the expertise and capacity
within the team.
Increased throughput of volumes.
Food
Ingredients
Increase scale and expand offeringExcellent Progress
• Review strategic initiatives and consider organic
and acquisition opportunities to increase
divisional scale.
Acquisition of 60 per cent of
Shelby completed.
Joint venture with Alliance announced.
Further opportunities being investigated.
Income Statement
2018
$’000
2017
$’000
(Restated)
Underlying Revenue464,707393,093
Underlying EBITDA67,05762,007
Underlying EBIT52,27447,758
Underlying Net Profit35,81432,730
After tax impact of:
Non-cash NZ IFRS adjustments9,685(1,113)
Net Profit45,49931,617
Capital employed360,217307,531
Return on capital employed17%17%
Summary
We are pleased to present record Underlying revenue of $464.7 million and Underlying
EBITDA of $67.1 million for the year ended 31 December 2018. This was a solid
financial result supported by strong performances across all divisions and, once again,
reflected the attention to detail and commitment to excellence within all teams.
The individual performance of each division is discussed further in the Divisional
Overview section.
Directors and management use non-GAAP (Underlying) profit measures when discussing financial performance in this document. The Directors and management
believe that these measures provide information that is useful to stakeholders along with GAAP measures. Non-GAAP measures also represent some of the
performance measures required by Scales’ debt providers. Underlying Results include earnings from Polarcold (full year) and Liqueo (up until sale).
Non-GAAP profit measures are not prepared in accordance with NZ IFRS and are not uniformly defined, therefore the non-GAAP profit measures reported in
this document may not be comparable with those that other companies report and should not be viewed in isolation or considered as a substitute for measures
reported by Scales in accordance with NZ IFRS.
The next table shows how Underlying EBITDA and Underlying Net Profit reconcile to EBITDA and Net Profit (respectively) in our Financial Statements (which are
prepared in accordance with NZ IFRS). Note that our financial statements are prepared on a fully NZ IFRS compliant basis.
Group Financials
14
Scales Corporation Limited
Managing Director and Chair’s Report
Reconciliation of Reported EBITDA and Net Profit to Underlying EBITDA and Net Profit
2018
$’000
2017
$’000
(Restated)
Reported EBITDA51,74445,305
Change in fair value gain on apple inventory25640
Change in gross liability for Non-Controlling Interests(146)629
Share based payments3192
Equity settled employee benefits849389
Discontinued operations EBITDA14,32315,552
Underlying EBITDA67,05762,007
Reported Net Profit45,49931,617
Change in fair value gain on apple inventory25640
Change in gross liability for Non-Controlling Interests(146)629
Share based payments3192
Equity settled employee benefits849389
Taxation(80)(37)
Gain on disposal of Liqueo(8,174)-
Depreciation after transfer to disposal(2,421)-
Underlying Net Profit35,81432,730
Capital Management
ROCE and EBITDA margin continue to be important
performance metrics for each division and the Group.
ROCE is a measure of how efficiently we are generating a
return on our assets. It lies at the heart of how we monitor
the performance of the portfolio as well as decisions around
capital expenditure. Prior to committing to an investment in
assets, we need to be confident that we will generate a return
that meets or exceeds our targets. The ROCE targets vary by
division, given each division’s specific asset and risk profiles.
However, as a Group, we target a long-run combined ROCE of
15 per cent.
Group capital employed increased by $52.7 million in 2018,
principally due to:
• The acquisition of Shelby in December 2018, resulting in
additional assets and goodwill.
• Capital expenditure including orchard redevelopment (see
the Horticulture section for further details).
• Increases in inventory.
ROCE from all divisions were in excess of their long-run
divisional targets and was maintained at 2017 levels at Group
level, above our long-run objective rate.
EBITDA margin is a measure of profitability of each division.
Over time we use it to monitor the competitive dynamics
and cost control of each business within the Scales portfolio.
EBITDA margin targets vary significantly by business.
Our Group and divisional EBITDA margins remain strong, with
a decrease in Group EBITDA margins mostly due to increased
trade from lower margin activities of the Group.
Following the sale of Polarcold and Liqueo, the performance
metrics for the renamed Logistics division will be reviewed.
Scales’ Net Tangible Assets as at 31 December 2018 were
$1.43 per share (31 December 2017: $1.43 per share)
8
.
Scales’ basic earnings per share for the year ended 31
December 2018 was 32.2 cents per share (22.5 cents per
share in the year ended 31 December 2017). The increase was
mainly due to the gain on sale of Liqueo.
8
Based on the weighted average number of ordinary shares.
Annual Report - Year Ended 31 December 2018
15
Managing Director and Chair’s Report
Capital Management
20182017
ROCE
Horticulture21%21%
Storage & Logistics
9
16%13%
Food Ingredients
10
32%37%
Group17%17%
Target15%15%
Underlying EBITDA margin
Horticulture17%18%
Storage & Logistics14%15%
Food Ingredients10%10%
Group
11
14%16%
Financing
Average Net Debt
12
for the year was $70.7 million, $15.9
million above Average Net Debt during 2017 of $54.8
million. However, if the effect of debt funding for the Shelby
transaction was excluded, average net debt for the year would
have been $53.1m.
Hedging Strategy
As an exporter, we continue to have significant exposure
to foreign exchange movements. This is most prevalent in
Mr Apple, but our Food Ingredients and Storage & Logistics
divisions are also affected.
In 2018, Mr Apple made approximately 57 per cent of its apple
sales in US dollars, 33 per cent in Euros, 8 per cent in British
pounds, and 1 per cent in Canadian dollars
13
. We continue to
have a natural hedge covering some of our US dollar exposure
as all international shipping is payable in US dollars. We take
cover on the remaining expected net US dollar, Euro, British
pound and Canadian dollar exposures.
We also take out interest rate swaps and forward rate
agreements which provide some certainty on interest costs on
Scales’ term and short term borrowings. We funded the US
dollar investment in Shelby via a US dollar term loan to provide
a hedge on the investment.
Scales has a Board approved Treasury Management Policy
within which all foreign exchange, interest rate and related
activities are conducted. This policy is reviewed biennially.
Under this policy we take foreign exchange cover for up to
48 months using a variety of foreign exchange instruments
(including options and forward contracts). Scales maintains a
blend of instruments. For the next 12 months, approximately
80 per cent of Mr Apple’s expected net foreign exchange
exposure is covered.
We also have interest rate swaps and forward rate agreements
covering interest on our long term and short term borrowings.
Dividend
A final 2017 fully imputed cash dividend of 9.0 cents per share
(a gross amount of 12.5 cents per share) was paid on 6 July
2018. Together with an interim dividend of 9.0 cents per share
(a gross amount of 12.5 cents per share) that was paid on 19
January 2018, this brought the annual dividends for 2017 to
a total of 18.0 cents per share (a gross amount of 25.0 cents
per share).
A fully imputed interim 2018 cash dividend of 9.5 cents per
share (a gross amount of 13.2 cents per share) was declared
in December 2018 and paid on 18 January 2019. Our
expectation is to declare a final fully imputed cash dividend
in respect of 2018 in May 2019, for payment in July 2019.
As always, any dividend is subject to Board approval. It is
standard practice for the Directors to consider all aspects
of the Group’s performance and financial position prior to
declaring any dividend.
9
Storage & Logistics ROCE for 2018 is based on Scales Logistics and Polarcold. Liqueo has been excluded due to the nil balance of capital employed at year end.
10
Food Ingredients ROCE excludes Shelby.
11
Group EBITDA margin is based on Underlying EBITDA divided by Underlying Revenue (revenue from continuing and discontinued businesses).
12
Average Net Debt is calculated as the term debt balance plus the average net working capital facility balance (calculated as the average of the net working capital facility
balance as at 30 June 2018 and 31 December 2018).
13
The balance was made in NZD.
16
Scales Corporation Limited
Managing Director and Chair’s Report
Tim Goodacre
Chair
22 March 2019
Andy Borland
Managing Director
2018
$’000
2017
$’000
Operational capital expenditure
Horticulture3,5203,826
Storage & Logistics3,287 3,330
Food Ingredients518211
Other178 73
Total operational capital expenditure7,503 7,440
Growth capital expenditure
Horticulture6,4765,237
Storage & Logistics2,347802
Food Ingredients - -
Total growth capital expenditure8,8236,039
Total capital expenditure16,32613,479
Capital Expenditure
Operational capital expenditure in 2018 of $7.5 million was slightly higher than 2017, whilst $8.8 million was invested in
growth projects in 2018, positioning us strategically for future earnings growth.
Major investments during 2018 included:
• Redevelopment of orchards to premium apples such as Dazzle
TM
and Posy
TM
.
• The relocation of Havelock plant and equipment to Longlands.
• Racking upgrades at Polarcold’s Whakatu coldstore for improved FMCG storage, and racking at Scales Logistics.
Annual Report - Year Ended 31 December 2018
17
Managing Director and Chair’s Report
Outlook
In summary, 2018 was a year when all businesses performed well and enjoyed favourable climatic and trading conditions. Although
the businesses are exposed to seasonal variation, the 2019 apple harvest is underway within the Horticulture division with a positive
outlook on packout rate, and the Storage & Logistics and Food Ingredients divisions are trading positively.
We believe the overall agribusiness environment remains positive, providing us with opportunities to continue to progress our
Strategy Refresh. We are excited to integrate Shelby into the Scales Group as well as benefit from our partnership with Alliance and
continue the redevelopment of our orchards.
We are indebted to all of our management and staff, fellow Directors, suppliers, customers and other stakeholders for their
assistance and support in our 107th year of trading.
Committed to
sustainability
Sustainability Report
Our Sustainability Journey
Following our inaugural Sustainability Report in 2016 where we identified our materiality
index, we progressed in 2017 to identifying our key Sustainability focus areas and, in
2018, we have begun measuring these areas and setting targets for reducing these
impacts. Accurate measurement will enable us to determine our current position and will
also enable us to assess our progress in achieving those reductions. We will revisit our
materiality index later in 2019 to review its ongoing relevance.
In 2018 we focused on the following areas:
People – in particular, staff engagement
and health and safety.
Energy – participation in CEMARS
®
(carbon footprint calculation) baseline.
Waste - in particular the amount of
waste sent to landfill.
Due to its size, our primary focus was around the
operations of the Horticulture division but the staff
engagement survey was launched throughout the
whole Scales group.
Annual Report - Year Ended 31 December 2018
19
Sustainability Report
Community
investment
Water
Energy
WasteBiosecurity
Spray use
& residues
Certification
& traceability
Workforce
stability
Health
& Safety
Employment
practices
P
e
o
p
l
e
M
a
r
k
e
t
p
l
a
c
e
E
n
v
i
r
o
n
m
e
n
t
Sustainability framework - areas of focus
A Snapshot of Scales Group
~715
~1,150
1,000+
staff employed at the peak of the
harvest season
Permanent staff
members
Recognised Seasonal
Employer (RSE)
Customers
worldwide
~30%
~40%
Permanent female
staff Scales-wide
Female senior
leadership staff
50+
Sites in
operation
Our People
Staff Engagement Survey
Our people remain the most important asset of our Group. For that reason, in
August 2018, we partnered with AON to undertake our first Group-wide staff
engagement survey (excluding Polarcold, which is subject to conditional sale).
Undertaking such a survey is one of our steps to becoming an Employer of Choice
and allowed us to understand what that means to our staff and where we are.
We were delighted to note that the survey highlighted many areas for celebration
but, as expected from surveys of this type, also drew attention to a few areas of
focus. In a number of cases, initiatives are already underway.
85% response rate (405 people).
Even distribution between ages and male /
female responses.
93% positive response to “In the past year I
have always felt safe at work.”
96% positive response to “I feel safety is an
every day part of doing my job.”
Highest engagement scores from the
Mr Apple coolstore division and Scales Logistics.
Lowest engagement scores from
Balance Cargo, the Mr Apple orchard division
and at Meateor.
92% of staff positively answered that they get a
sense of accomplishment from their work.
93% of staff positively stated that Scales is
responsive to the changing needs of our
external customers.
Areas of strength:
Diversity and inclusion.
Relationship with manager.
Work tasks.
Work / life balance.
Customer focus.
Areas for focus:
Talent and staffing.
Rewards and recognition.
Senior leadership (communication).
Decision making.
56%
Overall Scales
engagement
score
14
14
This compares to the Australia / New Zealand (ANZ)
average of 59%. ANZ top quartile - 68%.
2018 employee
engagement
surveyresults
20
Scales Corporation Limited
Sustainability Report
Specific initiatives include:
Better structured communication
plans for our in-house staff
newsletters, focusing on the
content quality and frequency of
toolbox talks, introducing more
formal CEO site-walks, undertaking
leadership courses.
Introduction of a new bin card
/ orchard logistics package to
dramatically reduce administration
time, streamline harvesting
operations and give better real-time
information to our packhouses.
This is part of the Smarter Orchard
project launched in late 2017.
Team involvement at Balance Cargo
in respect of a move of some of the
operations, provision of more space
and a better working environment.
2018 employee
engagement
surveyinsights
Engaging with our staff is of the utmost
importance and we highly value their feedback.
As a result, we hope to increase engagement
through a wide range of initiatives.
Repeat this exercise at least every two years,
although ideally more often.
Continue to work on
culture and what it means to
be part of the Scales family.
Listen to our team members, ask for their
feedback and implement their ideas.
To never underestimate the power of feedback.
To focus on the areas that we can change,
regardless of our environment.
To
share ideas and innovations across the group to
increase the collaboration.
To make our leadership teams more
visible.
Continue to remain agile and able to adapt to
ever-changing customer, consumer and global needs.
Continue to
expand on our areas of strength.
To
walk the talk.
To be more
transparent in our decision making.
To
celebrate our successes more openly.
Annual Report - Year Ended 31 December 2018
21
Sustainability Report
Health and Safety
Safety Innovations and Investments
The review and control of our critical risks has been a high
priority for us this year. We have had a particular focus on
forklifts, traffic management, ammonia and fatigue and a
number of successful initiatives included:
• Painting of truck grids at Mr Apple post-harvest sites to
reinforce the 4m rule.
• Utilisation of a forklift trainer across the group with area
and task specific competency training and assessments
being used at all Mr Apple sites and at Balance Cargo.
This has seen a dramatic change in behaviours and culture
across these sites and is contributing to a reducing trend
in forklift incidents. 2019 will see this training rolled out
across the Meateor sites.
Safety Statistics
KPIs are in place throughout all our businesses, focusing
on managing critical risks, safety improvements in
reducing injuries and improving reporting. During 2018:
• There were only 2 notifiable injuries (2017: 4).
• A 5% increase in hours worked.
• 2.4 times more safety observations reported and an
increase in near-miss reporting.
• The Lost Time Injury Frequency Rate (most often
attributable to low-level sprains and strains associated with
the manual operations in our orchards) was in line with
previous years.
• There was a continued decline in ladder incidents due to
missing steps or slipping.
Tony Hughes.
• Use of a wireless operator and fleet management
programme across the majority of our forklift fleet, which
has helped to identify issues in the use and suitability of
equipment and has reduced damages and incidents.
• An alignment of ammonia management to the published
WorkSafe standards.
• Full attendance of the Board and CEO’s at safety governance
and leadership training, along with additional time learning
about corporate ethics.
• A fatigue toolkit which helps supervisors identify and
manage fatigue should it occur.
• The roll-out of cab tractors at Mr Apple, nearly completing
the 3-year focus on upgrading all tractors on site to cabs.
• Increasing frequency of audits, including the development of
a more appropriate health and safety management tool.
• New safety positions created at Meateor and Balance Cargo.
22
Scales Corporation Limited
Sustainability Report
Governance
Shortly after the end of our financial year, we were pleased to announce the appointment of Nadine Tunley and Lai
Po Sing, Tomakin to our Board. Together with the appointment of Teresa Steele-Rika in August 2018 as our current
Future Director, these appointments added depth and industry experience to our governance team.
Nadine was appointed as a Non-Executive Independent
Director of Scales, effective from 26 February 2019. Nadine
is currently CEO of Ngai Tahu owned, Oha Honey LP, which
farms in excess of 35,000 bee hives nationwide. Nadine brings
experience from a number of governance roles, including as
the former Chair of NZ Apples & Pears.
We were pleased to appoint Teresa as our next Future
Director in 2018, continuing our participation in the Institute
of Directors’ programme. Teresa is Head of Corporate
Communications & Brand at Datamars Limited where she is
responsible for global brand, product and marketing strategies
as well as leading internal and external communications and
supporting M&A activity. This is Scales’ third appointment
under the Institute of Directors’ Future Directors programme
following the previous appointments of Liz Muller and Jen
Bunbury in 2016 and 2017 respectively.
In January 2019 the Board welcomed Tomakin as a Director
of the Company. Tomakin replaces Weiyong Wang as China
Resources Ng Fung’s representative on the Board. He is a
Director of China Resources Ng Fung. Tomakin is also the Vice
President, Chief Financial Officer and Company Secretary of
China Resources Enterprise, Limited.
Nadine Tunley Lai Po Sing, Tomakin
Teresa Steele-Rika
Marketplace
We continue to be cognisant of the needs and requests of our
customers and other external stakeholders. As a result:
• Security training is undertaken online and nearly 300 people
regularly complete this. Specific attention has been turned
towards email and online security awareness training.
• 100% of companies have an updated Business Continuity
Plan, which is supported by the Scales-wide Crisis
Management Plan.
• 100% of CEOs attending a crisis simulation training day
demonstrating the effectiveness of the Crisis
Management Plan.
• Over 370 third-party audits were conducted throughout the
Group to maintain our certifications.
• In partnership with Plant & Food Research, 900,000 sterile
codling moths were released over the Mr Apple orchards
in Central Hawke’s Bay in order to decrease the wild moth
population to almost zero.
Scales continues to constantly evolve and we understand
the importance of continually evaluating and adapting our
processes and structures to best meet these changes. As a
result, we are working towards the creation of a compliance
hot-line to ensure that all practices that we, and our partners,
engage in are in line with Scales’ values.
Annual Report - Year Ended 31 December 2018
23
Sustainability Report
Think
differently
REPLACE
REDUCE
REFUSE
REDESIGN
REUSE
ROT
REPAIR
RECYCLE
Ask can I do it
another way?
What you
do need
Anything
that you can
What you can
If you cant do
any of the above
Everything else
Rethink if you
even need it
What you
dont need
Our Environment
Waste
During the year, we focused on identifying how our waste is
generated, with the completion of waste audits across Mr Apple
and Balance Cargo. Going forward our focus will be on reducing
waste to landfill by:
• Asking suppliers to reduce or remove unnecessary packaging.
• Identifying and utilising new avenues for recycling.
• Educating our staff on how to support us in achieving
this goal.
Progress so far includes:
• Colour-coded “endless” bags introduced across the Mr
Apple post-harvest sites.
• Saving over 400 reams (over 200,000 pieces) of paper at Mr
Apple by reducing the number of reports and documents
requiring printing in the packhouses.
• Saving 100,000 Styrofoam cups from landfill by changing to
compostable cups within the Mr Apple staff areas.
• Reusing 32,250 kg of dairy slip sheets at Balance Cargo.
Other initiatives underway include:
• Printing double-sided.
• Returning or reusing pallets.
• Trialling liner-less labels.
• Composting food scraps.
• Researching compostable alternatives to hairnets and gloves.
• Increasing recycling facilities.
• Removing plastic knives and forks in canteens.
• Education via posters and TVs.
Contamination
The Canterbury Regional Council (the Council) has laid
charges against Polarcold in relation to discharges from its
former Belfast operation in early April 2018, discharges which
the Council states were not authorised by the correct resource
consents. The Council also alleges that the discharges were
the cause of the death of fish in the Kaputone Creek. At all
times Polarcold has fully cooperated with the Council in its
investigation. Polarcold has also engaged the appropriate
experts to investigate the circumstances surrounding
this incident so as to establish if there was any fault on
Polarcold‘s part. These investigations are continuing and, in
the meantime, Polarcold has initiated a full audit of all its
operations to confirm that all appropriate authorisations and
safeguards are in place.
Carbon Footprint
2018 saw the completion of the very first CEMARs
®
calculation for Mr Apple, with verification granted in
February 2019 for the 2018 financial year.
• The overall carbon footprint for Mr Apple is
21,824.21 Tonnes of carbon dioxide equivalent
(tCO2e).
• This equates to total gross greenhouse gas (GHG)
emissions per:
–All staff (at peak season) of 9.92 tCO2e.
–Bins tipped of 0.81 tCO2e.
–Cartons exported of 0.0044 tCO2e.
–Hectares planted of 18.86 tCO2e.
–Permanent employees of 57.43 tCO2e.
–Revenue ($ millions) of 107.10 tCO2e.
24
Scales Corporation Limited
Sustainability Report
Our focus to reduce our emissions will be on those areas where
we have direct control, as shown in the chart above. We have
not shown the freight shipping element as it is currently not
within our ability to change. Key projects for reduction were
created in a company-wide workshop held in 2018 and these
agreed projects will direct our way forward. Initiatives include:
• Establishing LED replacement timelines.
• Investigating alternatives to fossil fuel transport.
• Dramatically reducing the amount of paper we use.
• Dramatically reducing the waste to landfill by reducing the
creation of the original waste and redirecting waste created
via the correct recycling channels.
• Improved monitoring and managing of our electricity.
• Continuation of improved management of our refrigerants.
GHG Operational Emissions by Source
Electricity
Diesel commercial
2,0002,5001,50050001,000
Freight Refrigerated HGV (Rigid, average)
Freight Road rigid truck (average)
Air travel
Waste land filled LFGR Mixed waste
Petrol regular
LPG stationary commercial
NB: The above graph shows areas over which we have direct control.
Annual Report - Year Ended 31 December 2018
25
Sustainability Report
The inner
workings
Divisional Overview
The following section provides a summary of each of our three operating divisions,
including their performance and key operating statistics. In line with our Group results,
we focus on the Underlying financial performance of our business divisions, excluding
certain one-off or non-cash NZ IFRS year-end adjustments.
Horticulture
Overview
Our Horticulture division continues to be the largest division
within the Scales group and comprises:
• Mr Apple (including Longview), New Zealand’s largest fully
vertically integrated apple business, based in Hawke’s Bay.
• A 73 per cent stake in Fern Ridge, a fresh produce exporter
in Hawke’s Bay.
It operates 3 packhouses, all with high-speed optical grading
machines, and 5 coolstores.
The division produced a strong result in 2018:
• Revenue of $254.6 million, 15 per cent higher than 2017.
• Underlying EBITDA of $42.6 million, 9 per cent higher
than 2017.
• 5.83 million TCEs of apple sales, 4 per cent higher
than 2017.
• A 7 per cent increase in weighted average FOB
15
apple prices.
Orchard Redevelopment
As noted in our 2017 annual report, the redevelopment of
Mr Apple’s orchards continues to be a major strategy for
the division. With 1,160 hectares of our own planted
orchards, Mr Apple is uniquely positioned to develop
commercially relevant volumes of new, premium varieties,
in particular those which Mr Apple own (either outright or
in collaboration with our partners).
During the winter of 2018, 68 hectares were redeveloped,
including the conversion of 50 hectares of established orchard.
Of this total redevelopment, 41 hectares were in Dazzle
TM
.
Further plantings of approximately 85 hectares (through
the redevelopment of 70 hectares of Braeburn and lower
performing orchard blocks) are anticipated to take place over
the 2019 and 2020 winters.
Whilst total orchard production is likely to reduce in the near
term as a result of this redevelopment, we anticipate volumes
returning to current levels by 2023.
Apple Brands
The development of new and exciting apple brands continues
to be a major focus for the Mr Apple team.
• Dazzle
TM
, a new apple brand 20 years in the making, is
specifically targeted at the Asia market with its high colour,
sweet taste and big size. Mr Apple’s first commercial sales
of Dazzle
TM
will take place during 2019.
• Posy
TM
is a pinky red, sweet apple, which is harvested at the
very beginning of the season, and is targeted at consumers
in Asia. The first commercial sales of Posy
TM
are expected to
take place in early to mid-2019.
Currently, Mr Apple has approximately 50 hectares of trees
producing Dazzle
TM
and 30 hectares of trees producing Posy
TM
,
with further planting anticipated as noted above. Further
development of these and other new brands will continue to
be a focus for the division in the future.
15
Free on Board – where the seller is responsible for transportation of the goods to the port of shipment and the cost of loading.
Annual Report - Year Ended 31 December 2018
27
Divisional Overview
Mr Apple - Sales by Region (TCEs)
20172018
Markets
New Zealand continues to hold a premium position in the world markets for apple production and export. The New Zealand apple
industry was, for the fourth year running, named the most competitive on the global stage by The World Apple Review, against 33
major apple growing countries.
In 2018 the Horticulture division sold apples to more than 170 customers in over 40 countries.
Our relationships with China Resources Ng Fung and PCNZ continue to provide essential insight, support and access to the large Asia
market, with sales to Asia and the Middle East continuing to account for over 50 per cent of export sales. Sales to Europe in 2018
also benefited from a decision to send fruit to this market early.
Developing a Market Focused Brand in Asia and China
While continuing to develop Asia, Mr Apple sees opportunities in creating a more consumer-centric brand in China. Mr Apple is
uniquely positioned to fulfill this position by virtue of its size and being 100 per cent dedicated to apples. To build a consumer-centric
brand, Mr Apple is implementing a range of marketing and branding strategies, including:
• Increasing market awareness through China social media, in-store promotions and exhibitions.
• Extending sales channels through e-commerce.
• Packaging innovation, specific to consumer needs.
• Working closely with partners on brand promotions.
28
Scales Corporation Limited
Divisional Overview
Asia &
Middle East
54%
Europe
31%
UK
10%
North America
5%
Asia &
Middle East
53%
Europe
34%
UK
9%
North America
4%
Financial Performance and Key Operating Statistics
Summary Performance
The table below shows the financial performance of our Horticulture division for 2018 and 2017.
Horticulture Financial Performance
2018
$’000
2017
$’000
(Restated)
Revenue254,569 221,963
Underlying EBITDA
Mr Apple 40,690 36,634
Fern Ridge 1,898 2,299
Underlying Horticulture EBITDA42,589 38,933
Depreciation and amortisation(8,387)(7,840)
Underlying Horticulture EBIT34,202 31,093
NZ IFRS impacts877(669)
Horticulture EBITDA43,46638,263
Horticulture EBIT35,07930,423
Capital employed169,499 157,903
Return on capital employed21%21%
NB: The table above includes 100 per cent of the EBITDA contribution from Fern Ridge. Approximately 27 per cent of Fern Ridge is owned by minority shareholders.
We record a minority interest of $0.4 million (2017: $0.4 million) in our group results reflecting their share of tax paid profit from Fern Ridge.
Annual Report - Year Ended 31 December 2018
29
Divisional Overview
The Horticulture division generated record revenue of $255
million, up 15% on the prior year (2017: $222 million) and
Underlying EBITDA of $42.6 million, an increase of 9% on the
previous year (2017: $38.9 million). These increases resulted
from a return to expected growing conditions compared to
2017, together with ongoing investment in the Middle East
and Asia markets and strong demand from Europe, which
delivered an overall growth in apple prices.
Non-cash NZ IFRS adjustments, before tax, in 2018 and 2017
relate to revaluation of foreign exchange contracts and fair
value gains on unharvested agricultural produce.
Note that gains and losses on foreign exchange contracts
closed out during the year are a normal part of our business
and are included in the calculation of Underlying EBITDA.
20182017201620152014
Orchard
Total planted orchard (at time of harvest)*Ha.1,149 1,142 1,042 1,052 1,037
Fully mature equivalent planted orchardHa.1,057 1,043 922 902 871
Apples picked (Mr Apple orchards)TCE 000s5,090 4,434 4,360 4,433 3,668
Apples packed (Mr Apple + external growers
(Hawke’s Bay))TCE 000s4,739 4,354 4,150 3,809 3,327
Exported volume
Mr AppleTCE 000s3,867 3,545 3,546 3,155 2,752
External growers **TCE 000s1,964 2,0781,187 1,019 1,218
TotalTCE 000s5,831 5,6224,733 4,174 3,970
Mr Apple packout %%76%80%81%71%75%
Total NZ productionTCE 000s20,687 18,956 19,346 18,360 17,259
Mr Apple own grown volume share of NZ production%18.7%18.7%18.3%17.2%15.9%
*Planted orchard at the end of the year was 1,160 hectares.
**External grower volumes in 2017 and 2018 include Fern Ridge Fresh.
In summary:
• Around 590 million apples were picked from Mr Apple’s planted apple orchards, a new record for the company.
• This equated to a gross production of 5.09 million TCEs (on average there were 116 apples in a TCE) from which 3.87 million
TCEs were exported.
• Together with our external growers, the division sold 5.83 million TCEs, up 4 per cent on 2017.
• Production from our owned and leased orchards continued to be significant to the national apple crop, continuing to account for
18.7 per cent of the national crop (2017: 18.7 per cent).
Orchard Statistics
We continue to monitor and report against various operating statistics, a selection of which are noted below.
30
Scales Corporation Limited
Divisional Overview
Volumes and Prices
Volumes and prices (on a NZD FOB basis) for 2018 and 2017 are noted below.
Varietal Performance - Mr Apple Volumes
Volumes by Variety (TCE 000s)20182017
Premium Varieties
NZ Queen457 406
Pink Lady359 253
Red Sports (Fuji and Royal Gala)959 809
Other126 148
Total1,901 1,616
Growth18%(2%)
% premium49%46%
Traditional Varieties
Braeburn742 758
Royal Gala557 567
Other667 604
Total1,966 1,928
Growth2%2%
Total Mr Apple owned and leased orchards3,867 3,545
Growth9%(0%)
Prices by Variety (NZD / TCE (FOB))
Weighted average price for premium varieties 38.8 36.8
Weighted average price for traditional varieties 32.7 30.8
Total weighted average price 35.7 33.5
We were pleased to achieve improved pricing for both our premium and traditional apple varieties in 2018 compared to 2017. Our
weighted average FOB price was up 7 per cent on 2017 reflecting a change in mix, with premium varieties accounting for nearly 50
per cent of all sales, together with minor favourable movements in foreign exchange rates. We are confident that the strategy to
redevelop our orchards will continue to deliver improvements in pricing, particularly in respect of premium varieties, in future periods.
Annual Report - Year Ended 31 December 2018
31
Divisional Overview
2019 Outlook
As previously noted, as a result of our replanting strategy, Mr Apple’s total orchard production is likely to reduce temporarily in the
near term with volumes forecast to return to current levels by 2023. However, our expectation is that we will return to long-run
average packout rates over this period and we expect these to be accompanied by an increase in average pricing, assuming positive
market conditions are maintained.
We are also excited to continue our focus of investing in the Mr Apple brand. This will ensure our product is clearly differentiated in
the market as a premium-quality product, allowing us to maximise returns year-on-year.
20172019F20182020F2021F2022F2023F2024F
3,545
3,620
3,867
3,598
3,590
3,747
3,900
4,025
1,616
1,929
1,882
1,737
1,901
1,966
1,987
1,611
2,058
1,532
2,202
1,546
2,346
1,554
2,465
1,560
NB: Volumes from 2019 onwards are forecast, actual results may differ from forecast.
32
Scales Corporation Limited
Divisional Overview
20182017
NZD:USD0.69 0.69
NZD:EUR0.580.60
NZD:GBP0.48 0.46
NZD:CAD0.86 0.88
Volume growth in 2018 was concentrated within the sale of
premium varieties, which collectively recorded an increase of
18 per cent over 2017 export volumes to 1.90 million TCEs.
Growth was strong across most varieties reflecting our strategy
to focus on varieties that appeal to the Asia market. Traditional
varieties also increased by 2 per cent, from 1.93 million TCEs
to 1.97 million TCEs, notwithstanding the redevelopment of
our traditional orchards.
Exchange Rates
Weighted average exchange rates for 2018 and 2017 are
summarised in the table below.
3,500
3,000
2,500
2,000
1,500
1,000
500
0
201020112012201320142015201620172018
4,000
Other Premium
Red Sports
(Fuji and Royal Gala)
Pink Lady
NZ Queen
Other Traditional
Royal Gala
Braeburn
Volumes by Variety
Mr Apple Own Export Volumes (TCE 000s)
Whilst there were minor movements in exchange rates
compared to 2017, our overall foreign exchange position in
2018 provided a net benefit. As previously stated, we have a
natural hedge for some US dollar exposure and combine this
with formal hedge contracts for the remaining US dollar and
other foreign currency exposure. It is our policy to manage
foreign exchange exposure and minimise the impact of any
volatility in spot rates.
We note that foreign exchange spot rates may present a
headwind for the business post-2019 should the current
exchange rates prevail.
Premium VarietiesTraditional Varieties
Storage & Logistics
Divisional Components of EBITDA
Overview and Divisional Developments
Our Storage & Logistics division changed significantly during
the year as a result of:
• The sale of Liqueo, our bulk liquid storage business, in
August 2018.
• The conditional sale of Polarcold, our controlled
temperature storage and warehousing business, in May
2018, which remains subject to OIO approval.
The deadline for satisfaction of the OIO condition has been
extended to 31 May 2019 and, assuming this is granted, our
Storage & Logistics division will be renamed the “Logistics”
division and will comprise:
• Scales Logistics – leaders in ocean freight services to
exporters and importers of perishable products, with offices
in Auckland, Christchurch, Tauranga, Hawke’s Bay,
and Melbourne.
• Balance Cargo – providers of air freight services, including
a purpose built chiller and warehousing facilities, based
in Christchurch.
2017
Liqueo
$1.3m
7%
Scales
Logistics
$3.3m
17%
Polarcold
$14.5m
76%
2018
Liqueo
$1.1m
5%
Scales
Logistics
$4.9m
23%
Polarcold
$15.1m
72%
NB: EBITDA for Polarcold is Underlying EBITDA. 2018 Liqueo EBITDA
is for the part year from 1 January 2018 to 13 August 2018 (being
the date of settlement of the sale of Liqueo).
34
Scales Corporation Limited
Divisional Overview
Financial Performance
The key operational metrics and the summarised financial performance for the Storage & Logistics division are shown below.
Storage & Logistics
20182017
Key Operational Metrics
Polarcold
Total available refrigerated coldstore space
(at end of year)m
3
000s722.1775.1
Scales Logistics
TEUs shippedTEUs35,210 29,481
Airfreight tonnes managedMT9,251 6,217
Financial Performance$’000$’000
(Restated)
Underlying Revenue153,169 125,998
Underlying EBITDA
Polarcold15,142 14,495
Scales Logistics4,882 3,295
Liqueo1,093 1,335
Underlying Storage & Logistics EBITDA21,117 19,125
Depreciation and amortisation(5,776)(5,824)
Underlying Storage & Logistics EBIT15,341 13,301
NZ IFRS impacts(16,215)(15,552)
Logistics EBITDA 4,902 3,573
Logistics EBIT4,665 3,419
Capital employed91,838 91,240
Return on capital employed16%13%
The Storage & Logistics division experienced strong growth in
2018 with Underlying EBITDA of $21.1 million, an increase of
10 per cent on 2017 Underlying EBITDA of $19.1 million:
• There was a solid performance from Polarcold, which
recognised a 4 per cent increase in Underlying EBITDA.
• Scales Logistics delivered a standout performance with a 48
per cent increase in EBITDA. The equivalent of 35,210 TEUs
of ocean freight were shipped during the year, up 19 per
cent on 2017, and 9,251 tonnes of airfreight was handled,
up 49 per cent on the prior year.
• Liqueo also performed well in the period up until its sale in
August 2018.
2019 Outlook
The year has stated positively for the Storage & Logistics
division. Polarcold is operating close to capacity with benefits
being obtained from the recently installed racking system.
Scales Logistics has also experienced a positive start, with
activity expected to remain at 2018 levels.
Following the divestment activity in 2018, Scales is committed
to further opportunities for growth, both organic and through
acquisition, for this division in 2019.
NB: Capital Employed and ROCE for 2018 is based on Scales Logistics and Polarcold. Liqueo has been excluded due to the Nil balance of capital employed at year end.
Annual Report - Year Ended 31 December 2018
35
Divisional Overview
Food Ingredients
Overview
Our Food Ingredients division converts agricultural by-
products into valuable food commodities. The division
comprises 4 businesses:
• Meateor New Zealand – a processor and marketer of pet
food ingredients for the global pet food industry with
processing plants in Whakatu and Dunedin. In March
2019, Scales announced that Alliance had acquired a 50
per cent interest in Meateor’s New Zealand business.
• Meateor Australia – a marketer of petfood ingredients.
• Shelby – a 60 per cent ownership of a US procurer,
processor and marketer of ingredients for the petfood
industry, purchased in December 2018.
• Profruit – a 50 per cent owned manufacturer of high
quality apple, kiwifruit and pear juice concentrates,
located in Hawke’s Bay.
This division is proving to present a number of exciting
developments and opportunities.
Divisional Developments
The most significant development within this division was
the acquisition of a controlling interest in Shelby, which adds
80,000 MT of petfood ingredient sales to the Group. This will
increase the breadth and geographical diversity of proteins
that we source as well as improving the strategic positioning of
Meateor with its customers.
Notwithstanding the acquisition of Shelby, there was pleasing
growth in both revenues and profitability within the Food
Ingredients division. Excluding volumes contributed by
Shelby, Meateor’s volume of petfood sold in 2018 increased 5
percent on 2017 to 29,028 MT (2017: 27,663 MT).
Profruit sales volumes increased by 10 percent to 6.2 million
litres of juice concentrate (2017: 5.6 million litres), reflecting the
return to more normal apple growing and cropping conditions.
36
Scales Corporation Limited
Divisional Overview
Financial Performance
The table below outlines key operational metrics and the summarised financial performance for Food Ingredients:
Food Ingredients
20182017
Key Operational Metrics
MeateorMT29,028 27,663
Profruitlitres 000s6,219 5,579
Financial Performance$’000$’000
(Restated)
Meateor revenue83,054 68,855
Underlying Food Ingredients EBITDA 10,225 8,041
Depreciation and amortisation(582)(532)
Underlying Food Ingredients EBIT9,643 7,509
NZ IFRS impacts796 -
Food Ingredients EBITDA 11,021 8,041
Food Ingredients EBIT10,439 7,509
Capital Employed35,32423,137
Return on capital employed32%37%
NB: Capital employed and ROCE exclude Shelby.
Food Ingredients delivered a record profit in 2018, achieving Underlying EBITDA of $10.2 million for the first time. This was an
increase of 27 per cent on 2017 Underlying EBITDA of $8.0 million. Strong revenue growth was matched by profit improvement,
as Meateor achieved increases in sales volume coupled with improved sale prices and margins.
Profruit delivered an excellent result, with our share of earnings being $1.7 million, an increase of 24 per cent on 2017
(2017: $1.4 million).
2019 Outlook
The outlook for the Food Ingredients division is extremely positive with the significant developments of 2018 and early 2019
positioning the division towards achieving its long-run earnings objectives. We expect 2019 volumes to be significantly higher with
the inclusion of Shelby sales, the impact of our JV with Alliance, and with demand expected to remain firm.
Annual Report - Year Ended 31 December 2018
37
Divisional Overview
Map data ©2018 Google
Setting the
standard
Leadership Profiles
Tim was elected to the Board in 2014, having been
appointed Chair of Scales’ Horticulture division in 2012. He
has been involved in agribusiness for nearly 40 years and
was CEO of Zespri International from 2003 to 2007. Tim is
currently: Chair of The Nutritious Kiwifruit Company Limited,
which is a consortium of New Zealand kiwi fruit suppliers
selling under a new single brand, based around nutrition and
health, on the Australian market; Director of Prevar Limited,
an Australian and New Zealand joint venture apple and
pear industry company, supporting the development and
commercialisation of new apple and pear varieties; Director
of Nagambie Healthcare, a community hospital and aged
care facility, based in regional Victoria, Australia; President of
Nagambie Lakes Tourism and Commerce Incorporated; and
Director of Featherston Resources Limited. Tim is a member
of Scales’ Nominations and Remuneration Committee.
Board of Directors (as at 22 March 2019)
Andy joined Scales in 2007 and became Managing Director
in 2011. Prior to joining Scales he had a 20 year career in
banking, with his final role being Head of Corporate at
Westpac New Zealand. Andy has overall responsibility for the
strategic direction and day-to-day management of Scales. In
addition to his directorships of the Group, Andy is currently
the Chair of Akaroa Salmon Limited, Primary Collaboration
New Zealand Limited and Primary Collaboration New Zealand
(Shanghai) Co. Limited, and is a Director of apple and
pear industry body New Zealand Apples & Pears, George
H Investments Limited, Rabobank New Zealand Limited,
Rabobank Australia Limited and Rabo Australia Limited. Andy
is a member of Scales’ Finance and Treasury Committee and
Scales’ Health and Safety Committee.
Nick was elected to the Board in 2014, having been appointed
a Director of both Scales’ Storage & Logistics division and
Meateor in 2012. Nick was previously the Managing Director,
and was one of the founding shareholders of Hellers Limited,
New Zealand’s largest bacon, ham and small goods company.
Nick is a shareholder and Director of several private companies.
He also chairs Enterprise North Canterbury Trust and is Deputy
Chair of the Canterbury Hockey Association. Nick is Chair
of Scales’ Health and Safety Committee and is a member of
Scales’ Audit and Risk Management Committee.
Mark was elected to the Board in 2011. He is a founding
partner of Direct Capital. Mark has a background in private
equity, specialising in portfolio management with a focus
on strategy, growth and capital funding. Mark is currently a
Director of a number of Direct Capital entities and portfolio
companies including George H Investments Limited. Mark
is also: Director of dual listed (NZX and ASX) New Zealand
King Salmon Investments Limited; and Director of investment
company, Evergreen Partners Limited. Mark is Chair of Scales’
Nominations and Remuneration Committee, Scales’ Finance
and Treasury Committee and is a member of Scales’ Audit and
Risk Management Committee.
Tim Goodacre,
Non-Executive
Independent Chair
Nick Harris,
Non-Executive
Independent Director
Andrew (Andy)
Borland,
Executive Director
Mark Hutton,
Non-Executive
Independent Director
Annual Report - Year Ended 31 December 2018
39
Leadership Profiles
Board of Directors (continued)
Alan was elected to the Board in 2014. Alan was the
President of the International Cricket Council between
2012 and 2014 and is currently; Chair of McGrathNicol
and Partners NZ and the Basin Reserve Trust; a Director of
Oceania Healthcare (NZ) Limited, Skellerup Holdings Limited
and a number of private companies. Alan has an extensive
background in the accounting and finance field and is a
former National Chair of KPMG. He was made a Companion
of the New Zealand Order of Merit (CNZM) in 2013 for
services to cricket and business. Alan is Chair of Scales’ Audit
and Risk Management Committee.
Tomakin was appointed to the Board on 28 January 2019.
He is a Director of China Resources Ng Fung Limited, which
holds a 15.24% shareholding in the Company, and is also the
Vice President, Chief Financial Officer and Company Secretary
of China Resources Enterprise, Limited. Tomakin joined the
China Resources Group in 2008, and holds both a Business
Administration degree from the Chinese University of Hong
Kong, and a Master of Business Administration degree from
the University of Manchester. He has extensive experience
in internal and external auditing, finance and accounting,
regulatory and compliance, and as a company secretary.
Nadine was appointed to the Board on 26 February 2019.
Nadine is currently CEO of Ngai Tahu owned, Oha Honey
LP, which farms in excess of 35,000 bee hives nationwide.
Nadine has extensive horticulture and wider primary industry
management experience from a number or previous roles.
Nadine also brings experience from a wide variety of
governance and advisory roles, including as a member of
the Primary Sector Council, and as the former Chair of New
Zealand Apples & Pears.
Alan Isaac,
Non-Executive
Independent Director
Nadine Tunley
Non-Executive
Independent Director
Lai Po Sing, Tomakin
Non-Executive Director
40
Scales Corporation Limited
Leadership Profiles
Andy Borland, Managing Director
Andy joined Scales in 2007 and became Managing Director in
2011. Andy’s full biography is set out above.
Hamish Davis, Managing Director Fern Ridge
Hamish joined Fern Ridge in 2001, becoming Managing
Director in 2008 following supply management and sales roles.
He has over 30 years experience in the growing and post-
harvest sectors of the apple industry, and remains very active in
export sales for the company.
Stephen Foote, CEO Polarcold
Stephen has been with the Polarcold group of companies
in various management roles for 25 years. Prior to that,
Stephen worked for Dominion Breweries and had interests in
orcharding in Hawke’s Bay.
Brett Frankel, President Shelby Foods
Brett established United States based Shelby Foods in 2007,
and has been its President since inception. Brett has over 20
years experience in petfood, having had a senior procurement
role prior to starting Shelby. He also represents the 3rd
generation of family involvement in the sector, following in the
footsteps of both his father and grandfather.
Steve Kennelly, Chief Financial Officer
Steve has been with Scales since 1993 in a variety of
accounting and financial roles. As CFO, Steve is responsible for
finance, funding, legal, company secretarial and information
technology. Steve is a member of Chartered Accountants
Australia and New Zealand.
Karen Morrish, Group Health & Safety,
Compliance and Sustainability Manager
Karen was appointed to this new Group role during 2017.
Prior to that Karen was the Health & Safety and Compliance
Manager for Mr Apple, where she has worked for 14 years.
Kent Ritchie, CEO Scales Logistics
Kent joined Scales in 1998, and has spent over 30 years in the
shipping industry. He has been involved in setting up shipping
services from New Zealand, has experience in all aspects of
the transport industry and has led Scales’ expansion into the
logistics arena.
John Sainsbury, CEO Meateor
John has been with Meateor in various management roles
for the last 18 years. Prior to that, John worked in senior
management, marketing and operational roles in the United
States. John was appointed CEO of Meateor Foods in
March 2015.
Andrew van Workum, CEO Mr Apple
Andrew has worked in the apple industry for over 30 years. He
joined Mr Apple at its inception in 2001 and prior to that was
General Manager of Mr Apple’s predecessor, Grocorp Pacific
Limited, where he worked for 16 years. He has extensive
experience in the production aspects of the apple industry, and
was previously a Director of Pipfruit New Zealand.
Management Profiles
Annual Report - Year Ended 31 December 2018
41
Leadership Profiles
Attention
to detail
Financial Statements
Contents
Comprehensive income 44
The income earned and operating expenditure incurred
by the Scales Group during the financial year (profit or
loss) followed by the other comprehensive income that is
taken to reserves in equity.
Changes in equity 46
The opening balance, details of movements during
the year and the balance of each component of
shareholders’ equity at the end of the financial year.
Financial position 47
The Scales Group assets, liabilities and equity at the end
of the financial year.
Cash flows 48
Cash generated and used in the operating, investing and
financing activities of the Scales Group.
Notes to the Financial Statements 50
A. Segment information 52
B. Financial performance 54
B1. Revenue
B2. Cost of sales, administration and
operating expenses
B3. Other income and losses
B4. Finance cost
B5. Taxation
B6. Foreign currency transactions
C. Key assets 59
C1. Property, plant and equipment
C2. Unharvested agricultural produce
C3. Investments accounted for using the
equity method
C4. Goodwill
C5. Inventories
C6. Impairment of assets
D. Capital funding 64
D1. Share capital
D2. Reserves
D3. Dividends
D4. Imputation credit account
D5. Earnings per share
E. Financial assets and liabilities 68
E1. Trade and other receivables
E2. Other financial assets
E3. Trade and other payables
E4. Borrowings
E5. Other financial liabilities
E6. Interest rate risk
E7. Foreign currency risk
E8. Categories of financial instruments
E9. Maturity profile of financial liabilities
F. Group structure 74
F1. Subsidiary companies
F2. Acquisition of Shelby JV LLC Group
F3. Discontinued operations
G. Other 77
G1. Capital commitments
G2. Operating lease commitments
G3. Related party disclosures
G4. Contingent liability
G5. Events occurring after balance date
H. Adoption of New and Amended
Financial Reporting Standards,
Resulting Restatements and
Other Restatements
79
Annual Report - Year Ended 31 December 2018
43
Financial StatementsFinancial Statements
44
Scales Corporation Limited
Financial Statements
20182017
NOTE$’000$’000
(Restated)*
Continuing operations
RevenueB1 402,542 335,531
Cost of salesB2(312,228)(256,682)
90,314 78,849
Share of profit of entity accounted for using the equity methodC31,706 1,376
Other incomeB3236 1
Administration and operating expensesB2(40,512)(34,286)
Other lossesB3- (635)
EBITDA51,744 45,305
Amortisation (534)(295)
DepreciationC1(8,713)(8,284)
EBIT42,497 36,726
Finance revenue265 155
Finance costB4(2,695)(3,039)
PROFIT BEFORE INCOME TAX EXPENSE FROM CONTINUING OPERATIONS40,067 33,842
Income tax expense B5(11,044)(9,277)
PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS29,023 24,565
Profit from discontinued operations net of taxF316,476 7,052
PROFIT FOR THE YEAR45,499 31,617
Profit for the year from continuing operations is attributable to:
Equity holders of the Company28,608 24,124
Non-controlling Interests 415 441
29,023 24,565
Profit for the year from discontinued operations is fully attributable to equity holders of the Company.
EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE
COMPANY:
Basic earnings per share (cents):
Continuing operations D520.5 17.4
Discontinued operationsD511.8 5.1
TotalD532.2 22.5
Diluted earnings per share (cents):
Continuing operationsD520.4 17.3
Discontinued operationsD511.7 5.1
Total D532.1 22.4
The notes to the financial statements on pages 50 to 80 form part of and should be read in conjunction with this statement.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018
* The restatements to comparative period are explained in Section H.
Annual Report - Year Ended 31 December 2018
45
Financial Statements
20182017
NOTE$’000$’000
(Restated)*
OTHER COMPREHENSIVE INCOME
Items that may be reclassified subsequently to profit or loss:
Loss on cash flow hedges (6,775)(6,163)
Income tax relating to cash flow hedges 1,897 1,726
Foreign exchange gain on translating foreign operations 49 -
(4,829)(4,437)
Items that will not be reclassified to profit or loss:
Revaluation of land and buildings 9,762 4,200
Income tax relating to buildings(175)(588)
Revaluation of apple trees(466)-
Income tax relating to apple trees131 -
9,252 3,612
OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEARD24,423 (825)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR49,922 30,792
Total comprehensive income for the year attributable to:
Equity holders of the Company49,507 30,351
Non-controlling Interests415 441
49,922 30,792
The notes to the financial statements on pages 50 to 80 form part of and should be read in conjunction with this statement.
Consolidated Statement of Comprehensive Income (continued)
for the year ended 31 December 2018
* The restatements to comparative period are explained in Section H.
46
Scales Corporation Limited
Financial Statements
Share
CapitalReserves
Retained
Earnings
Attributable
to Owners
of the
Company
Non-
controlling
InterestsTotal
NOTE$’000$’000$’000$’000$’000$’000
Balance at 1 January 2017
(Restated)*89,748 67,785 56,651 214,184 406 214,590
Profit for the year- - 31,176 31,176 441 31,617
Other comprehensive loss for
the year- (825)- (825)- (825)
Total comprehensive (loss)
income for the year- (825)31,176 30,351 441 30,792
Shares issuedD1970 - - 970 - 970
Recognition of share-based
paymentsD2- 389 - 389 - 389
Shares soldD1, D2179 - - 179 - 179
Shares fully vestedD1, D22,853 (462)(591)1,800 - 1,800
DividendsD3- - (26,397)(26,397)(406)(26,803)
Balance at 31 December 2017
(Restated)*93,750 66,887 60,839 221,476 441 221,917
Profit for the year- - 45,084 45,084 415 45,499
Other comprehensive income
for the year- 4,423 - 4,423 - 4,423
Total comprehensive income for
the year- 4,423 45,084 49,507 415 49,922
Business acquisition- - - - 3,165 3,165
Transfer to retained earningsD2- (129)129 - - -
Recognition of share-based
paymentsD2- 849 - 849 - 849
Shares soldD1, D2109 - - 109 - 109
Shares fully vestedD1, D2325 (31)(46)248 - 248
DividendsD3- - (25,897)(25,897)(440)(26,337)
Balance at 31 December 201894,184 71,999 80,109 246,292 3,581 249,873
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018
The notes to the financial statements on pages 50 to 80 form part of and should be read in conjunction with this statement.
* The restatements to comparative period are explained in Section H.
Annual Report - Year Ended 31 December 2018
47
Financial Statements
20182017
NOTE$’000$’000
(Restated)*
EQUITY
Share capitalD194,184 93,750
ReservesD271,999 66,887
Retained earningsD280,109 60,839
Equity attributable to Scales Corporation Limited shareholders246,292 221,476
Equity attributable to Non-controlling Interests3,581 441
TOTAL EQUITY249,873 221,917
CURRENT ASSETS
Cash and bank balances2,790 5,690
Trade and other receivablesE122,910 23,437
Other financial assetsE23,921 6,415
Unharvested agricultural produceC220,547 20,189
InventoriesC545,442 22,212
Prepayments3,391 3,423
99,001 81,366
Assets held for saleF3104,378 -
TOTAL CURRENT ASSETS203,379 81,366
NON-CURRENT ASSETS
Property, plant and equipmentC1150,586 228,881
Investments accounted for using the equity methodC35,213 4,507
GoodwillC443,875 18,177
Other financial assetsE26,903 7,764
Computer software 1,131 1,811
TOTAL NON-CURRENT ASSETS207,708 261,140
TOTAL ASSETS411,087 342,506
CURRENT LIABILITIES
Bank overdrafts3,749 -
Trade and other payablesE327,282 22,215
Dividend declaredD313,299 12,586
BorrowingsE43,329 6,500
Current tax liabilities845 2,739
Other financial liabilitiesE55,663 4,331
54,167 48,371
Liabilities associated with assets held for saleF319,281 -
TOTAL CURRENT LIABILITIES73,448 48,371
NON-CURRENT LIABILITIES
BorrowingsE464,664 40,000
Deferred tax liabilitiesB515,588 28,175
Other financial liabilitiesE57,514 4,043
TOTAL NON-CURRENT LIABILITIES87,766 72,218
TOTAL LIABILITIES161,214 120,589
NET ASSETS249,873 221,917
Consolidated Statement of Financial Position
as at 31 December 2018
The notes to the financial statements on pages 50 to 80 form part of and should be read in conjunction with this statement.
* The restatements to comparative period are explained in Section H.
48
Scales Corporation Limited
Financial Statements
20182017
NOTE$’000$’000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers460,458 393,145
Dividends received1,019 1,018
Interest received280 175
461,757 394,338
Cash was disbursed to:
Payments to suppliers and employees(409,843)(345,660)
Interest paid(2,695)(3,039)
Income tax paid(12,652)(13,271)
(425,190)(361,970)
NET CASH GENERATED BY OPERATING ACTIVITIES 36,567 32,368
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Proceeds from sale of Liqueo Bulk Storage Limited net of cash in Liqueo20,323 -
Advances repaid487 866
Sale of property, plant and equipment and computer software120 147
20,930 1,013
Cash was applied to:
Net cash outflow on acquisition of businessesF2(35,269)(978)
Purchase of computer software(827)(1,654)
Purchase of financial instruments(932)(5)
Purchase of property, plant and equipment(15,589)(11,826)
(52,617)(14,463)
NET CASH USED IN INVESTING ACTIVITIES(31,687)(13,450)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from term facility borrowings33,945 10,000
Proceeds from seasonal facility borrowings67,500 52,500
Proceeds from related party borrowings1,329 -
Treasury stock sold109 179
102,883 62,679
Cash was applied to:
Repayments of term facility borrowings(10,000)-
Repayments of seasonal facility borrowings(72,000)(57,000)
Dividends paid(25,184)(24,856)
Dividends paid to non-controlling interests(440)(406)
(107,624)(82,262)
NET CASH USED IN FINANCING ACTIVITIES(4,741)(19,583)
NET INCREASE (DECREASE) IN NET CASH139 (665)
Net foreign exchange difference(59)-
Cash and cash equivalents at the beginning of the year5,690 6,355
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR5,770 5,690
Represented by:
Cash and bank balances 2,790 5,690
Bank overdrafts(3,749)-
Cash and bank balances attributable to discontinued operationsF36,729 -
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR5,770 5,690
The notes to the financial statements on pages 50 to 80 form part of and should be read in conjunction with this statement.
Consolidated Statement of Cash Flows
for the year ended 31 December 2018
Annual Report - Year Ended 31 December 2018
49
Financial Statements
20182017
$’000$’000
(Restated)
NET CASH GENERATED BY OPERATING ACTIVITIES
Reconciliation of profit for the year to net cash generated by operating activities:
Profit for the year 45,499 31,617
Non-cash items:
Amortisation 643 588
Deferred tax1,306 1,126
Depreciation10,779 13,661
Share of equity accounted results(1,706)(1,376)
Share-based payments983 523
Change in gross liability on put options(147)628
Gain on disposal of Liqueo(8,174)-
Items classified as investing and financing activities:
Working capital amounts included in acquisition of businesses8,180 (54)
Dividends received from equity accounted entity1,000 1,000
Gain on disposal of property, plant and equipment127 36
Changes in net assets and liabilities:
Trade and other receivables (8,599)(5,908)
Unharvested agricultural produce (358)(1,756)
Inventories (23,345)(5,847)
Prepayments (302)232
Trade and other payables 9,733 168
Current tax 948 (2,270)
NET CASH GENERATED BY OPERATING ACTIVITIES36,567 32,368
Statement of Cash Flows
For the purpose of the statement of cash flows, cash and cash equivalents include cash and bank balances and bank overdrafts.
The following terms are used in the statement of cash flows:
Operating activities are the principal revenue producing activities of the Group and other activities that are not investing or
financing activities.
Investing activities are the acquisition and disposal of long-term assets and other investments not included in
cash equivalents.
Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of
the Group.
For and on behalf of the Board of Directors who authorised the issue of the financial statements on 26 February 2019.
Andy Borland, Managing Director Tim Goodacre, Chair
Consolidated Statement of Cash Flows (continued)
for the year ended 31 December 2018
Notes to the Financial Statements
The notes to the financial statements include information which is considered relevant and material to assist the reader
in understanding the financial performance and financial position of the Scales Corporation Limited Group (Scales).
Information is considered relevant and material if:
• the amount is significant because of its size and nature;
• it is important for understanding the results of Scales;
• it helps to explain changes in Scales’ business; or
• it relates to an aspect of Scales’ operations that is important to future performance.
Scales Corporation Limited (the “Company”) is a for-profit entity domiciled and registered under the Companies Act 1993 in New
Zealand. It is an FMC reporting entity for the purposes of the Financial Markets Conduct Act 2013. The Group consists of Scales
Corporation Limited, its subsidiaries and joint venture. The principal activities of the Group are to provide logistics services, grow
apples, export products, provide insurance services to companies within the Group and operate storage and processing facilities.
The financial statements have been prepared:
• in accordance with Generally Accepted Accounting Practice (GAAP), International Financial Reporting Standards (IFRS), the New
Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable financial reporting standards,
as appropriate for a Tier 1 for-profit entity;
• in accordance with the requirements of the Financial Markets Conduct Act 2013;
• in accordance with accounting policies that are consistent with those applied in the previous year except for adoption of NZ IFRS
9 Financial Instruments and NZ IFRS 15 Revenue from Contracts with Customers;
• on the basis of historical cost, except for certain assets and financial instruments that are measured at fair values; and
• in New Zealand dollars with all values rounded to the nearest thousand dollars.
Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is 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, regardless of whether that price is directly observable or estimated using another valuation
technique. In estimating the fair value of an asset or liability, the Group takes into account the characteristics of the asset or liability if
market participants would take those characteristics into account when pricing the asset or liability at the measurement date.
For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the
inputs to the fair value measurements are observable. The levels are described as:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date;
• Level 2 inputs are inputs, other than quoted prices within Level 1, that are observable for the asset or liability, either directly or
indirectly; and
• Level 3 inputs are unobservable inputs for the asset or liability.
Key judgements and estimates
In the process of applying the Group’s accounting policies and the application of financial reporting standards, Scales has made a
number of judgements and estimates. The estimates and underlying assumptions are based on historical experience and various
other factors that are considered to be appropriate under the circumstances. Actual results may differ from
these estimates.
Judgements and estimates which are considered material to understanding the performance of Scales are explained in the
following notes:
• Apple trees in note C1;
• Unharvested agricultural produce in note C2.
Basis of consolidation
The Group financial statements incorporate the financial statements of the Company and its subsidiaries (being entities controlled by
Scales Corporation Limited), and the equity accounted result, assets and liabilities of the joint venture.
The financial statements of members of the Group, are prepared for the same reporting period as the parent company, using
consistent accounting policies.
In preparing the Group financial statements, all material intra-group transactions, balances, income, expenses and cash flows have
been eliminated. Subsidiaries are consolidated from the date on which control is obtained to the date on which control is lost.
50
Scales Corporation Limited
Financial Statements
Annual Report - Year Ended 31 December 2018
51
Financial Statements
Other accounting policies
Other accounting policies that are relevant to an understanding of the financial statements are provided throughout the notes to the
financial statements.
Change in accounting policy on adoption of amendments to financial reporting standards, new financial reporting
standards and resulting restatement
See Note H.
Adoption of New and Revised Standards and Interpretations - Standards and Interpretations in Issue not yet Effective
NZ IFRS 16 Leases
NZ IFRS 16 Leases introduces a comprehensive model for the identification of lease arrangements and accounting treatments
for both lessors and lessees. NZ IFRS 16 will supersede the current lease guidance including NZ IAS 17 Leases and the related
interpretations when it becomes effective on 1 January 2019.
NZ IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. The
distinction between operating leases (off balance sheet) and finance leases (on balance sheet) is removed for lessee accounting, and
is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all
on balance sheet) except for short-term leases and leases of low value assets.
The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less
accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially
measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for
interest and lease payments, as well as the impact of lease modifications, among others. Furthermore, the classification of cash
flows will also be affected as operating lease payments under NZ IAS 17 are presented as operating cash flows; whereas under
the NZ IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing
and operating cash flows respectively.
In contrast to lessee accounting, NZ IFRS 16 substantially carries forward the lessor accounting requirements in NZ IAS 17, and
continues to require a lessor to classify a lease either as an operating lease or a finance lease.
Furthermore, extensive disclosures are required by NZ IFRS 16.
The Group will apply NZ IFRS 16 on 1 January 2019 using the modified retrospective (full simplified) transition method. Comparative
periods presented will not be restated.
Most of the Group’s non-cancellable operating lease commitments will meet the definition of a lease under NZ IFRS 16, and hence
the Group will recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify for low
value or short-term leases upon the application of NZ IFRS 16. The expense previously recorded in relation to operating leases will
move from being included in operating expenses (and within EBITDA), to depreciation and finance expense. The impact on net
earnings before income tax of an individual lease over its term remains the same, however, the new standard will result in a higher
interest expense in early years, and lower in later years of a lease, compared with the current straight-line expense profile of an
operating lease.
The estimated impact on the statement of profit or loss for the year ending 31 December 2019 would be a decrease in operating
expenses of approximately $8.7 million offset by an increase in depreciation of $6.8 million and an increase in net finance expense
of $3.5 million. This would result in an increase in EBITDA of $8.7 million but a decrease in net earnings before income tax of $1.6
million. The estimated impact on the statement of financial position as at 1 January 2019 would be an increase in total assets of
$72.9 million with an equal and opposite increase in total liabilities.
Other
The Group has reviewed all other Standards, Interpretations and Amendments to existing Standards in issue not yet effective and,
except as noted above, does not expect these Standards to have a material effect on the financial statements of the Group.
52
Scales Corporation Limited
Financial Statements
A. Segment Information
This section explains the financial performance of the operating segments of Scales, providing additional information
about individual segments, including:
• total segment revenue and revenue from external customers;
• segment profit before income tax; and
• total segment assets and liabilities.
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker,
being the Managing Director. The Managing Director monitors the operating performance of each segment for the purpose of
making decisions on resource allocation and strategic direction. Inter-segment pricing is determined on an arm’s length basis.
Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. No
single external customer’s revenue accounts for 10% or more of the Group’s revenue. All non-current assets are located in New
Zealand and United States of America.
The Group comprises the following operating segments:
Food Ingredients: processing and marketing of food ingredients such as pet food ingredients and juice concentrate. Meateor Foods
Limited, Meateor Foods Australia Pty Limited, Shelby JV LLC Group (Shelby Cold Storage Inc, Shelby Exports Inc, Shelby Foods Inc,
Shelby JV LLC, Shelby Properties LLC, Shelby Trucking Corp) and Profruit (2006) Limited.
Horticulture: orchards, fruit packing and marketing. Mr Apple New Zealand Limited, New Zealand Apple Limited, Fern Ridge Produce
Limited and Longview Group Holdings Limited.
Logistics: logistics services. Scales Logistics Limited and Scales Logistics Australia Pty Ltd.
Other: Scales Corporation Limited, Geo. H. Scales Limited, Meateor Group Limited, Meateor US LLC, Scales Employees Limited,
Scales Holdings Limited and Selacs Insurance Limited.
Liqueo Bulk Storage Limited was sold, and Polarcold Stores Limited and Whakatu Coldstores Limited were reclassified to held for
sale during the year. These entities were excluded from the “Storage and Logistics” segment and the segment was renamed to
“Logistics”. See Note F3 for detail and the results of those entities.
Horticulture
Food
IngredientsLogisticsOtherEliminationsTotal
$'000$'000$'000$'000$'000$'000
2018
Total segment revenue254,568 83,053 89,270 3,756 (28,105)402,542
Inter-segment revenue- - (24,783)(3,322)28,105 -
Revenue from external customers254,568 83,053 64,487 434 - 402,542
Gain on sale of non-current assets72 - - - - 72
Share of profit of entity accounted for
using equity method- 1,706 - - - 1,706
EBITDA43,466 11,021 4,902 (7,645)- 51,744
Amortisation expense(471)(4)(31)(28)- (534)
Depreciation expense(7,916)(578)(206)(13)- (8,713)
Finance revenue189 4 1 71 - 265
Finance costs(14)- (34)(2,647)- (2,695)
Segment profit (loss) before income tax35,254 10,443 4,632 (10,262)- 40,067
Annual Report - Year Ended 31 December 2018
53
Financial Statements
Horticulture
Food
IngredientsLogisticsOtherEliminationsTotal
$'000$'000$'000$'000$'000$'000
Segment assets198,761 92,382 10,706 4,860 - 306,709
Segment liabilities43,958 20,330 6,650 70,995 - 141,933
Segment carrying value of investment
accounted for using the equity method- 5,213 - - - 5,213
Segment acquisition of property, plant and
equipment and computer software10,002 516 780 171 - 11,469
Property, plant and equipment and
computer software included in business
acquisitions (note F2)- 4,900 - - - 4,900
2017 (Restated)
Total segment revenue221,963 68,855 67,560 3,779 (26,626)335,531
Inter-segment revenue- - (23,495)(3,131)26,626 -
Revenue from external customers221,963 68,855 44,065 648 - 335,531
Loss on sale of non-current assets(5)- (1)- - (6)
Share of profit of entity accounted for
using the equity method- 1,376 - - - 1,376
EBITDA38,263 8,041 3,573 (4,572)- 45,305
Amortisation expense(247)(3)(19)(26)- (295)
Depreciation expense(7,593)(528)(135)(28)- (8,284)
Finance revenue94 1 - 60 - 155
Finance costs(22)- - (3,017)- (3,039)
Segment profit (loss) before income tax30,495 7,511 3,419 (7,583)- 33,842
Segment assets182,362 35,743 9,484 4,198 - 231,787
Segment liabilities38,229 7,906 5,103 51,299 - 102,537
Segment carrying value of investment
accounted for using the equity method- 4,507 - - - 4,507
Segment acquisition of property, plant
and equipment and computer software9,063 211 262 73 - 9,609
Property, plant and equipment and
computer software included in
business acquisitions- - 47 - - 47
Segment Reporting (continued)
54
Scales Corporation Limited
Financial Statements
B. Financial Performance
This section explains the financial performance of Scales, providing additional information about individual items in the
statement of comprehensive income, including:
• accounting policies, judgements and estimates that are relevant for understanding items recognised in the statement of
comprehensive income; and
• analysis of Scales’ performance for the year by reference to key areas including revenue, expenses and taxation.
B1. Revenue
2018
$’000
2017
$’000
(Restated)
By nature:
Revenue from the sale of goods312,890 276,626
Revenue from the rendering of services84,918 54,751
Fees and commission84 139
Net foreign exchange gain1,688 1,002
Net hail insurance proceeds- 119
Rental revenue2,962 2,894
402,542 335,531
By market:
New Zealand 106,543 70,357
Asia117,938 106,925
Europe93,853 76,603
North America82,968 79,480
Other1,240 2,166
402,542 335,531
By segment and type:
Horticulture - sale of agricultural produce232,041 209,631
Horticulture - agricultural produce related services19,572 9,322
Horticulture - other2,955 3,010
Food ingredients - sale of petfood ingredients82,246 68,072
Food ingredients - other807 783
Logistics services64,487 44,065
Other434 648
402,542 335,531
Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf
of third parties. The Group recognises revenue when it transfers control of a product or service to a customer.
Annual Report - Year Ended 31 December 2018
55
Financial Statements
B1. Revenue (continued)
Sale of agricultural produce
The Group sells apples to more than 160 customers in 40 countries. Sales-related quality claim provisions are recorded in accordance
with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Revenue is recognised when control of the goods has
transferred, being when the goods have been shipped to the customer (“outright sales”) or when the goods have been sold by
the customer (“consignment sales”). In addition, the apple season finishes before the end of the calendar year, with performance
obligations under both sales types satisfied for all sales made during that season.
Outright sales
Following shipment, revenue is recognised when the customer obtains control as it has full discretion over the manner of distribution
and price to sell the goods, has the primary responsibility when onselling the goods and bears the risks of loss in relation to the
goods. A receivable is recognised by the Group when it loses control, which is when the goods are delivered on the ship at the port
of shipment as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of
time is required before the payment is due. Terms of payment are up to 45 days on arrival.
Consignment sales
Revenue is recognised by the Group when it loses control, which is when the goods are confirmed to be on-sold to the customer as
this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required
before the payment is due. Terms of payment are immediate upon on-sale.
Sale of petfood ingredients
The Group sells petfood ingredients to a number of international and domestic customers. Revenue is recognised when control of
the goods has transferred, being when the goods have been delivered to the customer (“delivered to destination sales”) or when
shipped to the customer (“outright sales”). Terms of payments are up to 120 days.
Delivered to destination sales
Following delivery, revenue is recognised when the customer obtains control as it has full discretion over the manner of distribution
and price to sell the goods, has the primary responsibility when onselling the goods and bears the risks of loss in relation to goods. A
receivable is recognised by the Group when it loses control, which is when the goods are delivered to the destination named by the
customer as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time
is required before the payment is due.
Outright sales
Same as above under “Sale of agricultural produce - outright sales”.
Agricultural produce related services
The Group provides a number of agricultural produce related services to external apple growers, including packaging, cartage, export
documentation and export services. Each of those services is considered to be a distinct service as it is both regularly supplied by the
Group to customers on a stand-alone basis and is available for customers from other providers in the market.
A receivable is recognised by the Group when the service performance has been completed, and the performance obligation is
satisfied as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is
required before the payment is due. Terms of payment are up to 45 days.
Logistics services
The Group provides marine and air logistics services to domestic customers. Revenue is recognised by the Group at the point in time,
which is when the shipment is organised and the goods are on the ship or the aeroplane. The performance obligation is satisfied as
this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required
before the payment is due. Terms of payments are up to 60 days.
B2. Cost of Sales, Administration and Operating Expenses
2018
$’000
2017
$’000
(Restated)
Auditor's remuneration:
Audit of the financial statements
Audit of the annual financial statements159 139
Review of interim financial statements 41 42
Other services:
Audit of solvency certificate for Selacs Insurance Limited6 6
Anti-bribery and corruption awareness training6 -
Bad debts incurred522 47
Change in fair value adjustment to unharvested agricultural produce256 40
Change in inventories(17,510)(5,959)
Direct expenses47,037 30,871
Directors' fees463 466
56
Scales Corporation Limited
Financial Statements
2018
$’000
2017
$’000
(Restated)
Donations7 22
Electricity3,174 3,010
Employee benefits expense:
Post employment benefits - defined contribution plans1,227 1,110
Salaries, wages and related benefits67,426 58,034
Other employee benefits1,049 748
Grower payments53,036 49,613
Insurance3,594 3,240
Management fees141 119
Materials and consumables78,802 59,157
Ocean and air freight77,903 61,721
Operating lease expenses10,672 8,994
Packaging18,684 15,533
Repairs and maintenance6,045 4,015
352,740 290,968
Disclosed as:
Cost of sales312,228 256,682
Administration and operating expenses40,512 34,286
352,740 290,968
Employee Benefits
An accrual is made for benefits due to employees in respect of wages and salaries, annual leave and long service leave when it is
probable that settlement will be required and they are capable of being measured reliably. Accruals are measured at their nominal
values using the remuneration rate expected to apply at the time of settlement.
Contributions to defined contribution plans are recognised as an expense when employees have rendered service entitling them to
the contributions.
The costs relating to shares issued in accordance with the Senior Executive Share Scheme are explained in note D2.
Leased Assets
Operating lease payments, where the lessors effectively retain substantially all the risks and benefits of ownership of the leased
items, are recognised as an expense on a straight-line basis over the lease term.
B3. Other Income and Losses
2018
$’000
2017
$’000
(Restated)
Dividends18 1
Gain (loss) on disposal of property, plant and equipment72 (6)
Remeasurement of gross liability to non-controlling interest146 (629)
236 (634)
Disclosed as:
Other income236 1
Other losses- (635)
236 (634)
B2. Cost of Sales, Administration and Operating Expenses (continued)
Annual Report - Year Ended 31 December 2018
57
Financial Statements
B4. Finance Cost
2018
$’000
2017
$’000
(Restated)
Interest on loans2,417 2,729
Other interest94 180
Bank facility fees 184 130
2,695 3,039
Finance costs consist of interest and other costs incurred in connection with the borrowing of funds. Interest expense is accrued on a
time basis using the effective interest method.
B5. Taxation
Income Tax Recognised in Profit or Loss
Income tax expense comprises:
Current tax expense from continuing operations10,892 8,209
Current tax expense from discontinued operations2,736 3,235
Total current tax expense13,628 11,444
Adjustments recognised in the current year in relation to the current tax of prior years - (503)
Deferred tax expense relating to the origination and reversal of temporary differences1,277 1,186
14,905 12,127
Total income tax expense recognised in profit or loss from continuing operations11,044 9,277
Total income tax expense recognised in profit or loss from discontinued operations (Note F3)3,861 2,850
Total income tax expense recognised in profit or loss14,905 12,127
The prima facie income tax expense on pre tax accounting profit reconciles to the income tax expense
in the financial statements as follows:
Profit from continuing operations40,067 33,842
Profit from discontinued operations (Note F3)20,337 9,902
Total profit before tax60,404 43,744
Income tax expense calculated at 28%16,913 12,248
Non-assessable income(2,772)(390)
Non-deductible expenses726 443
Under (over) provision of income tax in previous year - current tax11 (503)
Under provision of income tax in previous year - deferred tax27 329
14,905 12,127
The tax rate used in the above reconciliation is the corporate tax rate of 28% payable by New Zealand companies under New
Zealand tax law, 30% payable by Australian companies under Australian law and 21% payable by US entities under US tax law.
58
Scales Corporation Limited
Financial Statements
Opening
balance
Charged to
profit or loss
Charged to other
comprehensive
income
Discontinued
operations
Closing
balance
$'000$'000$'000$'000$'000
Deferred Tax Liability
Taxable and deductible temporary differences
arise from the following:
31 December 2018
Deferred tax liabilities (assets):
Trade and other receivables(5)(134)- (1)(140)
Unharvested agricultural produce5,652 (94)- - 5,558
Property, plant and equipment and
computer software21,496 1,611 44 (12,318)10,833
Trade and other payables(669)(106)- 308 (467)
Other financial assets and liabilities 1,701 - (1,897)- (196)
Net deferred tax liability28,175 1,277 (1,853)(12,011)15,588
31 December 2017
Deferred tax liabilities (assets):
Trade and other receivables(5)- - - (5)
Unharvested agricultural produce4,883 769 - - 5,652
Property, plant and equipment and
computer software20,334 574 588 - 21,496
Trade and other payables(512)(157)- - (669)
Other financial assets and liabilities 3,487 (60)(1,726)- 1,701
Net deferred tax liability28,187 1,126 (1,138)- 28,175
Current tax is the taxation expected to be paid to taxation authorities in respect of the current year. Deferred taxation is recognised
in respect of temporary differences between the tax bases of assets and liabilities and their carrying amounts in the Financial
Statements. Current and deferred tax is calculated on the basis of the laws enacted or substantively enacted at balance date.
Income Tax
Current and deferred tax are recognised in profit or loss, except when the tax relates to items charged or credited to other
comprehensive income, in which case the tax is also recognised in other comprehensive income.
B6. Foreign Currency Transactions
In preparing the financial statements of the individual entities, the transactions in currencies other than New Zealand dollars are
recorded at the rates of exchange prevailing at the dates of the transaction. At the end of each reporting period financial assets
and liabilities denominated in foreign currencies are retranslated into New Zealand dollars at the rates prevailing at the end of the
reporting period.
Exchange differences from these transactions are recognised in profit or loss in the period in which they arise.
Income and expenses for each subsidiary whose functional currency is not New Zealand dollars are translated at exchange rates that
approximate the rates at the actual dates of the transactions. Assets and liabilities of each subsidiary are translated at exchange rates
at balance date.
All resulting exchange differences are recognised in the foreign exchange translation reserve, which is a separate component of equity.
The effective portion of exchange differences on foreign currency borrowings designated as hedges of net investments in foreign
operations is also recognised in the foreign exchange translation reserve.
B5. Taxation (continued)
Annual Report - Year Ended 31 December 2018
59
Financial Statements
C. Key Assets
This section shows the key assets Scales uses to generate operating revenues. There is information about:
• property, plant and equipment;
• unharvested agricultural produce;
• investments accounted for using the equity method;
• goodwill; and
• inventories.
C1. Property, Plant and Equipment
Land and
Buildings at
fair value
Apple Trees
at fair value
Plant and
Equipment
at cost
Office
Equipment &
Motor Vehicles
at cost
Capital
Work in
Progress
at costTotal
$’000$’000$’000$’000$’000$’000
Gross carrying amount
Balance at 1 January 2017140,670 31,139 108,861 19,282 4,913 304,865
Additions252 2,209 7,599 2,505 (739)11,826
Acquisition of businesses- - - 47 - 47
Disposals(9)- (685)(1,032)- (1,726)
Revaluation1,712 - - - - 1,712
Balance at 31 December 2017142,625 33,348 115,775 20,802 4,174 316,724
Additions843 3,857 6,019 1,187 19 11,925
Acquisition of businesses (Note F2)2,187 - 2,691 22 - 4,900
Reclassified as held for sale (Note F3)(65,450)- (38,596)(7,912)(2,179)(114,137)
Sale of bulk storage assets (Note F3)(2,132)- (14,752)(182)- (17,066)
Disposals(219)- (3,477)(1,953)- (5,649)
Revaluation8,794 (5,605)- - - 3,189
Effect of foreign currency translation21 - 26 - - 47
Balance at 31 December 201886,669 31,600 67,686 11,964 2,014 199,933
Accumulated depreciation and
impairment
Balance at 1 January 2017- 185 64,570 13,458 - 78,213
Depreciation expense2,488 2,432 6,628 2,113 - 13,661
Disposals- - (595)(948)- (1,543)
Revaluation(2,488)- - - - (2,488)
Balance at 31 December 2017- 2,617 70,603 14,623 - 87,843
Depreciation expense1,609 2,522 5,030 1,618 - 10,779
Reclassified as held for sale (Note F3)(607)- (24,345)(5,368)- (30,320)
Sale of bulk storage assets (Note F3)- - (7,380)(65)- (7,445)
Disposals(34)- (3,461)(1,908)- (5,403)
Revaluation(968)(5,139)- - - (6,107)
Balance at 31 December 2018- - 40,447 8,900 - 49,347
Net book value
As at 31 December 2017142,625 30,731 45,172 6,179 4,174 228,881
As at 31 December 201886,669 31,600 27,239 3,064 2,014 150,586
The above disclosure includes both continuing and discontinued operations up to the date of sale or reclassification into held for
sale. Depreciation expense includes both continuing and discontinued operations.
60
Scales Corporation Limited
Financial Statements
Accounting Policy
Land, buildings and apple trees are included in the statement of financial position at their fair value at the date of revaluation, less
any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed with sufficient
regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of
the reporting period.
Any valuation increase arising on the revaluation of such land, buildings and apple trees is recognised in other comprehensive
income and accumulated as a separate component of equity in the revaluation reserve, except to the extent that it reverses a
valuation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss
to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land, buildings
and apple trees is charged to profit or loss to the extent that it exceeds the balance, if any, held in the revaluation reserve relating
to a previous revaluation of that asset.
Depreciation on revalued buildings and apple trees is charged to profit or loss. On the subsequent sale or retirement of revalued
property or apple trees, the attributable revaluation surplus remaining in the revaluation reserve is transferred directly to retained
earnings. No transfer is made from the revaluation reserve to retained earnings except when an asset is derecognised.
Office equipment, motor vehicles, plant and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the item.
Depreciation is provided on property, plant and equipment, including buildings and apple trees but excluding land and capital work
in progress. Depreciation is charged so as to write off the cost or valuation of assets, other than land and capital work in progress,
over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method
are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. The following
estimated useful lives are used in the calculation of depreciation:
Apple trees 30 years
Buildings 10 to 50 years
Office Equipment and Motor Vehicles 2 to 20 years
Plant and Equipment 2 to 25 years
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference
between the sale proceeds and the carrying amount of the asset and is recognised in profit or loss.
Land and Buildings carried at Fair Value
Land and buildings shown at valuation were valued at fair value as at 31 December 2018 by independent registered valuers Added
Valuation Limited and Logan Stone Limited. The valuations were arrived at by reference to market evidence of transaction prices for
similar properties.
The fair value of land and buildings is calculated on the basis of market value. Market value is determined by applying income
capitalisation and comparative sales calculations which are benchmarked against depreciated replacement cost calculations. The
valuations include adjustments to observable data for similar properties to take into account property-specific attributes.
The significant unobservable inputs, based on regional averages, for the land and buildings (mainly coldstores and packhouses) are
potential market comparative rentals $12 - $150 per square metre and the capitalisation rates of 8.75% - 12.5%. The higher the
rental rates the higher the fair value. The higher the capitalisation rates the lower the fair value. Significant changes in either of these
inputs would result in significant changes to the fair value measurement.
Orchard land is valued within the range of $28,300 to $107,000 per hectare.
The Group’s land and buildings are classified as Level 3 in the fair value hierarchy.
The carrying amount of land and buildings had it been recognised under the cost model is $48,774,000 (31 December 2017:
$82,221,000).
Apple Trees carried at Fair Value
The Group’s apple orchards, being the apple trees other than the existing crop on the trees, were valued at fair value by Boyd Gross
B.Agr (Rural Val), Dip Bus Std, FNZIV, FPINZ of Logan Stone Limited as at 31 December 2018. The market valuations completed by
Boyd Gross were based on a DCF analysis of forecast income streams and costs. This was benchmarked against a comparison of sales
of other orchards adjusted to reflect the location, plantings, age and varieties of trees and productive capabilities of the orchards.
The significant unobservable inputs, based on district averages, for the apple trees are:
20182017
Production levels (gross tray carton equivalent
(tce)) per hectare
3,250 - 5,9503,305 - 5,896
Orchard gate returns per tce$25.75 - $45.54$24.36 - $39.90
Orchard costs per tce$19.55 - $32.45$18.77 - $31.39
Discount rate16.0% - 19.40%18.0% - 21.40%
The higher the production levels and orchard gate return the higher the fair value. The higher the orchard costs and discount rate
the lower the fair value. Significant changes in any of these inputs would result in significant changes to the fair value measurement.
The Group’s apple trees are classified as level 3 in the fair value hierarchy.
C1. Property, Plant and Equipment (continued)
Annual Report - Year Ended 31 December 2018
61
Financial Statements
C1. Property, Plant and Equipment (continued)
The apple trees, on owned and leased orchards, have the following planting profile:
Total Hectares Planted
20182017
Premium varieties:
NZ Queen211 211
Pink Lady120 119
Red sports (Fuji and Royal Gala)247 234
Other premium122 75
Traditional varieties:
Braeburn128 165
Royal Gala182 186
Other traditional145 158
1,155 1,148
The exported volume from Mr Apple’s planted apple orchard was 3,867,000 TCEs (2017: 3,545,000 TCEs).
Risk Management Strategy:
The Group is exposed to financial risks arising from changes in climatic conditions, market prices and the value of the New Zealand
dollar. The Group mitigates these risks by installing hail and frost protection on orchards which have shown to be more susceptible to
these risks, obtaining hail insurance cover, utilising foreign currency derivative instruments and building close working relationships
with key customers.
C2. Unharvested Agricultural Produce
20182017
$'000$'000
Balance at beginning of the year20,189 18,433
Decrease due to harvest(20,189)(18,433)
Development expenditure19,850 19,236
Fair value adjustment697 953
Balance at end of the year20,547 20,189
The assessment of the value of unharvested agricultural produce was undertaken by management, using a discounted cash flow
model, and is calculated as the fair value less estimated harvest and post-harvest costs of the unharvested crop on the trees at the
reporting date. The risk adjusting discount rate represents an allowance for adverse events that may affect crop, harvest and/or
market conditions. This calculation is also benchmarked against orchard costs incurred during the current growing cycle.
The Group’s unharvested agricultural produce is classified as Level 3 in the fair value hierarchy.
The significant unobservable inputs included in the model are the:
20182017
$'000$'000
Production levels (tonnes per hectare per annum)59 - 11560 - 107
Orchard gate returns per tce$24 to $41$22 to $39
Risk adjusting discount rates 55% to 73%51% to 72%
The higher the yield per hectare and the higher the orchard gate returns per tce, the higher the fair value. The higher the risk
adjusting discount rate, the lower the fair value.
62
Scales Corporation Limited
Financial Statements
C3. Investments Accounted for Using the Equity Method
20182017
$'000$'000
Share of profit before taxation2,369 1,915
Share of income tax(663)(539)
Share of Net Profit for the Year and Total Comprehensive Income1,706 1,376
Carrying value at beginning of the year4,507 4,131
Dividend paid(1,000)(1,000)
Investment in Equity Accounted Entity5,213 4,507
Profruit (2006) Limited, which is domiciled in New Zealand and has a 31 December balance date, is a joint venture investment as at
31 December 2018 and 31 December 2017. The principal activity is juice production and sales. Scales held 50% of Profruit (2006)
Limited as at 31 December 2018 and 31 December 2017.
The Scales Corporation Limited Group share of the guarantee of the Profruit (2006) Limited bank loan facilities is $691,092
(2017: $1,494,197).
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets
of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require unanimous consent of the parties sharing control.
The results and assets and liabilities of joint ventures are incorporated in these consolidated financial statements using the equity
method of accounting. Under the equity method, an investment in joint venture is initially recognised in the consolidated statement
of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive
income of the joint venture. Dividends or distributions received from a joint venture reduce the carrying amount of the investment in
that joint venture in the Group financial statements. When the Group’s share of losses of a joint venture exceeds the Group’s interest
in that joint venture, the Group discontinues recognising its share of further losses. Additional losses are recognised only to the
extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.
An investment in a joint venture is accounted for using the equity method from the date on which the investee becomes a joint
venture until the date it ceases to be a joint venture. On acquisition of the investment in a joint venture, any excess of the cost of
the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as
goodwill, which is included within the carrying value of the investment. The requirements of NZ IAS 36 Impairment of Assets are
applied to determine whether it is necessary to recognise any impairment loss.
C4. Goodwill
20182017
$'000$'000
Gross Carrying Amount
Balance at beginning of the year18,177 16,222
Disposal of Liqueo Bulk Storage Limited(1,989)-
Acquisition of OceanAir business and assets and shares in OceanAir Freight Pty Limited- 1,955
Acquisition of 60% in Shelby JV LLC Group (see Note F2)27,421 -
Effect of foreign currency exchange differences266 -
Balance at end of the year43,875 18,177
Goodwill arising on the acquisition of a business is carried at cost as established at the date of acquisition of the business less
accumulated impairment losses, if any. For the purpose of impairment testing, goodwill has been allocated to the cash-generating
units listed below which represent the lowest level at which the Directors monitor goodwill.
Annual Report - Year Ended 31 December 2018
63
Financial Statements
C4. Goodwill (continued)
20182017
$'000$'000
Storage and Logistics1,955 3,944
Horticulture14,233 14,233
Food Ingredients US27,687 -
43,875 18,177
As at 31 December 2018, the Directors have determined, based on discounted cash flow and value in use calculations, that there is
no impairment of goodwill associated with any of the above CGUs. The Directors consider that any reasonably possible changes in
the key assumptions would not cause the carrying amount of any of the cash-generating units to exceed their recoverable amount.
C5. Inventories
20182017
$'000$'000
Finished goods40,483 17,798
Other4,959 4,414
45,442 22,212
Inventories are stated at the lower of cost and net realisable value. Cost means the actual cost of the inventory and in determining
cost the first in first out basis of stock movement is followed, with due allowance having been made for obsolescence. Net realisable
value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
C6. Impairment of Assets
At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine
whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate
the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the
asset belongs.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an
indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of
the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in
profit or loss and is not reversed in subsequent periods.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future pre-
tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount
of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or
loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
64
Scales Corporation Limited
Financial Statements
D. Capital Funding
This section explains how Scales manages its capital structure and how dividends are returned to shareholders. In this
section there is information about:
• equity:
• dividends paid; and
• earnings per share.
Capital Management
The Group’s capital includes share capital, reserves and retained earnings. The Group’s policy is to maintain a strong capital base so
as to maintain investor, creditor and customer confidence and to sustain the future development of the business. The impact of the
level of capital on shareholders’ return is also recognised and the Group recognises the need to maintain a balance between the
higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.
D1. Share Capital
Issued and paid up capital consists of 141,103,597 fully paid ordinary shares (2017: 140,510,292) less treasury stock of 1,195,664
shares (2017: 721,056 shares) (refer to note D2). All shares rank equally in all respects.
Shares issued or purchased on market under the Senior Executive Share Scheme (“Share Scheme”) (note D2) are treated as treasury
stock until vesting to the employee.
Number of shares
20182017
Fully paid ordinary shares
Opening balance140,510,292 139,779,006
Shares issued as consideration for business acquisition- 283,405
Share Scheme - shares issued593,305 335,211
Cash-settled share based payment shares issued- 112,670
Closing balance141,103,597 140,510,292
Treasury stock
Opening balance721,056 1,847,257
Share Scheme - shares issued593,305 335,211
Share Scheme - shares forfeited and sold on market(22,504)(50,212)
Share Scheme - shares fully vested(96,193)(1,411,200)
Closing balance1,195,664 721,056
The available subscribed capital of $41,230,000 (2017: $38,531,000) represents the amount of the shareholders’ equity that is
available to be returned to shareholders on a tax-free basis.
In accordance with the Companies Act 1993 the Company does not have a limited amount of authorised capital and issued shares
do not have a par value.
Annual Report - Year Ended 31 December 2018
65
Financial Statements
D2. Reserves
Revaluation
Cash
flow
hedge
Equity-settled
employee
benefits
Foreign
exchange
translation
Revaluation
related to
discontinued
operations
Total
reserves
$'000$'000$'000$'000$'000$’000
Balance at 1 January 2017 (Restated)57,717 9,565 503 - - 67,785
Other comprehensive income (loss) for the year3,612 (4,437)- - - (825)
Recognition of share-based payments- - 389 - - 389
Shares fully vested- - (462)- - (462)
Balance at 31 December 2017 (Restated)61,329 5,128 430 - - 66,887
Other comprehensive income (loss) for the year9,252 (4,878)- 49 - 4,423
Transfer to retained earnings(129)- - - - (129)
Transfer to discontinued operations(25,912)- - - 25,912 -
Recognition of share-based payments- - 849 - - 849
Shares fully vested- - (31)- - (31)
Balance at 31 December 201844,540 250 1,248 49 25,912 71,999
Revaluation Reserve
The revaluation reserve arises on the revaluation of land, buildings and apple trees, net of the related deferred tax.
Cash flow hedge reserve
The cash flow hedge reserve represents the unrealised gains and losses on interest rate and foreign currency
contracts taken out to manage the Group interest rate and foreign currency risks, net of the related deferred tax.
Equity-settled Employee Benefits Reserve
The Senior Executive Share Scheme involves the Company making available interest-free loans to selected senior executives to
acquire shares in the Company. The senior executives will not gain any benefit with respect to the shares purchased under the
Scheme unless they remain in employment with the Group for a period of three years from the date of acquisition of those shares.
The shares are held by a custodian during the restrictive period and are then transferred to the senior executive. All net dividends or
distributions received in respect of the shares must be applied to repayment of the interest-free loan.
Grant dateVesting dateExercise price, $Number of shares
Opening
balanceGrantedForfeited
Vested and
exercised
Closing
balance
8 May 2015 - BF8 May 20181.6696,193 - - 96,193 -
22 April 2016 - FY1522 April 20191.67298,998 - 11,352 - 287,646
5 May 2017 - FY16A5 May 20201.70290,031 - 11,152 - 278,879
5 May 2017 - FY16B5 May 20202.4535,834 - - - 35,834
20 April 2018 - FY17A20 April 20211.70- 309,698 - - 309,698
20 April 2018 - FY17B 20 April 20212.51- 36,007 - - 36,007
20 April 2018 - FY17C20 April 20213.62- 40,577 - - 40,577
28 June 2018 - FY17R28 June 20214.13- 207,023 - - 207,023
Total721,056 593,305 22,504 96,193 1,195,664
The weighted average share price for shares that vested on 8 May 2018 was $4.75.
The shares issued vest over three years. The estimated value of the share options was determined using the Black-Scholes pricing
calculator and is being amortised over the restrictive period. This cost is expensed with the corresponding credit included in the equity-
settled employee benefits reserve. Expected share price volatility was based on historical volatility of the Company ordinary shares.
66
Scales Corporation Limited
Financial Statements
D2. Reserves (continued)
The inputs into the “option pricing calculator” are:
20182017
FY17AFY17BFY17CFY17RFY16AFY16B
Acquisition date share price, $4.464.464.464.713.35 3.35
Expected share price volatility, %2222222223 23
Option life, years33333 3
Risk-free interest rate, %2.112.112.112.012.31 2.31
Exercise price, $1.702.513.624.131.70 2.45
Fair value, at the grant date, $2.872.131.271.141.77 1.16
Foreign exchange translation reserve
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net
investment, are accounted for in two ways. Gains or losses relating to the effective portion of the hedge are recognised in other
comprehensive income. Any gains or losses relating to the ineffective portion of the hedge are recognised in profit or loss.
Gains or losses arising on translation of foreign subsidiaries results (Note B6) are also recognised in this reserve.
Retained Earnings
Retained earnings represents the profits retained in the business.
D3. Dividends
20182017
$'000$'000
Final dividend paid - 9.00 (2017: 10.00) cents per share12,598 13,811
Interim dividend declared - 9.50 (2017: 9.00) cents per share13,299 12,586
25,897 26,397
The 2018 interim dividend was declared on 5 December 2018 and paid on 18 January 2019.
D4. Imputation Credit Account
20182017
$'000$'000
Balance at end of the year21,794 18,583
The imputation credit account balance represents the net amount available at the reporting date that can be attached to future
dividends declared.
The Scales Corporation Limited consolidated tax group for income tax includes Scales Corporation Limited and all New Zealand
registered subsidiary companies other than Scales Employees Limited.
Annual Report - Year Ended 31 December 2018
67
Financial Statements
D5. Earnings Per Share
Basic earnings per share is calculated by dividing the profit attributable to shareholders of the company by the weighted average
number of ordinary shares on issue during the year, excluding shares held as treasury stock. Diluted earnings per share assumes
conversion of all dilutive potential ordinary shares in determining the denominator.
20182017
(Restated)
$'000$'000
Profit attributable to equity holders of the Company ($000’s):
From continuing operations28,608 24,124
From discontinued operations16,476 7,052
Total45,084 31,176
Weighted average number of shares:
Ordinary shares139,869,055 138,738,233
Effect of dilutive ordinary shares (non-vested Senior Executive Share Scheme)447,143 751,619
Weighted average number of Ordinary Shares for diluted earnings per share 140,316,198 139,489,852
Earnings per share (cents):
Basic - continuing20.5 17.4
Basic - discontinued11.8 5.1
Basic - total 32.2 22.5
Diluted - continuing20.4 17.3
Diluted - discontinued11.7 5.1
Diluted - total32.1 22.4
68
Scales Corporation Limited
Financial Statements
E. Financial Assets and Liabilities
This section explains the financial assets and liabilities of Scales, the related risks and how Scales manages these risks. In
this section of the notes there is information on:
• the accounting policies, judgements and estimates relating to financial assets and liabilities; and
• the financial instruments used to manage risk.
Accounting Policies
Financial Assets
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL) and
‘measured at amortised cost’.
The classification depends on the business model for managing the financial asset and the cash flow characteristics of the financial
asset and is determined at the time of initial recognition or when a change in the business model occurs.
Financial assets at fair value through profit or loss
Financial assets are classified at fair value through profit or loss if they are not measured at cost or amortised cost. Gains and losses
on a financial asset designated in this category and not part of a hedging relationship are recognised in profit or loss.
Financial assets measured at amortised cost
The Group’s financial assets held in order to collect contractual cash flows that are solely payments of principal and interest on the
principal outstanding are measured at amortised cost. Cash and cash equivalents, trade receivables and employee loans are classified
in this category.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses (“ECL”) on investments in debt instruments that are measured
at amortised cost, trade and other receivables. The amount of expected credit losses is updated at each reporting date to reflect
changes in credit risk since initial recognition of the respective financial instrument.
The Group always recognises lifetime ECL for trade receivables. The expected credit losses on these financial assets are estimated
using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors,
general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting
date, including time value of money where appropriate.
For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since
initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the
Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.
Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial
instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on
a financial instrument that are possible within 12 months after the reporting date.
For financial assets, the expected credit loss is estimated as the difference between all contractual cash flows that are due to the
Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective
interest rate.
Financial Liabilities Measured at Amortised Cost
The Group’s financial liabilities include trade and other payables and borrowings. These financial liabilities are initially recognised
at fair value plus any directly attributable costs. Subsequent to initial recognition, they are measured at amortised cost using the
effective interest method.
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 with reference to observable market data at the end of each reporting period. The resulting gain or loss is recognised
in profit or loss immediately unless the derivative is designated as an effective hedging instrument, in which event the timing of the
recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as cash flow
hedges. A derivative is presented as a non-current asset or a non-current liability where the cash flow will occur after 12 months and
it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
Hedge Accounting
At the inception of a hedge relationship, the Group documents the relationship between the hedging instrument and the hedged
item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the
inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging
relationship is highly effective in offsetting changes in cash flows of the hedged item, attributable to the hedged risk.
Cash Flow Hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in
other comprehensive income and accumulated as a separate component of equity in the hedging reserve. The gain or loss relating to
the ineffective portion is recognised immediately in profit or loss, and is included in ‘other income’ or ‘other losses’.
Annual Report - Year Ended 31 December 2018
69
Financial Statements
E1. Trade and Other Receivables
20182017
$'000$'000
Trade receivables17,646 18,724
Other receivables1,149 1,356
Owing by entity accounted for using the equity method97 76
Goods and services tax4,018 3,281
22,910 23,437
Credit Risk Management
The Group activities expose it to credit risk which refers to the risk that a counterparty will default on its contractual obligations
resulting in financial loss to the Group. Financial instruments which potentially subject the Group to credit risk principally consist of
cash and cash equivalents, trade and other receivables and advances as disclosed in note E2. The Group performs credit evaluations
on trade customers, obtains trade credit insurance as appropriate but generally does not require collateral. The Group continuously
monitors the credit quality of its major receivables and does not anticipate non-performance of those customers. Cash and cash
equivalents are placed with high credit quality financial institutions.
There is a significant concentration of credit risk with five customers who represent 49.06% (2017: five customers who represent
25.93%) of trade and other receivables.
The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk.
Included in trade receivables are debtors which are past due at balance date, as payment was not received within one month,
and for which no provision has been made as there has not been a significant change in credit quality and the amounts are still
considered recoverable. No collateral is held over these balances although trade credit insurance cover is obtained in respect of some
specific receivables. Interest is not charged on overdue debtors. The ageing of these past due trade receivables is:
One month3,979 3,995
Two months 714 790
More than two months4,034 786
8,727 5,571
E2. Other Financial Assets
Current:
At fair value:
Foreign currency derivative instruments3,921 6,415
3,921 6,415
Non-current:
At fair value:
Foreign currency derivative instruments6,024 6,544
Shares in unlisted companies 211 211
At amortised cost:
Employee loans 668 1,009
6,903 7,764
Amounts recognised in the hedging reserve are reclassified from equity to profit or loss in the periods when the hedged item is
recognised in profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Group
revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge
accounting. Any cumulative gain or loss deferred in the hedging reserve at that time remains in equity and is recognised when
the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was deferred in the hedging reserve is recognised immediately in profit or loss.
Hedges of net investments in foreign operations
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated under the
heading of foreign exchange translation reserve. The gain or loss relating to the ineffective portion is recognised immediately in
profit or loss. Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign
exchange translation reserve are reclassified to profit or loss on the disposal of the foreign operation.
70
Scales Corporation Limited
Financial Statements
E3. Trade and Other Payables
20182017
$'000$'000
Trade payables14,029 10,325
Accruals9,599 7,214
Employee entitlements3,654 4,676
27,282 22,215
E4. Borrowings
Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured
at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit
or loss over the period of the borrowing using the effective interest method. The fair value of current and non-current borrowings is
approximately equal to their carrying amount.
The Group signed Multi-Option Facility Agreements with Coöperatieve Rabobank U.A., New Zealand Branch (“Rabobank”) and
Westpac New Zealand Limited (“Westpac”) on 22 March 2013. The total facility is $80,000,000 (2017: $90,000,000). At 31
December 2018 the undrawn amount under these facilities was $48,000,000 (2017: $43,500,000).
On 17 December 2018, the Group obtained an additional USD 11,635,000 term loan from Rabobank and USD 11,635,000 from
Westpac. These facilities were utilised to finance the acquisition of Shelby JV LLC Group. The USD denominated loans are designated
as a hedge of net investment in foreign operations. Post balance date, the unused portions of the USD facilities have expired and the
facility limits reduced to the above amounts.
The floating interest rate is 2.87% to 3.16% (2017: 2.94% to 3.34%) and the term borrowing facility expiry date is 1 July 2020.
Seasonal facility presented as current borrowings is due for repayment within one year. The bank facilities are secured by a first
ranking security interest granted by each of the Charging Group* Companies over all its present and after-acquired property
(including proceeds) and a first ranking security interest over any of the Charging Group Companies present and future assets and
undertakings which are not personal property. The bank facilities are also secured by first and exclusive registered mortgages over
property comprising coolstores, orchards and industrial and commercial property owned by members of the Charging Group.
*Charging Group Companies are Scales Corporation Limited, Scales Holdings Limited, Mr Apple New Zealand Limited, New Zealand
Apple Limited, Polarcold Stores Limited, Whakatu Coldstores Limited, Geo.H.Scales Limited, Meateor Foods Limited, Scales Logistics
Limited and Meateor Group Limited.
The Multi-Option Facility Agreements with the Group’s banks include the requirement that at all times the Tangible Net Worth of the
Group, being Tangible Assets less Total Liabilities (excluding deferred tax liabilities), be not less than $100,000,000. The Group has
complied with this requirement since the facility was established. The Group policies in respect of capital management and allocation
are reviewed regularly by the Board of Directors. There have been no material changes to the Group’s management of capital during
the year.
E5. Other Financial Liabilities
Current financial liabilities at fair value:
Foreign currency derivative instruments2,662 1,312
Interest rate swap contracts and forward rate agreements577 481
Put option2,424 2,538
5,663 4,331
Non-current financial liabilities at fair value:
Foreign currency derivative instruments4,646 3,318
Interest rate swap contracts and forward rate agreements780 725
Put option2,088 -
7,514 4,043
On 11 January 2016 the Group increased its shareholding in Fern Ridge Produce Limited (“Fern Ridge”) to 75%. As part of the
transaction, 2.12% of the shares were then sold to an employee of Fern Ridge, and Scales entered into agreements with the
remaining shareholders of Fern Ridge whereby those shareholders have an option to “put” their shares to Scales at a value based on
a multiple of Fern Ridge profits, but with a minimum value equivalent to that paid to the selling shareholders.
See Note F2 for detail regarding the put option in respect of 5% of the total units in Shelby JV LLC Group.
Annual Report - Year Ended 31 December 2018
71
Financial Statements
E6. Interest Rate Risk
Interest Rate Risk Management
The Group is exposed to interest rate risk as it borrows funds at floating interest rates. Management monitors the level of interest
rates on an ongoing basis and may use interest rate swaps and forward rate agreements to manage interest rate risk.
Interest Rate Swap Contracts and Forward Rate Agreements
Under interest rate swap contracts and forward rate agreements, the Group agrees to exchange the difference between fixed and
floating rate interest amounts calculated on agreed notional principal amounts. Such contracts, some of which commence in future
reporting years, enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued floating
rate debt. The fair value of these contracts at the reporting date is determined by discounting the future cash flows using the
forward interest rate curves at reporting date and the credit risk inherent in the contracts. The average contracted fixed interest rate
is based on the notional principal amount at balance date.
Details of interest rate swap contracts and forward rate agreements for the Group are:
Maturity Date
Fixed Interest
Rate
Notional Principal
AmountFair Value
201820172018201720182017
%%$’000$’000$’000$’000
Interest rate swap contracts:
Within one year3.05 - 35,000 - (241)-
Two to five years3.93 4.02 20,000 30,000 (1,116)(938)
After five years- 3.25 - 10,000 - (268)
55,000 40,000 (1,357)(1,206)
These interest rate swap contracts and forward rate agreements, exchanging floating rate interest amounts for fixed rate interest
amounts, are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from floating interest
rates on borrowings. The interest rate swap and forward rate agreement payments, and the interest payments on the loans occur
simultaneously, and the amount deferred in equity is recognised in profit or loss over the period that the floating rate interest
payments on debt impact profit or loss.
The Group’s interest rate swap contracts and forward rate agreements are classified as Level 2 in the fair value hierarchy.
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative
instruments at the reporting date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding
at reporting date was outstanding for the whole year. A 1% per cent increase or decrease is used when reporting interest rate risk
internally to key management personnel and represents management’s assessment of the reasonably possible change in interest
rates. Impact on net profit after tax assumes that none of floating interest rate borrowings were hedged.
20182017
+1%-1%+1%-1%
$000's$000's$000's$000's
Impact on net profit after tax(427)427 (558)558
Impact on cash flow hedge reserve net of tax598 (632)723 (770)
E7. Foreign Currency Risk
Foreign Currency Risk Management
Foreign currency risk is the risk that the value of the Group’s assets and liabilities or revenues and expenses will fluctuate due to
changes in foreign exchange rates. The Group is exposed to currency risk as a result of normal trading transactions denominated in
foreign currencies. The currencies in which the Group primarily trades are the Australian dollar, Euro, Canadian dollar, Great Britain
pound and United States dollar, with the largest exposure being to the United States dollar.
Currency risk is managed by the natural hedge of foreign currency receivables and payables and the use of foreign currency
derivative financial instruments. The fair value of foreign currency derivative financial instruments at the reporting date is determined
on a discounted cash flow basis whereby future cash flows are estimated based on forward exchange rates and contract forward
rates, discounted at a rate that reflects the credit risk of various counterparties.
The Group’s forward foreign exchange contracts and foreign exchange options are classified as Level 2 in the fair value hierarchy.
Details of foreign currency instruments at balance date for the Group are:
20182017
Contract ValueFair ValueContract ValueFair Value
$’000$’000$’000$’000
Sale commitments forward foreign exchange contracts204,693 (1,308)260,406 3,546
Sale commitments foreign exchange options168,079 3,945 96,787 4,783
72
Scales Corporation Limited
Financial Statements
E7. Foreign Currency Risk (continued)
These foreign currency instruments are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting
from movements in foreign currency exchange rates on anticipated future transactions. It is anticipated that the sales will take place
during the 2019 to 2022 financial years at which stage the amount deferred in equity will be released into profit or loss.
The following table demonstrates the sensitivity to a reasonably possible change of 5% in the value of New Zealand dollar against
other foreign currencies, with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the
fair value of monetary assets and liabilities. The impact on the Group’s equity is due to changes in the fair value of forward exchange
contracts designated as cash flow hedges.
20182017
+5%-5%+5%-5%
$000's$000's$000's$000's
Impact on net profit after tax284 (257)133 (120)
Impact on cash flow hedge reserve net of tax(11,846)10,960 (11,996)11,043
E8. Categories of Financial Instruments
2018 2017
$'000$'000
Financial Assets:
Amortised cost22,350 26,855
Derivative instruments in designated hedge accounting relationships9,945 12,959
Fair value through profit or loss211 211
32,506 40,025
Financial Liabilities:
Amortised cost112,323 81,301
Derivative instruments in designated hedge accounting relationships8,665 5,836
Fair value through profit or loss4,512 2,538
125,500 89,675
Annual Report - Year Ended 31 December 2018
73
Financial Statements
E9. Maturity Profile of Financial Liabilities
Liquidity Risk Management
The Group manages liquidity risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and
actual cash flows and matching the maturity profiles of financial assets and liabilities.
The following tables detail the Group’s remaining contractual maturity for its financial liabilities. The tables have been drawn up
based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay.
The table includes both interest and principal cash flows.
Within Three
Months
Four Months
to One Year
One to Five
YearsTotal
$'000$'000$'000$'000
2018
Trade and other payables27,282 - - 27,282
Dividend declared13,299 - - 13,299
Put options2,424 - 2,088 4,512
Borrowings2,593 1,797 65,862 70,252
Interest rate swaps and forward rate agreements323 968 2,033 3,324
45,921 2,765 69,983 118,669
2017
Trade and other payables22,215 - - 22,215
Dividend declared12,586 - - 12,586
Put options1,269 1,269 - 2,538
Borrowings363 7,601 40,633 48,597
Interest rate swaps and forward rate agreements120 364 1,247 1,731
36,553 9,234 41,880 87,667
74
Scales Corporation Limited
Financial Statements
F. Group Structure
This section provides information to help readers understand the Scales Group structure and how it affects the financial
position and performance of the Group. In this section there is information about:
• subsidiaries;
• the acquisition of Shelby JV LLC and its subsidiaries;
• the sale of Liqueo Bulk Storage Limited and reclassification of Polarcold Stores Limited and Whakatu Coldstores Limited to assets
held for sale.
F1. Subsidiary Companies
Subsidiary Companies:Principal Activity
Country of
Incorporation
Holding
2018 2017Balance Date
Fern Ridge Produce LimitedTrading companyNew Zealand 72.88%72.88%31 December
Geo. H. Scales Limited Non trading companyNew Zealand 100%100%31 December
Liqueo Bulk Storage LimitedTrading companyNew Zealand 0%100%31 December
Longview Group Holdings LimitedNon trading companyNew Zealand 100%100%31 December
Longview New Zealand Limited
Liquidated during
the year
New Zealand 0%100%31 December
Longview Packhouse Limited
Liquidated during
the year
New Zealand 0%100%31 December
Meateor Foods Australia Pty LimitedTrading companyAustralia100%100%31 December
Meateor Foods LimitedTrading companyNew Zealand 100%100%31 December
Meateor Group LimitedHolding companyNew Zealand 100%0%31 December
Meateor US LLCHolding companyUnited States100%0%31 December
Mr Apple New Zealand LimitedTrading companyNew Zealand 100%100%31 December
New Zealand Apple LimitedTrading companyNew Zealand 100%100%31 December
Polarcold Stores LimitedColdstore operatorNew Zealand 100%100%31 December
Scales Employees LimitedCustodial companyNew Zealand 100%100%31 December
Scales Holdings LimitedHolding companyNew Zealand 100%100%31 December
Scales Logistics LimitedFreight consolidatorNew Zealand 100%100%31 December
Scales Logistics Australia Pty Ltd*Freight consolidatorAustralia100%100%31 December
Selacs Insurance LimitedInsurance companyNew Zealand 100%100%31 December
Shelby Cold Storage, Inc (Note F2)Coldstore operatorUnited States60%0%31 December
Shelby Exports, Inc (Note F2)Non trading companyUnited States60%0%31 December
Shelby Foods, Inc (Note F2)Trading companyUnited States60%0%31 December
Shelby JV LLC (Note F2)Holding companyUnited States60%0%31 December
Shelby Properties LLC (Note F2)Non trading companyUnited States60%0%31 December
Shelby Trucking Corp (Note F2)Trading companyUnited States60%0%31 December
Whakatu Coldstores LimitedNon trading companyNew Zealand 100%100%31 December
* OceanAir Freight Pty Ltd prior to 7 September 2018
Subsidiary companies are controlled by the Company. Control is achieved when the Company:
• has power over the investee;
• is exposed, or has rights, to variable returns from its involvement with the investee; and
• has the ability to use its power to affect its returns.
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the company loses
control of the subsidiary.
Annual Report - Year Ended 31 December 2018
75
Financial Statements
F2. Acquisition of Shelby JV LLC Group
On 20 December 2018 Scales Corporation Limited, through its wholly owned subsidiary Meateor US LLC, acquired 60% of
Shelby JV LLC and its subsidiaries Shelby Foods Inc, Shelby Exports Inc, Shelby Cold Storage Inc, Shelby Trucking Corp and Shelby
Properties LLC (collectively, “Shelby Group”). Shelby Group is a large independent US buyer, processor, and seller of ingredients
for the petfood industry.
As part of the transaction, the Company entered into an agreement with the vendor whereby the vendor has an option to put a
further 5% of total units in Shelby JV LLC to Scales at a value based on a multiple of Shelby Group EBITDA. The obligation to acquire
the ownership interest under the put option is included in other financial liabilities. Scales has control over Shelby Group as it holds
a 60% ownership interest and has the right to appoint and remove 3 of the 5 directors of Shelby JV LLC. Due to the timing of the
acquisition, the acquisition accounting fair value adjustments were identified as being on a provisional basis in the Scales Group’s 31
December 2018 financial statements.
Details of the acquisition are as follows:
Carrying Value on
Acquisition
Fair Value on
Acquisition
$’000$'000
Current assets
Trade and other receivables4,819 4,819
Inventory5,938 5,938
Prepayments193 193
Other assets53 53
Non-current assets
Property, plant and equipment3,9954,902
Current liabilities
Trade and other payables(2,824)(2,824)
Net assets acquired12,174 13,081
Less fair value of non-controlling interest(5,233)
Goodwill on acquisition27,421
Net cash outflow on acquisition35,269
Goodwill arising on acquisition
Goodwill arose on the acquisition of Shelby Group because the cost of acquisition included established operations in the US markets,
synergies and future market benefits as the operations provide strong strategic alignment with the operations of our existing
petfood ingredients business, Meateor. Shelby Group extends the range of proteins that Meateor presently offers whilst also offering
an in-market point of contact for customers that are shared between the two businesses. Shelby adds approximately 80,000 MT of
product sales to Meateor’s sale volume of approximately 27,000 MT.
These benefits are not recognised separately from goodwill as the expected future economic benefits arising cannot be reliably
measured and they do not meet the definition of identifiable intangible assets.
Accounting for put option
Gross liability for the put option referred to above is discounted to present value of $2,088,000 and has been included in other non-
current financial liabilities and as a corresponding reduction to non-controlling interest.
Impact of the acquisition on the results of the Group
Shelby Group contributed $123,000 to the Group profit for the year. Group revenue for the year includes $1,688,000 in respect
of Shelby Group. Had the Shelby Group acquisition been effective at 1 January 2018, the revenue of the Group would have been
$480,568,000 and the profit for the year would have been $50,231,000.
F3. Discontinued Operations
On 9 May 2018 the Company announced an agreement to sell its coldstorage businesses, Polarcold Stores Limited and Whakatu
Coldstores Limited (which were merged on 1 January 2018 under the Polarcold brand). The sale, for consideration of $151.4
million, is to Emergent Cold, a global cold chain company. The transaction is subject only to Overseas Investment Office (OIO)
approval, after which it becomes effective from 1 June 2018. All earnings post 1 June 2018 accrue to the purchaser. Interest will
be charged on the purchase price until the sole condition is satisfied. These two elements will be reflected as a purchase price
adjustment and will be factored into the consideration referred to above.
On 13 August 2018 the Company entered into an unconditional agreement to sell its bulk liquid storage business, Liqueo Bulk
Storage Limited. Settlement occurred on the same date. The sale, for consideration of $20 million, was to a company related to
the SBT Group, a Taranaki based Group with interests in rendering and animal by-products.
76
Scales Corporation Limited
Financial Statements
F3. Discontinued Operations (continued)
The results of discontinued operations are set out below:
20182017
$'000$'000
Revenue62,164 57,562
Cost of sales(25,873)(24,414)
36,291 33,148
Other operating expenses including transaction costs(21,968)(17,596)
EBITDA14,323 15,552
Amortisation(109)(293)
Depreciation(2,066)(5,377)
EBIT12,148 9,882
Finance revenue15 20
Profit before tax from discontinued operations12,163 9,902
Income tax expense(3,861)(2,850)
Profit before tax from discontinued operations8,302 7,052
Gain on disposal net of tax8,174 -
Profit from discontinued operations net of tax16,476 7,052
The major classes of assets and liabilities of Polarcold Stores Limited and Whakatu Coldstores Limited classified as held for sale as at
31 December 2018 are as follows:
Assets
Cash and bank balances6,729
Trade and other receivables9,126
Prepayments297
Property, plant and equipment87,362
Computer software864
104,378
Liabilities
Trade and other payables4,719
Current tax liabilities2,842
Deferred tax liabilities11,720
19,281
Net assets directly associated with disposal group85,097
Revaluation reserve related to discontinued operations25,912
20182017
$'000$'000
The net cash flows pertaining to the entities referred to above are as follows:
Operating13,612 10,832
Investing(4,908)(3,759)
Financing- -
Net cash inflow8,704 7,073
Annual Report - Year Ended 31 December 2018
77
Financial Statements
G. Other
This section includes the remaining information relating to Scales’ financial statements which is required to comply
with NZ IFRS.
G1. Capital Commitments
2018 2017
(Restated)
$'000$'000
Commitments entered into in respect of apple trees as at balance date1,199 2,161
G2. Operating Lease Commitments
The Group as Lessee
Operating leases relate to coolstores, packhouses, orchards, offices, vehicles and office equipment with lease terms of between 3
to 9 years, generally with options to extend for further periods. All operating lease contracts contain review clauses that provide for
reviews at regular intervals and in the event that the Group exercises its options to renew.
Non-cancellable operating lease commitments:
Not later than 1 year9,095 7,144
Later than 1 year and not later than 5 years27,298 20,199
Later than 5 years13,382 12,105
G3. Related Party Disclosures
Transactions with Related Parties
Certain Directors or senior management have relevant interests in companies with which Scales has transactions in the normal
course of business. A number of Scales directors are also non-executive directors of other companies. Any transactions undertaken
with these entities have been entered in the ordinary course of business on a 3rd party arm’s-length basis.
Key Management Personnel Remuneration
The compensation of the directors and executives, being the key management personnel of the Group, is as follows:
20182017
$'000$'000
Short-term employee benefits3,002 2,820
Share-based payments963 433
Post-employment benefits111 102
4,076 3,355
During 2018, 379,082 (2017: 145,813) shares were issued to key management personnel in accordance with the senior executive
share scheme described in note D2.
Transactions with the Equity Accounted Entity
Revenue from sale of goods1,306 890
Revenue from services1,322 968
Dividends received1,000 1,000
Trade receivables at balance date97 76
78
Scales Corporation Limited
Financial Statements
G4. Contingent Liability
In December 2018 an insurance claim was notified to Selacs Insurance Limited, a wholly owned subsidiary of Scales Holdings Limited,
which in turn is a wholly owned subsidiary of Scales Corporation Limited.
The claim arises in consequence of the collapse of the roof of a leased coldstore located in Hastings, Hawke’s Bay.
The cause of the event is uncertain and is under investigation by the specialists. The cause of the event will determine whether it is
covered by the insurance policy. The claim will not be accepted until such time that (a) the cause is established, and (b) it is confirmed
that the event is covered by the insurance policy.
The risk is fully reinsured, and in the event the claim is accepted and becomes payable, there will be no impact on net income or net
assets of the Group.
No claim expense, reinsurance revenue, claim payable and reinsurance receivable have been recorded in the financial statements.
G5. Events Occurring After Balance Date
As stated above, Scales sold its coldstorage businesses (Polarcold Stores Limited and Whakatu Coldstores Limited) to Emergent Cold on
9 May 2018, subject to the sole condition of OIO approval. The sale agreement required that this condition be met by 9 February 2019.
Given that the process of obtaining OIO approval remains ongoing, Scales and Emergent Cold have agreed to extend the condition
date, from 9 February 2019 to 31 May 2019.
There were no other events occurring subsequent to balance date which require adjustment to or disclosure in the financial statements.
Annual Report - Year Ended 31 December 2018
79
Financial Statements
H. Adoption of New and Amended Financial Reporting
Standards, Resulting Restatements and Other Restatements
This section summarised the effect of the change in accounting policy on the prior period disclosures resulting from the
application of NZ IFRS 9 (2014) and NZ IFRS 15. In addition, it summarises the effect of application of NZ IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations.
Application of NZ IFRS 9 (2014)
Financial Instruments
The application of NZ IFRS 9 (2014) Financial Instruments which became effective on 1 January 2018 resulted in the time value of
options and its related tax effect being recognised in other comprehensive income instead of profit or loss. Under NZ IFRS 9 (2014),
the time value of options forms a part of the hedging instrument and changes in their value are recognised in other comprehensive
income. Comparatives have been restated retrospectively as disclosed below. The Group has previously adopted NZ IFRS 9 (2010)
which amended classification and measurement of financial instruments. Application of NZ IFRS 9 (2014) includes amendments to
impairment and hedge accounting.
In relation to the impairment of financial assets, NZ IFRS 9 (2014) requires an expected credit loss model, as opposed to an incurred
credit loss model under NZ IAS 39. The expected credit loss model requires an entity 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. In other words, it is no
longer necessary for a credit event to have occurred before credit losses are recognised.
The new general hedge accounting requirements retain the 3 types of hedge accounting mechanisms currently available in NZ
IAS 39. Under NZ IFRS 9 (2014), greater flexibility has been introduced to the types of transactions eligible for hedge accounting,
specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-
financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with
the principle of an “economic relationship”. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced
disclosure requirements about an entity’s risk management activities have also been introduced.
Impairment
Financial assets measured at amortised cost being cash and cash equivalents, trade receivables, and employee loans are subject to
the impairment provisions of NZ IFRS 9 (2014).
The Group applies the simplified approach to recognise lifetime expected credit losses for the above financial assets as required or
permitted by NZ IFRS 9 (2014). In general, the application of the expected credit loss model of NZ IFRS 9 (2014) results in earlier
recognition of credit losses and increases the amount of loss allowance recognised for those items. Given the seasonality of the
business, nature of the sales and type of customers of the Group, there was no material impact.
Hedge accounting
As the new hedge accounting requirements align more closely with the Group’s risk management policies, with generally more
qualifying hedging instruments and hedged items, an assessment of the Group’s current hedging relationships indicated that they
qualified as continuing hedging relationships upon application of NZ IFRS 9 (2014). Similar to the Group’s current hedge accounting
policy, the directors do not intend to exclude the forward element of foreign currency forward contracts from designated hedging
relationships. As described above, the time value of options also forms a part of the hedging instrument.
Application of NZ IFRS 15 Revenue from Contracts with Customers
The application of NZ IFRS 15 Revenue from Contracts with Customers which became effective on 1 January 2018 resulted in certain
apple export contracts being treated as agency export service contracts instead of principal goods purchase and sale contracts. While
this has resulted in a reduction in revenue and cost of sales, there was no impact on net income for those periods. Comparatives
have been restated retrospectively as disclosed below.
80
Scales Corporation Limited
Financial Statements
Year ended 31 December 2017
Previously
reportedAdjustmentsRestated
NZ IFRS 5NZ IFRS 9NZ IFRS 15
$’000$’000$’000$’000$’000
Continuing Operations
Revenue399,100 (57,562)- (6,007)335,531
Cost of sales(287,102)24,413 - 6,007 (256,682)
111,998 (33,149)- - 78,849
Share of profit of entity accounted for using the
equity method1,376 - - - 1,376
Other income233 (18)(214)- 1
Administration and operating expenses(51,871)17,585 - - (34,286)
Other losses(665)30 - - (635)
EBITDA61,071 (15,552)(214)- 45,305
Amortisation(588)293 - - (295)
Depreciation(13,661)5,377 - - (8,284)
EBIT46,822 (9,882)(214)- 36,726
Finance revenue175 (20)- - 155
Finance cost(3,039)- - - (3,039)
Profit Before Income Tax Expense from
Continuing Operations43,958 (9,902)(214)- 33,842
Income tax expense(12,187)2,850 60 - (9,277)
Profit for the Year from
Continuing Operations31,771 (7,052)(154)- 24,565
Profit from discontinued operations net of tax- 7,052 - - 7,052
Profit for the Year31,771 - (154)- 31,617
Other Comprehensive Income
Items that will not be reclassified to profit or loss:
Revaluation of land and buildings4,200 - - - 4,200
Income tax relating to buildings(588)- - - (588)
3,612 - - - 3,612
Items that may be reclassified subsequently to profit or loss:
Loss on cash flow hedges(6,377)- 214 - (6,163)
Income tax relating to cash flow hedges1,786 - (60)- 1,726
(4,591)- 154 - (4,437)
Other Comprehensive (Loss) Income for the Year(979)- 154 - (825)
Total Comprehensive Income for the Year30,792 - - - 30,792
Cash flow
hedge
reserve
Retained
earnings
Balance at 1 January 2017 as previously reported8,965 57,251
NZ IFRS 9 restatement600 (600)
Balance at 1 January 2017 - restated9,565 56,651
Application of NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
The Comparative year has been restated as required by NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF SCALES CORPORATION LIMITED
OpinionWe have audited the consolidated financial statements of Scales Corporation Limited and its
subsidiaries (the ‘Group’), which comprise the consolidated statement of financial position as
at 31 December 2018, and the consolidated statement of comprehensive income, statement
of changes in equity and statement of cash flows for the year then ended, and notes to the
consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements, on pages 44 to 80, present
fairly, in all material respects, the consolidated financial position of the Group as at 31 December
2018, and its consolidated financial performance and cash flows for the year then ended in
accordance with New Zealand Equivalents to International Financial Reporting Standards
(‘NZ IFRS’) and International Financial Reporting Standards (‘IFRS’).
Basis for opinionWe conducted our audit in accordance with International Standards on Auditing (‘ISAs’) and
International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1
(Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and
Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code
of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
Other than in our capacity as auditor, the provision of bribery and corruption training and
the provision of other assurance services, we have no relationship with or interests in the
Company or any of its subsidiaries. These services have not impaired our independence as
auditor of the Group.
Audit materialityWe consider materiality primarily in terms of the magnitude of misstatement in the financial
statements of the Group that in our judgement would make it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced (the
‘quantitative’ materiality). In addition, we also assess whether other matters that come to our
attention during the audit would in our judgement change or influence the decisions of such a
person (the ‘qualitative’ materiality). We use materiality both in planning the scope of our audit
work and in evaluating the results of our work.
We determined materiality for the Group financial statements as a whole to be $2.1 million.
Key audit mattersKey audit matters are those matters that, in our professional judgement, were of most
significance in our audit of the consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the consolidated financial statements as
a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Annual Report - Year Ended 31 December 2018
81
Financial Statements
Key audit matterHow our audit addressed the key audit matter
Valuation of Unharvested Agricultural Produce
Unharvested agricultural produce growing on bearer plants (e.g.
fruit), is measured at fair value less costs to sell.
The Group’s unharvested agricultural produce was valued
at $20.5 million at balance date as described in note C2. A
revaluation gain of $0.7 million is recorded in profit or loss.
Fair value less cost to sell is calculated by the Group using a
discounted cash flow model. The model includes significant
unobservable inputs and assumptions including, for each
variety, the forecast production per hectare per annum by
weight, sales prices, and risk-adjusting discount rates, as well as
costs to harvest and sell.
The risk-adjusting discount rates take into account the risk of
unknown adverse events that may affect crop, harvest and/or
market conditions.
The valuation of unharvested agricultural produce is considered
to be a key audit matter due to the level of judgement required
to determine the fair value less costs to sell.
Our procedures focused on the appropriateness of the valuation
methodology and the key assumptions applied in the internal
valuation model.
Our procedures included, amongst others:
• Holding discussions with management and considering market
information to identify factors, including environmental or
market risks, that would impact the current crop valuation.
• Engaging a Deloitte valuation specialist to consider whether
the valuation method applied was appropriate and whether
the risk-adjusting discount rates were reasonable based on
market information and risks relating to the unharvested
agricultural produce.
• Challenging the reasonableness of the key assumptions by
comparing the forecast production, prices, and costs to harvest
and sell for the current growing season to the approved budgets
for each orchard.
• Assessing the historical accuracy of the Group’s budget forecasts.
• Checking the mechanical accuracy of the discounted cash
flow model.
Valuation of Apple Trees
As disclosed in note C1 the Group has apple trees valued at
$31.6 million. A revaluation loss of $0.47 million has been
recorded in other comprehensive income.
The Group has a policy of recording apple trees at fair value
with valuations performed with sufficient regularity that the
carrying amount at the end of a reporting period does not differ
materially from their fair value.
Apple trees are valued on the basis of a discounted cash
flow analysis of forecast income streams and costs from each
orchard. The model uses a number of significant unobservable
inputs, in particular: production levels per hectare, orchard gate
returns (market prices), orchard costs, and discount rates.
Valuation of apple trees is considered to be a key audit matter
due to the significance of the assets to the Group’s consolidated
statement of financial position, and the level of judgement
involved in valuing the apple trees.
Our procedures focused on the appropriateness of the valuation
methodology and the key assumptions applied in the model.
Our procedures included, amongst others:
• Evaluating the Group’s processes in respect of the independent
valuation of the apple trees including its review of the
valuation methodology and determination of the key
valuation assumptions.
• Engaging a Deloitte valuation specialist to consider whether the
valuation method applied is reasonable.
• Assessing the competence, objectivity and integrity of the
Group’s independent registered valuer. This included assessing
the valuer’s professional qualifications, experience and
independence. It also included meeting with the valuer to
understand the valuation process adopted and to identify and
challenge the critical judgement areas in the valuation.
• Assessing the valuation methodology for consistency with the
the most recent valuation (“2016 valuation”) and determining
whether any changes to the methodology were appropriate.
• Challenging the reasonableness of the key assumptions by
comparing them to the 2016 valuation, the Group’s internal
data and current market evidence.
–We tested estimated production levels per hectare by
comparing orchard hectares in production with the 2016
valuation. We compared the production levels per hectare to
external production data as well as internal production data
for the previous season.
–We tested the orchard gate returns by comparing these to
actual sales returns received during the previous year.
°
We challenged orchard costs by comparing orchard costs
to the 2016 valuation and available market data.
°
We challenged the discount rates by comparing them
with 2016 valuation discount rates and considering the
risks associated with the orchards.
• Checking the mechanical accuracy of the discounted cash flow
models on a sample basis.
82
Scales Corporation Limited
Financial Statements
Other informationThe directors are responsible on behalf of the Group for the other information. The other
information comprises the information in the Annual Report that accompanies the consolidated
financial statements and the audit report. The Annual Report is expected to be made available
to us after the date of this auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and
we will not express any form of assurance conclusion thereon.
Our responsibility is to read the other information identified above when it becomes available
and consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated.
When we read the other information in the Annual Report, if we conclude that there is a
material misstatement therein, we are required to communicate the matter to the directors and
consider further appropriate actions.
Directors’ responsibilities for
the consolidated financial
statements
The directors are responsible on behalf of the Group for the preparation and fair presentation
of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such
internal control as the directors determine is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible on behalf of the
Group for assessing the Group’s ability 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
consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole are 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 ISAs and ISAs (NZ)
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 these consolidated
financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements
is located on the External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-
report-1
This description forms part of our auditor’s report.
Restriction on useThis report is made solely to the Company’s shareholders, as a body. Our audit has been
undertaken so that we might state to the Company’s shareholders those matters we are
required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company’s shareholders as a body, for our audit work, for this report, or for the opinions we
have formed.
Michael Wilkes, Partner
for Deloitte Limited
Christchurch, New Zealand
26 February 2019
Annual Report - Year Ended 31 December 2018
83
Financial Statements
84
Scales Corporation Limited
Corporate Governance
CORPORATE GOVERNANCE STATEMENT
The Board of Scales Corporation Limited (Scales or the Company) is committed to ensuring that the Company meets best practice
governance principles and maintains the highest ethical standards. This Corporate Governance Statement provides an overview of
the Company’s governance framework. It is structured to follow the NZX Corporate Governance Code (NZX Code) and discloses the
practices relating to the NZX Code’s recommendations.
The Board’s view is that Scales complies with the corporate governance principles and recommendations set out in the NZX Code
apart from two specific areas as noted in this report. The Board believes our governance structures, in particular our approach to
remuneration, meets our strategic objectives. In forming our conclusions we have sought external feedback from shareholders and
advisors to challenge our thinking and validate our findings, which we have appreciated.
The Company also complies with the corporate governance requirements of the NZX Main Board Listing Rules (NZX Listing Rules). The
Board regularly reviews and assesses Scales’ governance structures and processes to ensure that they are consistent with best practice.
Scales will transition to the new NZX Listing Rules with effect from 1 May 2019. Accordingly, this Corporate Governance Statement
has been prepared in accordance with the NZX Code that was published in 2017. Scales will prepare its Corporate Governance
Statement for the year ended 31 December 2019 in accordance with the NZX Code dated 1 January 2019.
Scales’ key corporate governance documents referred to in this statement, including charters and policies, can be found at www.
scalescorporation.co.nz/about-us/governance.
Scales’ Corporate Governance Code (the Scales Code) was reviewed and updated in February 2018 and is reviewed annually. This
Corporate Governance Statement was approved by the Board on 22 March 2019.
Principle 1 – Code of Ethical Behaviour
“Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for
these standards being followed throughout the organisation.”
RECOMMENDATION 1.1
The Board should document minimum standards of ethical behaviour to which the issuer’s Directors and employees are
expected to adhere (a Code of Ethics).
Code of Ethics
Scales’ Board sets a framework of ethical standards for the Company via its Code of Ethics, which is contained in the Scales Code.
These standards are expected of all Directors and employees of Scales and its subsidiaries.
The Code of Ethics covers a wide range of areas including:
• standards of behaviour;
• conflicts of interest;
• proper use of Company information and assets;
• accepting gifts;
• delegated authorities;
• compliance with laws and policies;
• reporting concerns; and corporate opportunities.
The procedure for advising the Company of a suspected breach is set out in the Code of Ethics. No breaches were identified during
the year.
Every new Director, employee and contractor is to be provided with a copy of the Code of Ethics and must confirm that they have
read and understand the Code of Ethics. The Code of Ethics is also available on the Company’s website.
During 2018 the Board undertook specific Anti-Bribery and Corruption training, along with Company senior management. The
Board will continue to assess the appropriate options for Company-wide ethics training in order for the Company to fully meet the
ethics training recommendation.
The Code of Ethics is subject to biennial review by the Board.
RECOMMENDATION 1.2
An issuer should have a financial product dealing policy which applies to employees and Directors.
Share trading by Company Directors and Employees
The Board has implemented formal procedures to handle trading in the Company’s securities by Directors, employees and advisors
of the Company, with approval being required before trading can occur. Approval is required to be obtained from the Chair, other
Directors, CEO or the Chief Financial Officer depending on who is trading. A blackout period is imposed for all Directors and
employees between the end of the half year and full year and the release to NZX of the result for that period.
The policy provides that shares may not be traded at any time by any individual holding material information. The full procedures are
outlined in the Securities Trading Policy and Guidelines, which is contained in the Scales Code.
The fundamental rule in the policy is that insider trading is prohibited at all times. The requirements of the policy are separate from,
and in addition to, the legal prohibitions on insider trading in New Zealand.
Annual Report - Year Ended 31 December 2018
85
Corporate Governance
Principle 2 – Board Composition & Performance
To ensure an effective Board, there should be a balance of independence, skills, knowledge, experience and perspectives.
RECOMMENDATION 2.1
The Board of an issuer should operate under a written charter which sets out the roles and responsibilities of the Board.
Responsibilities of the Board
The Board has overall responsibility for all decision making within Scales. In this regard the Board is responsible for laying solid
foundations for the direction, management and oversight of the Company in the support of its objectives to generate growth,
corporate profit and shareholder gain. It has delegated day-to-day management of the Company to the Managing Director and the
senior management team.
The main functions of the Board include to:
• Review and approve the strategic, business and financial plans prepared by Management.
• Monitor performance against the strategic, business and financial plans.
• Appoint, provide counsel to and review the performance of the Managing Director.
• Approve major investments and divestments.
• Ensure ethical behaviour by the Company, Board, Management and employees.
• Assess its own effectiveness in carrying out its functions.
The Board monitors these matters by receiving reports and plans from Management, maintaining an active programme of divisional
visits and through its annual work programme.
The Board uses Committees to address certain issues that require detailed consideration by members of the Board who have
specialist knowledge and experience. The Board retains ultimate responsibility for the functions of its committees and determines
their responsibilities.
The Board has a statutory obligation to reserve responsibility for certain matters. It also deals directly with issues relating to the
Company’s mission, appointments to the Board, strategy, business and financial plans.
Details of the Board’s role, composition, responsibilities, operation, policies and committees are provided in the Scales Code.
RECOMMENDATION 2.2
Every issuer should have a procedure for the nomination and appointment of Directors to the Board.
Director nomination and appointment
The Board is responsible for appointing Directors. The Nominations and Remuneration Committee manages the appointment process
for new Directors and the re-election of existing Directors in order to make a recommendation to the Board. When considering an
appointment, the Committee will undertake a thorough check of the candidate and his or her background. Where the Board determines
a person is an appropriate candidate, shareholders are notified of that and are provided with all material information that is relevant to the
decision on whether to elect or re-elect a Director.
The Nominations and Remuneration Committee also has responsibility for reviewing the composition of the Board to ensure that the
Company has access to the most appropriate balance of skills, qualifications, experience, perspectives and background to effectively govern
the Company.
Using the Board skills matrix the Board has determined that to operate effectively and to meet its responsibilities it requires competencies
in disciplines including executive leadership and strategy, governance, agriculture, storage and logistics, finance and capital markets, risk
and compliance, legal and regulatory, people, digital and technology, export, retail and doing business in China.The recent appointment of
Nadine Tunley as a director brings specific experience in horticulture, international trade and governance.
The current mix of skills and experience is considered appropriate for the responsibilities and requirements of governing Scales. The Board
looks to strengthen its oversight of issues in all disciplines, as required, via expert advice.
As at 31 December 2018 the Board has a majority of Independent Directors. Director independence is considered on a case-by-case basis
and is monitored on an ongoing basis.
RECOMMENDATION 2.3
An issuer should enter into written agreements with each newly appointed Director establishing the terms of
their appointment.
Letter of appointment
All new directors will enter into a written agreement with Scales setting out the terms of their appointment.
86
Scales Corporation Limited
Corporate Governance
RECOMMENDATION 2.4 AND 2.8
Every issuer should disclose information about each Director in its annual report or on its website, including a profile of
experience, length of service, independence and ownership interests.
The Chair and the CEO should be different people.
Board of Directors
A profile of each of the Directors is on pages 39 – 40 of this report. The profiles include information on the year of appointment,
skills, experience and background of each Director.
Tim Goodacre is the Independent Chair of Scales. Nick Harris, Mark Hutton, Alan Isaac and Nadine Tunley are Independent Directors.
Tomakin Lai is the Vice President, Chief Financial Officer and Company Secretary of China Resources Enterprise, Limited, the parent
company of China Resources Ng Fung Limited, holder of a 15.24% shareholding in the Company. Mr Lai is a non-executive Director.
Andy Borland is the Managing Director and Chief Executive Officer (CEO) of Scales.
The roles of Board Chair, Audit and Risk Management Committee Chair and CEO are not held by the same person.
The Board determines annually on a case-by-case basis on the advice of the Nominations and Remuneration Committee who, in its
view, are Independent Directors. The guidelines set out in the NZX Listing Rules (para.3.3.1) are used for this purpose.
Ownership of Scales shares by Directors is encouraged rather than being a requirement. Directors’ ownership interests are disclosed
at page 99.
The Board does not have a tenure policy however it recognises that a regular refreshment programme leads to the introduction of
new perspectives, skills, attributes and experience.
Director period of appointment
0-3 years3 – 9 years9 years +
Number of Directors250
Interests Register
The Board maintains an Interests Register. Any Director who is interested in a transaction with the Company must immediately
disclose to the Board the nature, monetary value and extent of the interest. A Director who is interested in a transaction may attend
and participate at a Board meeting at which the transaction is discussed but may not be counted in the quorum for that meeting or
vote in respect of the transaction, unless it is one in respect of which Directors are expressly required by the Companies Act 1993 to
sign a certificate.
Particulars of entries made in the Interests Register for the year ended 31 December 2018 are included in the Director Disclosures
section on page 99.
RECOMMENDATION 2.5
An issuer should have a written diversity policy which includes requirements for the Board or a relevant Committee of
the Board to set measurable objectives for achieving diversity (which, at a minimum, should address gender diversity)
and to assess annually both the objectives and the entity’s progress in achieving them.
Diversity
Scales recognises the value in diversity of thinking and skills, and seeks to ensure that the Board and workforce both comprise
members reflecting diversity. A formal Diversity Policy has been adopted by the Board.
The Board seeks diversity in the skills, attributes, perspectives and experience of its members across a broad range of criteria so as
to represent the diversity of shareholders, business types and regions in which Scales operates. Diversity, both at Board level and
throughout the company, is actively considered and reviewed by the Board.
Additions to the Board in the past year have been:
• Lai Po Sing, Tomakin, continuing China Resources Ng Fung representation following the resignation of Weiyong Wang;
• Nadine Tunley, who brings extensive experience in horticulture, international trade and governance.
Scales participates in the Institute of Directors’ Future Directors programme as part of our commitment to further develop the
skillsets available within the agriculture sector. Our third and current Future Director, Teresa Steele-Rika, will sit on the Board as a
participant in this programme. Teresa participates in discussions at all Board meetings but does not participate in decision making.
The programme is designed to give talented young aspiring Directors exposure to a company Board, whilst also giving the host
company a fresh perspective.
Scales recruits, promotes and compensates on the basis of merit, regardless of gender, ethnicity, religion, age, nationality, sexual
orientation, union membership or political opinion. Scales requires that people in the workplace are treated with respect in
accordance with the Company’s philosophies of equal employment opportunities, and anti-harassment and discrimination policies.
Responsibility for workplace diversity and the setting of measurable objectives is held by the Nominations and Remuneration
Committee. The Committee continues to assess desired measurable objectives and consequently is not fully compliant with
Recommendation 2.5.
Annual Report - Year Ended 31 December 2018
87
Corporate Governance
The gender composition of Scales’ Directors, Senior Managers and Management Team (comprising the top two layers of
management) was as follows:
As at 31 December 2018As at 31 December 2017
PositionFemaleMaleFemaleMale
Director*0 (0%)6 (100%)1 (14%)6 (86%)
Senior Managers1 (17%)5 (83%)1 (14%)6 (86%)
Management Team (excluding
Senior Managers)
12 (35%)22 (65%)14 (35%)26 (65%)
*2017 figure includes Carol Chen as Alternate Director. There were no Alternate Directors as at 31 December 2018.
RECOMMENDATION 2.6
Directors should undertake appropriate training to remain current on how to best perform their duties as Directors of
an issuer.
DIRECTOR TRAINING
The Board ensures that there is appropriate training available to all Directors to enable them to remain current on how best to
discharge their responsibilities and keep up to date on changes and trends in areas relevant to their work. Directors are provided with
industry information and receive copies of appropriate Company documents to enable them to perform their role. The Board has
allocated funding of $1,000 per annum for each Director to provide resources to help develop and maintain skills and knowledge.
The Board also ensures that new Directors are appropriately introduced to Management and the businesses.
RECOMMENDATION 2.7
The Board should have a procedure to regularly assess Director, Board and Committee performance.
Board Performance Evaluation
The Board annually assesses its effectiveness in carrying out its functions and responsibilities. The Chairman of the Board leads the
review and evaluation of the Board as a whole, and of the Board Committees, against their charters. The Chair of the Board also
engages with individual Directors to evaluate and discuss performance and professional development.
Principle 3 – Board Committees
The Board should use Committees where this will enhance its effectiveness in key areas, while still retaining Board responsibility.
Board Committees
The Board has four formally constituted committees – the Audit and Risk Management Committee, the Nominations and Remuneration
Committee, the Health and Safety Committee and the Finance and Treasury Committee. Each Committee focuses on specific areas of
governance and together they strengthen the Board’s oversight of Scales. Committee membership is reviewed annually.
Each Committee has a written charter that is approved by the Board and sets out its mandate. The charters are reviewed annually with
any proposed changes recommended to the Board for approval. The charters are included in the appendices within the Scales Code.
Annually each Committee agrees a programme of matters to be addressed over the following twelve month period. The Committees
each annually review their performance against the Committee charter and objectives for the year and report their findings to
the Board.
Attendance at Meetings
The table below sets out Director attendance at Board and Committee meetings during the year ended 31 December 2018.
BoardAudit and
Risk Management
Committee
Nominations
and Remuneration
Committee
Finance and
Treasury
Committee
Health and
Safety
Committee
Eligible
to attend
AttendedEligible
to attend
AttendedEligible
to attend
AttendedEligible
to attend
AttendedEligible
to attend
Attended
Andrew Borland1111----4455
Carol Chen*54--------
Tim Goodacre1111--66----
Nick Harris11864----54
Mark Hutton1111666644--
Alan Isaac111066------
Nelson Liu*64--------
Weiyong Wang116--------
*Carol Chen resigned as Alternate Director to Weiyong Wang on 15 June 2018. Nelson Liu was appointed as Alternate Director to Weiyong Wang on
15 June 2018, and resigned on 18 December 2018.
88
Scales Corporation Limited
Corporate Governance
RECOMMENDATION 3.1
An issuer’s Audit Committee should operate under a written charter. Membership on the Audit Committee should be
majority independent and comprise solely of non-executive Directors of the issuer. The Chair of the Audit Committee
should not also be the Chair of the Board.
Audit and Risk Management Committee
The primary functions of the Audit and Risk Management Committee are:
• To oversee the financial reporting process to ensure that the interests of shareholders are properly protected in relation to
financial reporting and internal control.
• To provide the Board with an independent assessment of the Company’s financial position and accounting affairs.
• To keep under review the effectiveness of the Company’s procedures for the identification, assessment and reporting of
material risks.
• To oversee the appointment and performance of the external auditor.
Members of the Committee are appointed by the Board and must comprise solely non-executive Directors, a majority of which must
be Independent Directors. The current members of the Committee are Alan Isaac (Chair), Nick Harris and Mark Hutton. All members
of the Audit and Risk Management Committee are Independent Directors. Alan Isaac is a former national chair of KPMG. The Chair
of the Audit and Risk Management Committee and the Board Chair are different people.
The Committee met on six occasions during the year. The agenda items for each meeting generally relate to financial governance,
external financial reporting, external audit, internal audit, risk management, compliance and insurance.
RECOMMENDATION 3.2
Employees should only attend Audit Committee meetings at the invitation of the Audit Committee.
Meeting Attendance
The Managing Director and Chief Financial Officer are regularly invited to attend Audit and Risk Management Committee meetings.
RECOMMENDATION 3.3 AND 3.4
An issuer should have a Remuneration Committee which operates under a written charter.
Nominations and Remuneration Committee
The primary functions of the Nominations and Remuneration Committee are:
• To establish a clear framework for oversight and management of the Company’s remuneration structure, policies, procedures and
practices to ensure Scales’ remuneration is fair and reasonable.
• Defining the roles and responsibilities of the Board and senior management.
• Reviewing and making recommendations on Board and Committee composition and succession.
Members of the Committee are appointed by the Board and must comprise a majority of Independent Directors. The current
members of the Committee are Mark Hutton (Chair) and Tim Goodacre.
Management attends Nomination and Remuneration Committee meetings if invited by the Committee.
The Committee met on six occasions during the year.
RECOMMENDATION 3.5
An issuer should consider whether it is appropriate to have any other Board Committees as standing Board Committees.
All Committees should operate under written charters.
Health and Safety Committee
The Board’s commitment to ensuring a safe and healthy workplace for staff, contractors and visitors led to it establishing a Health
and Safety Committee.
The primary functions of the Committee are:
• To assist the Board to provide leadership and policy for health and safety.
• To assist the Board to fulfil its responsibilities and to ensure compliance with all legislative and regulatory requirements in relation
to the health and safety practices of the Company as those activities affect employees and contractors.
• To support the ongoing improvement of health and safety in the workplace.
Members of the Committee are appointed by the Board. The Committee must be chaired by an Independent Director. The current
members of the Committee are Nick Harris (Chair) and Andy Borland.
The Committee met on five occasions during the year.
Finance and Treasury Committee
Scales operates in a capital intensive sector and is one of New Zealand’s leading horticultural exporters with material foreign currency
receipts. The Board considers that both with the size of Scales’ existing activities and the current implementation of the Strategy
Refresh it is appropriate to have a Board Committee to further focus on this part of the business.
Annual Report - Year Ended 31 December 2018
89
Corporate Governance
The primary functions of the Committee are to:
• Review the allocation of capital;
• Oversee the Company’s capital and treasury risk management;
• Monitor continuous disclosure processes to ensure their integrity, transparency and adequacy, and that they are in accordance
with Company policies.
• In addition, the Committee will oversee takeover protocols and, if required, establish a Takeovers Committee comprising of
Independent Directors.
Members of the Committee are appointed by the Board. The Committee must be chaired by an Independent Director. The current
members of the Committee are Mark Hutton (Chair) and Andy Borland. The committee also obtains ongoing advice from
external advisors.
The Committee met on four occasions during the year.
RECOMMENDATION 3.6
The Board should establish appropriate protocols that set out the procedure to be followed if there is a takeover offer
for the issuer.
Takeover Protocols
The Board has documented and adopted a series of protocols to be followed in the event of a takeover offer being made, including
communication between insiders and any bidder. A committee of Independent Directors would be formed and would have
responsibility for managing the takeover in accordance with the Board protocols and the New Zealand Takeovers Code.
Principle 4 – Reporting and Disclosure
The Board should demand integrity in financial and non-financial reporting, and in the timeliness and balance of
corporate disclosure.
RECOMMENDATION 4.1
An issuer’s board should have a written continuous disclosure policy.
Shareholder Communications and Market Disclosure
Scales’ Board is committed to the principle that high standards of reporting and disclosure are essential for proper accountability
between the Company and its investors, employees and stakeholders.
It achieves these commitments, and the promotion of investor confidence, by ensuring that trading in its shares takes place in
an efficient, competitive and informed market. The Company has in place a written Shareholder Communications and Market
Disclosure Policy designed to ensure this occurs. The policy includes procedures intended to ensure that disclosure is made in a timely
and balanced manner and in compliance with the NZX Listing Rules, such that:
• All investors have equal and timely access to material information concerning the Company, including its financial situation,
performance, ownership and governance.
• Company announcements are factual and presented in a clear and balanced way.
Accountability for compliance with disclosure obligations is with the Managing Director and Chief Financial Officer. Managers
reporting to the Managing Director are required to provide the Chief Financial Officer with all relevant information that may be
material and to regularly confirm that they have done so.
Significant market announcements, including the preliminary announcement of the half year and full year results, the financial
statements for those periods, and any advice of a change in earnings forecast are approved by the Board.
Directors consider at each Board meeting whether there is any material information which should be disclosed to the market.
RECOMMENDATION 4.2
An issuer should make its Code of Ethics, Board and Committee charters and the policies recommended in the NZX Code,
together with any other key governance documents, available on its website.
Governance Policies and Charters
Scales’ key corporate governance documents, including charters and policies, can be found at www.scalescorporation.co.nz/about-
us/governance.
RECOMMENDATION 4.3
Financial reporting should be balanced, clear and objective. An issuer should provide non-financial disclosure at least
annually, including considering material exposure to environmental, economic and social sustainability risks and other
key risks.
Financial and Non-Financial Reporting
Scales’ Board is committed to ensuring integrity and timeliness in its financial reporting and in providing information to the market
and shareholders which reflects a considered view on the present and future prospects of the Company.
A programme of clear, meaningful, timely and effective communications with shareholders is centred around a comprehensive set of
information regarding Scales’ operations and results being available on the Company’s website and in shareholder reports.
90
Scales Corporation Limited
Corporate Governance
The Audit and Risk Management Committee oversees the quality and integrity of external financial reporting including the accuracy,
completeness, balance and timeliness of financial statements. It reviews interim and annual financial statements and makes
recommendations to the Board concerning accounting policies, areas of judgement, compliance with financial reporting standards,
stock exchange and legal requirements, and the results of the external audit. All matters required to be addressed and for which the
Committee has responsibility were addressed during the period under review.
All interim and full-year financial statements are prepared in accordance with relevant financial standards.
Non-Financial Reporting
Both financial and non-financial disclosures are made at least annually, including reporting of material exposure to environmental,
economic and social sustainability risks and other key risks. Scales has a strategic target to develop best-in-class sustainability
reporting and to measure and report on key sustainability aspects affecting its businesses.
Scales’ Sustainability Report is included in this report at pages 18 – 25, and provides details of the continuing growth and
improvements in Scales’ initiatives in this area. The Group-wide report identifies material sustainability topics, grouped under the
headings Our People, Marketplace, and Our Environment.
Principle 5 - Remuneration
The remuneration of Directors and senior management should be transparent, fair and reasonable.
Remuneration Report
Introduction
This Remuneration Report outlines the Company’s overall reward strategy for the year ended 31 December 2018 and provides
detailed information on the remuneration arrangements in this period for the Directors of the Company, the CEO and other
nominated executives.
The Company’s Remuneration Policy, which may be amended from time to time, is reviewed at least once a year. The Company
has also established a number of additional policies to support a strong governance framework and uphold ethical behaviour and
responsible decision making.
Remuneration Philosophy
The Nominations and Remuneration Committee is responsible for making recommendations to the Board on remuneration
policies and packages for Directors, the CEO and nominated executives. The primary objectives of the Remuneration Policy
are to provide a competitive and flexible structure that reflects market practice, but is tailored to the specific circumstances of
the Company and which reflects each person’s duties and responsibilities so as to attract, motivate and retain people of the
appropriate quality. This includes the company responsibility to monitor diversity and ensure pay equity.
The Nominations and Remuneration Committee reviews market data on remuneration structure and quantum. The remuneration
packages of the CEO and nominated executives are structured to include a Short Term Incentive Scheme (STI Scheme) that is
directly linked to the overall financial and operational performance of the Company. The CEO and nominated executives may also
be invited to participate in the Company’s Long Term Incentive Scheme (LTI Scheme). The long term benefits of the LTI Scheme are
solely conditional upon the Company’s share price meeting certain performance criteria, details of which are outlined below.
Remuneration Structure
In accordance with best practice corporate governance, the structure of non-executive Director remuneration is separate and distinct
from the remuneration of the CEO and other executives.
Components of Compensation – Non-executive Directors
The Board seeks to set aggregate remuneration for non-executive Directors at a level which provides the Company with the ability to
attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.
No remuneration is payable to Directors unless it is approved by the Company’s shareholders. The NZX Listing Rules specify that
shareholders can approve a per-Director remuneration amount or an aggregate Directors’ fee pool. Shareholders approved an
aggregate remuneration pool for non-executive Directors of $500,000 per annum in 2017. An increase of the director fee pool will
be proposed at the 2019 Annual Shareholders Meeting, subject to the election, at the meeting, of the additional Director appointed
by the Board during the year.
The Board reviews its fees annually to ensure the Company’s non-executive Directors are fairly remunerated for their services,
recognising the level of skill and experience required to fulfil the role, and to enable the Company to attract and retain talented
non-executive Directors. The process involves benchmarking against a group of peer companies. In addition, the Board reviews the
Committee structure and appropriate level of resourcing required to make an on-going contribution to long term value creation.
Non-executive Directors have no entitlement to any performance-based remuneration or participation in any share-based incentive
schemes. This policy reflects the differences in the role of the non-executive Directors, which is to provide oversight and guide
strategy, and the role of management, which is to operate the business and execute the Company’s strategy. Non-executive Directors
are encouraged to be shareholders, but are not required to hold shares in the Company.
Each non-executive Director receives a fee for services as a Director of the Company and an additional fee is also paid for being
a member of the Board Committees. The payment of an additional fee recognises the additional time commitment required by
Directors who serve on those Committees. All Directors are also entitled to be reimbursed for costs associated with carrying out
their duties.
Annual Report - Year Ended 31 December 2018
91
Corporate Governance
Fees payable to the non-executive Directors of the Company for the period 1 January 2018 to 31 December 2018 were as follows:
DirectorBase feeFees for
serving on
Nominations
and
Remuneration
Committee
Fees for
serving on
Audit and Risk
Management
Committee
Fees for
serving on
the Board
of Selacs
Insurance
Limited
Fees for
serving
on Health
and Safety
Committee
Fees for
serving on
Finance and
Treasury
Committee
Tim Goodacre $131,000
(Chair)
$0$0$0$0$0
Alan Isaac$65,000$0$18,000 (Chair)$12,000$0$0
Nick Harris$65,000$0$6,000$0$9,000 (Chair)$0
Mark Hutton $65,000$12,000 (Chair)$6,000$0$0$9,000 (Chair)
Weiyong Wang$65,000$0$0$0$0$0
(a) Remuneration of the CEO and Employees
The number of employees of the Company (including former employees), not being a Director mentioned above, who received
remuneration and other benefits in excess of $100,000 in the period 1 January 2018 to 31 December 2018 is set out in the
remuneration bands detailed below:
Amount of RemunerationEmployees
$100,001 - $110,0006
$110,001 - $120,0009
$120,001 - $130,00016
$130,001 - $140,0009
$140,001 - $150,0009
$150,001 - $160,0005
$160,001 - $170,0002
$170,001 - $180,0001
$190,001 - $200,0001
$200,001 - $210,0001
$210,001 - $220,0003
$220,001 - $230,0001
$230,001 - $240,0002
$240,001 - $250,0001
$250,001 - $260,0002
$270,001 - $280,0002
$280,001 - $290,0001
$300,001 - $310,0001
$330,001 - $340,0001
$350,001 - $360,0002
$390,001 - $400,0002
$620,001 - $630,0001
As set out in further detail below, the total remuneration and value of other benefits paid to the CEO (including under the STI
Scheme and LTI Scheme detailed below) for the year ended 31 December 2018 was $1,079,259 (2017: $886,774).
92
Scales Corporation Limited
Corporate Governance
(b) Components of Compensation – CEO and Nominated Executives
(i) Structure
The Company aims to reward the CEO and nominated executives with a level and mix of remuneration commensurate with their
position and responsibilities within the Group, so as to:
• Reward them for Company and business unit performance against targets set by reference to appropriate benchmarks and key
performance indicators;
• Align their interests with those of shareholders; and
• Ensure total remuneration is competitive by market standards.
Remuneration consists of both fixed and variable remuneration components. The variable remuneration component comprises the
STI Scheme and the LTI Scheme.
The proportion of fixed remuneration and variable remuneration is established for the CEO and for each nominated executive by
the Board, following recommendations from the Nominations and Remuneration Committee and the CEO (in the case of the
nominated executives).
The remuneration packages for the CEO and nominated executives are all subject to Board approval. During 2018 there were no
material changes to the structure or targets for the fixed or STI remuneration. The existing LTI scheme was extended for a further
three year period for all nominated executives with the Total Shareholder Return (TSR) gross hurdle rate increased to 20.0% based on
the share price from the date of joining the scheme. In addition, selected executives were provided with a new one-off opportunity
to increase their participation in the scheme with additional shares being allocated over the next three year period.
The mix of fixed and variable ‘at risk’ remuneration payable in respect of 2018 and 2017 was as follows:
(ii) Fixed annual remuneration
Remuneration levels are reviewed annually to ensure that they are appropriate for the responsibility, qualifications and experience of
the CEO and each nominated executive and are competitive with the market.
The CEO and nominated executives receive their fixed annual remuneration in cash and a limited range of prescribed fringe benefits
such as superannuation, motor vehicle and health insurance. The total employment cost of any remuneration package, including
fringe benefit tax, is taken into account in determining an employee’s fixed annual remuneration.
For the financial year ended 31 December 2018, the CEO received $551,553 (2017: $562,350) in fixed annual remuneration. The
annual cash remuneration and LTI scheme are linked and fixed for a three year period.
(iii) Variable remuneration – STI Scheme
The objective of the STI Scheme is to link the achievement of the annual financial and operational targets with the remuneration
received by the executives charged with meeting those targets. The total potential remuneration under the STI Scheme is set at a
level so as to provide sufficient incentive to the executive to achieve the targets such that the cost to the Company is flexible and in
line with the trading outcome for the year.
Actual STI Scheme payments granted to the CEO and each nominated executive depend on the extent to which specific targets, set
at the beginning of the year, are met. The targets may include a weighted combination of:
• At least 40% for meeting budget or target Underlying Net Profit after Tax for the Group; plus
• At least 40% for meeting budget or target Underlying Net Profit after Tax and/or Return on Capital Employed for the group or
business unit; and
• Any balance for strategic objectives; and other contributions.
The Nominations and Remuneration Committee consider the performance against the targets, and determine the amount, if any,
to be allocated to the CEO and nominated executives. STI Scheme payments relating to the financial year ended 31 December 2018
are delivered as a taxable cash bonus and are payable on completion of the annual audited financial statements. It should be noted
that the level of remuneration detailed in this report for the CEO includes the bonus paid in early 2018 relating to the 2017 financial
year. The actual amount paid for all nominated executives in the STI Scheme for 2017 was $675,000 and the total accrual for 2018
is $942,872, being 96% of the total pool for the year.
The STI Scheme payment for the CEO relating directly to the financial year ended 31 December 2018 has been approved for
payment, with the CEO receiving $144,000 (2017: $80,133), being 100% of his maximum available bonus.
STI Scheme payment values are set as a percentage of base cash remuneration, being 30% for the CEO and between 10% and 30%
for other nominated executives for the financial year ended 31 December 2018. For the financial year ended 31 December 2018
there were 47 nominated executives in the STI Scheme, a decrease of 2 from the 2017 year.
In addition to the STI Scheme the Board reserves the ability to pay ad hoc bonus payments to any employee, again directly related
with the trading outcome.
CEONominated Executives
20182018
20172017
51%71%
63%76%37%
FixedVariable
24%
49%29%
Annual Report - Year Ended 31 December 2018
93
Corporate Governance
(iv) Variable remuneration – LTI Scheme
The LTI Scheme has been designed to link reward with key performance indicators that drive sustainable growth in shareholder value
over the long term. The objectives of the LTI Scheme are to:
• Align the CEO and nominated executives’ interests with those of shareholders;
• Help provide a long term focus; and
• Retain high calibre senior employees by providing an attractive equity-based incentive that builds an ownership of the
Company mindset.
• Encourage executives to think and act like owners.
The hurdle rate used for the LTI Scheme is an absolute share price growth hurdle, which is more challenging over time than a
relative TSR approach. This approach only rewards executives if the shareholders also do well.
Under the LTI Scheme, the CEO and nominated executives are offered an interest free loan which is to be applied to acquire
shares in the Company. Shares acquired under the LTI Scheme are held by a custodian and will only vest in the employee if he or
she is still employed by the Company after three years from the date of issue. Once the shares vest, the employee still remains
obligated to repay the outstanding balance of the loan. Often to fund the repayment of the outstanding loans, executives may,
subject to the approved procedures, sell on market their LTI vested shares. Over the next twelve months a total of 287,646 shares
vest from 22 April 2019 (as detailed in the table below). Alternatively, if an employee leaves employment before the expiry of the
three year period, the Company is authorised to sell that employee’s shares with the proceeds applied to repay the balance of the
loan, with any deficit covered by the Company and any surplus retained by the Company.
Although performance rights are the most prevalent LTI instrument in Australasia the company believes the issue of shares and
loans is more relevant for Scales. The structure is well understood by executives and more closely aligns to the security held by
shareholders. In addition, the economic return achieved by executives is more challenging under the current terms.
Each employee’s loan amount (which determines how many shares will be acquired) is set as a percentage of their base cash
remuneration and selected employees will be offered a loan for this amount if the criteria set by the Board are met. For the next three
years of the LTI Scheme, from 2018 until the 2020 allocation, the criterion is the achievement of a gross TSR of 20.0% (previously
12.5%) over the reference share price. The reference share price for all new participants is set at the time of joining the scheme.
An offer may be made under the LTI Scheme to the CEO and nominated executives each financial year and is based on individual
performance as assessed by the annual appraisal process. If an executive does not sustain a consistent level of high performance
they will not be nominated for participation in the LTI Scheme. The Nominations and Remuneration Committee reviews all
nominated executives, with participation in the LTI Scheme subject to final Board approval. The Board has retained the discretion
to vary the applicable criteria for each offer under the LTI Scheme. Once the Board has fixed the criteria for a specific offer under
the LTI Scheme, those performance hurdles cannot be varied in respect of that offer.
LTI Scheme loan amounts are set as a percentage of base cash remuneration, being 30% for the CEO and 10%-20% for other
nominated executives in respect of the financial year ended 31 December 2018. For the financial year ended 31 December 2018,
there were 47 nominated executives in the LTI Scheme, a decrease of 2 from the 2017 year.
In addition to the existing LTI scheme, selected executives were provided with a one-off opportunity to increase their participation
in the share based LTI scheme with additional shares being allocated over the next three year period. The final allocation price
is referenced to the share price at the time of implementation. For 2018 the total additional shares issued was 207,023 shares.
This allocation replaces the highly successful original IPO Allocation and the board believes is consistent with our objective to
encourage executives to think and act like owners.
During the financial year ended 31 December 2018, 386,282 shares were allocated under the LTI Scheme relating to the 2017
financial year with matching interest free loans of $763,752, an average of $1.98 per share. The CEO will receive 52,941 shares in
the Company under the LTI Scheme relating to the financial year ended 31 December 2018, compared to 84,706 shares relating
to the previous year. As at the end of the financial year ended 31 December 2018, the total balance owing under the loans
advanced to the CEO under the LTI Scheme was $625,422 and $1,128,253 to nominated executives. Note that under accounting
treatment, loans relating to unvested shares are not recorded on the Company balance sheet.
In total, the CEO at year end held 306,413 shares under the LTI scheme which are subject to vesting constraints.
As at year end total loans, for vested shares, which are now full recourse, of $587,715 remain outstanding and are recorded on
the company balance sheet. The executives are obligated to repay the outstanding loan balance on the sale of the shares or on
termination of employment.
Total shares allocated under the scheme as at the end of the financial year ended 31 December 2018 are as follows:
Grant dateVesting dateExercise price ($)Number of shares
Opening
balance
GrantedForfeitedVested and
exercised
Closing
balance
8 May 2015 - BF8 May 20181.6696,193--96,193-
22 ApriI 2016 - FY1522 ApriI 20191.67298,998-11,352-287,646
5 May 2017 - FY16A5 May 20201.70290,031-11,152-278,879
5 May 2017 - FY16B5 May 20202.4535,834---35,834
20 ApriI 2018 - FY17A20 ApriI 20211.70-309,698--309,698
20 ApriI 2018 - FY17B20 ApriI 20212.51-36,007--36,007
20 ApriI 2018 - FY17C20 ApriI 20213.62-40,577--40,577
28 June 2018 - FY17R28 June 20214.13-207,023--207,023
Total 721,056593,30522,50496,1931,195,664
94
Scales Corporation Limited
Corporate Governance
The total cost of the LTI Scheme relating to share allocations made during 2018 was $1,782,844. Under accounting standard IFRS
2 Share Based Payments, the total option value of each annual allocation is spread across the three years of the vesting period from
the date of issue. As a result, the total expense recorded in the Statement of Comprehensive Income for the financial year ended 31
December 2018 is $846,796. The total cost relating to each annual share allocation will be cumulative.
The total annual cost of the LTI Scheme relating to shares issued from 2014 to 2018 is detailed below. In addition, the annual allocation
spread across the three years of the vesting period is as follows:
Financial YearLTI YearAllocation Cost
at Grant Date
P&L Amortisation*
2014IPO$469,985$65,000
20152014$31,465$167,850
20162015$517,879$269,719
20172016$572,866$388,732
20182017$1,251,325$846,796
2019*$397,056
2020*$479,547
2021*$140,447
*The forecast years assume no further Allocations.
It should be noted the level of remuneration detailed in this report for the CEO for 2018 includes all of the pro-rata portion of the
accounting expense of the LTI Scheme to date. The actual cost relating to the 2018 LTI Scheme allocation will be included in the 2019
remuneration amount reported.
(v) Employee share ownership scheme
At the time of the Company’s initial public offering, it established an employee share ownership scheme to facilitate an increase in the
level of participation by employees as shareholders, which improves the alignment of interests between employees and shareholders.
Under the scheme, each eligible employee was offered an interest free loan up to $5,000 to fund 50% of the subscription price for the
shares which the employee wished to acquire in the Company. Employees are obliged to repay their loans when the shares are sold or
when they leave the Company.
Principle 6 – Risk Management
Directors should have a sound understanding of the material risks faced by the issuer and how to manage them. The Board
should regularly verify that the issuer has appropriate processes that identify and manage potential and material risks.
RECOMMENDATION 6.1
An issuer should have a risk management framework for its business and the issuer’s Board should receive and review
regular reports.
Risk Management Framework
The Board is responsible for ensuring that key business and financial risks are identified, and that appropriate controls and procedures are
in place to effectively manage those risks.
The Audit and Risk Management Committee has overall responsibility for ensuring that Company’s risk management framework is
appropriate and that it appropriately identifies, considers and manages risks.
Risk management is an integral part of Scales’ business. A risk management framework incorporating a risk register is used to
identify those situations and circumstances in which the Company may be materially at risk and for which risk mitigation activities are
appropriate. This approach is intended to embed a comprehensive, holistic, Group-wide culture of risk awareness in senior management,
supported by a consistent method of identifying, assessing, controlling, monitoring and reporting existing and potential risks to
Scales’ business.
The objectives of the framework are to:
• Provide a consistent and structured way to manage risk across the Company;
• Ensure the Company manages effectively the risks it faces in achieving its objectives; and
• Ensure our people are aware of and meet their responsibilities to identify, evaluate and treat the risks that may prevent or restrict the
Company from achieving its objectives.
The Board has delegated responsibility to the Audit and Risk Management Committee to establish and regularly review the Company’s
risk management framework. As part of this framework the Committee is tasked with identifying situations and circumstances in which
the Company may be materially at risk, and initiating appropriate action through the Board or Managing Director. A risk management
policy is overseen by the Managing Director and supports a comprehensive approach to the management of those risks identified as
material to the Company’s operations. Risk management is a standing item on the agenda for Audit and Risk Management Committee
meetings, with detailed reports provided by management.
The Managing Director and Chief Financial Officer have provided the Board, through the Audit and Risk Management Committee,
with assurances that, in their opinion, financial records have been properly maintained, that the financial statements comply with those
accounting standards under which Scales must report and that the statements give a true and fair view of Scales’ financial position and
performance. These representations are given on the basis that a sound system of internal controls and risk management is operating
effectively in all material respects in relation to financial reporting.
Annual Report - Year Ended 31 December 2018
95
Corporate Governance
Insurance
In managing the Company’s business risks, the Board approves and monitors policy and procedures in areas such as treasury
management, financial performance, taxation and delegated authorities.
Scales has insurance policies in place covering most areas where risk to its assets and business can be insured at a reasonable cost.
It also operates a captive insurance subsidiary, Selacs Insurance Limited. Selacs Insurance accesses reinsurance, for the benefit of the
Company, in the London insurance market.
RECOMMENDATION 6.2
An issuer should disclose how it manages its health and safety risks and should report on their health and safety risks,
performance and management.
Health and Safety
The Health and Safety Committee was established to assist the Board to meet its responsibilities under the Health & Safety at Work
Act 2015. In particular, the Committee is responsible for ensuring that health and safety is given an appropriate level of focus
across the Scales Group by regularly reviewing the assurance processes around risk assessment and mitigation, safety systems, staff
capability, staff competency, safety leadership and safety culture. Detailed reporting is provided to the Committee on lead and lag
indicators including health and safety incidents, injury rates by severity, local site health and safety committee meetings, and sick
leave. The findings of independent audit reports are provided to the Committee. Further information is included in the Sustainability
Report on pages 18 – 25.
Principle 7 – Auditors
The Board should ensure the quality and independence of the external audit process.
RECOMMENDATION 7.1 AND 7.2
The Board should establish a framework for the issuer’s relationship with its external auditors.
The external auditor should attend the issuer’s Annual Shareholders Meeting to answer questions from shareholders in
relation to the audit.
External Auditor
Oversight of the Company’s external audit arrangements to safeguard the integrity of financial reporting is the responsibility
of the Audit and Risk Management Committee. Scales maintains an External Auditor Independence Policy to ensure that audit
independence is maintained, both in fact and appearance.
The policy covers the following areas:
• Appointment of the external auditor.
• Provision of other assurance services by the external auditor.
• Pre-approval process for the provision of other assurance services.
• External auditor lead and engagement partner rotation.
• Hiring of staff from the external auditor.
• Relationships between the external auditor and the Company.
• Reporting on fees and non-audit work.
The role of the external auditor is to audit the financial statements of the Company in accordance with applicable auditing standards
in New Zealand and to report on its findings to the Board and shareholders of the Company.
The External Auditor Independence Policy is available in the Governance section of the Company’s website.
Deloitte Limited is the Company’s current external auditor. Michael Wilkes has been the audit engagement partner following a
partner rotation after the completion of the 2015 audit. Michael was previously the audit engagement partner for the seven years up
to 2012.
All services provided by the Company’s external auditor are considered on a case by case basis by Management and the Audit and
Risk Management Committee to ensure there is no actual or perceived threat to independence in accordance with the policy. The
external auditor has provided the Audit and Risk Management Committee with written confirmation that, in his view, he was able to
operate independently during the year.
Fees paid to Deloitte Limited are included in note B2 of the notes to the financial statements. A total of $206,000 was paid to
Deloitte Limited for audit-related services. In addition, fees of $5,730 were paid to Deloitte Limited for non-audit work during the
year. All non-audit services provided must have the prior approval of the Audit and Risk Management Committee.
The effectiveness, performance and independence of the external auditors is reviewed by the Audit and Risk Management
Committee. The auditor is regularly invited to meet with the Committee including without Management present.
The auditor has been invited to attend the Annual Shareholders’ Meeting and will be available to answer questions about the audit
process and the independence of the auditor.
96
Scales Corporation Limited
Corporate Governance
RECOMMENDATION 7.3
Internal audit functions should be disclosed.
Internal Audit
Scales internal audit function is overseen by the Audit and Risk Management Committee. The objective of the internal audit function
is to enhance and protect the organisational value of Scales by providing risk-based and objective assurance, advice and insight.
Internal audit activities are governed by Scales’ Internal Audit Charter, which outlines, amongst other things, the principles, purpose,
authority and scope of the function.
An annual internal audit plan is prepared for approval by the Audit and Risk Management Committee. Where necessary, external
expertise is obtained for specific audit activities.
The internal auditor is regularly invited to meet with the Committee including without Management present.
Principle 8 – Shareholder Relations
The Board should respect the rights of shareholders and foster constructive relationship with shareholders that
encourage them to engage with the issuer.
RECOMMENDATION 8.1
An issuer should have a website where investors and interested stakeholders can access financial and operational
information and key corporate governance information about the issuer.
Shareholder Relations
Scales’ Board is committed to maintaining open and transparent communications with investors and other stakeholders. Annual and
interim reports, NZX releases, governance policies and charters and a variety of corporate information is posted onto the Company’s
website. Recordings of results briefings are available at Investor Presentations in the Investors section of the website.
Each shareholder is entitled to receive a hard copy of each annual and interim report.
The Company has a Shareholder Meetings page in the Investors section on its website. Documents relating to meetings are available.
Shareholder meetings will be held at a time and location to encourage participation in person by shareholders. Annual meetings to
date have been held in Christchurch, reflecting the head office location for the Company, and the historical shareholder base.
RECOMMENDATION 8.2
An issuer should allow investors the ability to easily communicate with the issuer, including providing the option to
receive communications from the issuer electronically.
Electronic Communications
Shareholders have the option of receiving their communications electronically.
Contact details for Scales’ head office are available on the website.
RECOMMENDATION 8.3
Shareholders should have the right to vote on major decisions which may change the nature of the company in which
they are invested in.
Major Decisions
Directors’ commitment to timely and balanced disclosure is set out in its Shareholder Communications and Market Disclosure Policy
and includes advising shareholders on any major decisions. Where voting on a matter is required the Board encourages investors to
attend the meeting or to send in a proxy vote. Shareholders may raise matters for discussion at the Annual Shareholders’ Meeting
either in person or by emailing the Company with a question to be asked.
RECOMMENDATION 8.4
Each person who invests money in a company should have one vote per share of the company they own equally with
other shareholders.
Voting
Scales conducts voting at its Annual Shareholder Meetings by way of poll and on the basis of one share, one vote.
RECOMMENDATION 8.5
The board should ensure that the annual shareholders notice of meeting is posted on the issuer’s website as soon as
possible and at least 28 days prior to the meeting.
Notice of Meeting
Scales’ Notice of Meeting will be available at least 28 days prior to the meeting on the Shareholder Meetings page in the Investors
section of the website.
Annual Report - Year Ended 31 December 2018
97
Director Disclosures
DIRECTOR DISCLOSURES
Directors
The following persons were Directors of Scales and its subsidiaries during the year ended 31 December 2018:
Scales Corporation Limited
Andrew Borland Executive Director
Carol Chen (resigned 15 June 2018) Alternate Director
Tim Goodacre Independent Chair
Nick Harris Independent Director
Mark Hutton Independent Director
Alan Isaac Independent Director
Nelson Liu (appointed 15 June 2018,
resigned 18 December 2018)
Alternate Director
Weiyong WangDirector
Fern Ridge Produce Limited
Russell Black
Andrew Borland
Hamish Davis
Andrew van Workum
Geo.H.Scales Limited
Andrew Borland
Steve Kennelly
Kent Ritchie
Liqueo Bulk Storage Limited
Andrew Borland (resigned 13 August 2018)
Kevin Cahill (resigned 13 August 2018)
Longview Group Holdings Limited
Andrew Borland
Andrew van Workum
Longview New Zealand Limited
(removed from the register 9 November 2018)
Andrew Borland
Andrew van Workum
Longview Packhouse Limited
(removed from the register 9 November 2018)
Andrew Borland
Andrew van Workum
Meateor Foods Limited
Andrew Borland
Stephen Foote (resigned 28 May 2018)
Nick Harris
Meateor Foods Australia Pty Limited
Andrew Borland
Tim Goodacre
Meateor Group Limited
Andrew Borland (appointed 25 May 2018)
Nick Harris (appointed 25 May 2018)
Meateor US LLC
Andrew Borland (appointed 6 December 2018)
John Sainsbury (appointed 6 December 2018)
Mr Apple New Zealand Limited
Andrew Borland
Tim Goodacre
Mark Hutton
New Zealand Apple Limited
Andrew Borland
Tim Goodacre
Scales Logistics Australia Pty Limited
(formerly OceanAir Freight Pty Limited)
Andrew Borland
Tim Goodacre
Polarcold Stores Limited
Andrew Borland
Nick Harris
Mark Hutton
98
Scales Corporation Limited
Director Disclosures
Scales Employees Limited
Andrew Borland
Mark Hutton
Scales Holdings Limited
Andrew Borland
Steve Kennelly
Kent Ritchie
Scales Logistics Limited
Andrew Borland
Steve Kennelly
Kent Ritchie
Selacs Insurance Limited
Andrew Borland
Alan Isaac
Steve Kennelly
Interests Register
The following entries were made in the interests register of Scales and its subsidiaries during the period 1 January 2018 to 31
December 2018:
Indemnification and Insurance of Directors
As permitted by the company’s Constitution and in accordance with Section 162 of the Companies Act 1993, the group has
indemnified all Directors and arranged Directors’ and Officers’ liability insurance which ensures that, to the extent permitted by
law, Directors will incur no monetary loss as a result of actions undertaken as Directors. Certain actions are specifically excluded, for
example, the incurring of penalties and fines, which may be imposed in respect of breaches of the law.
Share Dealings by Directors
Dealings by Directors in relevant interests in Scales’ ordinary shares during the year ended 31 December 2018 as entered in the
Interests Register of Scales are as follows:
Name of
Director
No. of
Shares
Nature of Relevant
Interest
Acquisition/ DisposalConsiderationDate of
Acquisition /
Disposal
Andrew Borland84,706Beneficial ownerAcquisition$4.46 per share20 April 2018
Andrew Borland750,000Registered holder,
together with Gina
Dellabarca and Mark
Bolton, as trustees of
the Borland Dellabarca
Family Trust, of which
Andrew Borland is a
discretionary beneficiary.
Disposal$4.73 per share24 May 2018
Andrew Borland77,482Beneficial ownerAcquisition$4.71 per share28 June 2018
Shelby Exports, Inc.
Brett Frankel (appointed 8 June 2010)
Bruce Curtis (appointed 8 June 2010)
Shelby JV LLC
Andrew Borland (appointed 20 December 2018)
John Sainsbury (appointed 20 December 2018)
Brett Frankel (appointed 6 December 2018)
Bruce Curtis (appointed 6 December 2018)
Whakatu Coldstores Limited
Andrew Borland
Stephen Foote
Annual Report - Year Ended 31 December 2018
99
Director Disclosures
General Notice of Disclosure of Interest in the Interests Register
Details of Directors’ general disclosures entered in the relevant interests register for Scales or its subsidiaries during the period 1
January 2018 to 31 December 2018 are as follows:
Scales Corporation Limited
Andrew Borland
Loganbrae LimitedCeased as a Director
Alan Isaac
Basin Reserve TrustAppointed as Chair
Fliway Group LimitedCeased as a Director
New Zealand Vault Depository LimitedAppointed as a Director
New Zealand Vault Depository LimitedCeased as a Director
New Zealand Vault LimitedCeased as a Director
Opus International Consultants LimitedCeased as a Director
Nelson Liu
China Resources Ng Fung LimitedNoted as a related party
Relevant Interests
The table below records the Scales ordinary shares in which each Director had a relevant interest as at 31 December 2018.
DirectorNumber of Ordinary Shares –
Beneficial
Number of Ordinary Shares –
Non-Beneficial
Andrew Borland306,413750,000
Tim Goodacre15,625Nil
Nick Harris100,000Nil
Mark HuttonNil748,277
Alan Isaac25,0003,000
Weiyong WangNilNil
Use of Company Information by Directors
No notices were received from Directors pursuant to section 145 of the Companies Act 1993 to use Company information, received
in their capacity as Directors, which would otherwise not have been available to them.
Auditor’s Fees
Deloitte Limited has continued to act as the auditor of Scales and its subsidiaries. The amount payable by Scales and its subsidiaries
to Deloitte Limited as audit fees during the year ended 31 December 2018 was $206,000. In addition, fees of $5,730 were paid to
Deloitte Limited for non-audit work during the year.
100
Scales Corporation Limited
Director Disclosures
Shareholder Information
Spread of Shares
Set out below are details of the spread of shareholders of Scales as at 31 January 2019:
Number of ShareholdersNumber of Shares Held% of Shares Held
Under 2,000993966,4330.69
2,000 to 4,9991,2603,866,2842.76
5,000 to 9,9998165,329,5993.80
10,000 to 49,99980914,621,75010.43
50,000 to 99,999734,907,8633.50
100,000 and over70110,499,10978.82
20 Largest Shareholders
Set out below are details of the 20 largest shareholders of Scales as at 31 January 2019:
ShareholderNumber of Shares% of Shares
New Zealand Central Securities Depository Limited41,736,69929.58
China Resources Ng Fung Limited21,500,00015.24
FNZ Custodians Limited7,641,1375.42
Custodial Services Limited6,350,4844.50
Custodial Services Limited4,040,5732.86
Custodial Services Limited2,912,2332.06
John Grant Sinclair & Camille Elizabeth Sinclair2,241,0001.59
Custodial Services Limited1,992,2831.41
John Grant Sinclair1,745,4991.24
Custodial Services Limited1,710,1501.21
PT (Booster Investments) Nominees Limited1,525,0351.08
Scales Employees Limited1,195,6640.85
New Zealand Depository Nominee Limited1,118,8500.79
Forsyth Barr Custodians Limited1,040,1200.74
Custodial Services Limited964,9380.68
Investment Custodial Services Limited825,6190.59
FNZ Custodians Limited818,4590.58
Andrew James Borland & Gina Dellabarca
& Mark Andrew Bolton
750,0000.53
Woolf Fisher Trust Incorporated680,0000.48
JB Were (NZ) Nominees Limited618,8750.44
Total101,407,61871.87
Annual Report - Year Ended 31 December 2018
101
Director Disclosures
Substantial Product Holders
Set out below are details of the substantial product holders of Scales as advised by notice to Scales at 31 December 2018.
The number of shares shown below is as advised in the most recent substantial product holder notices given to Scales and may not
be their holding as at 31 December 2018.
NameNumber of SharesClass of Shares
China Resources Ng Fung Limited21,500,000Ordinary
Harbour Asset Management Limited13,109,060Ordinary
Salt Funds Management Limited7,049,397Ordinary
The total number of Scales Corporation Limited ordinary shares on issue as at 31 December 2018 was 141,103,597.
Other Information
NZX Waivers
Scales did not rely upon any waivers granted by NZX Limited during the year ended 31 December 2018.
Exercise of NZX Disciplinary Powers
NZX Limited did not exercise any of its powers under Listing Rule 5.4.2 in relation to Scales during the year ended 31 December 2018.
Donations
Donations of $6,790 were made by Scales during the year ended 31 December 2018.
Annual Report - Year Ended 31 December 2018
103
Directory
DIRECTORY
Board of Directors
Tim Goodacre (Chair)
Andrew Borland (Managing Director)
Carol Chen (Alternate Director for Weiyong Wang, resigned
on 15 June 2018)
Nick Harris
Mark Hutton
Alan Isaac
Lai Po Sing, Tomakin (Appointed on 28 January 2019)
Weiyong Wang (Resigned on 28 January 2019)
Nelson Liu (Alternate Director for Weiyong Wang,
appointed 15 June 2018, resigned on 18 December 2018)
Nadine Tunley (Appointed on 26 February 2019)
Audit and Risk Management Committee
Alan Isaac (Chair)
Nick Harris
Mark Hutton
Nominations and Remuneration Committee
Mark Hutton (Chair)
Tim Goodacre
Finance and Treasury Committee
Mark Hutton (Chair)
Andrew Borland
Health and Safety Committee
Nick Harris (Chair)
Andrew Borland
Registered Office
52 Cashel Street
Christchurch 8013
New Zealand
Postal Address
PO Box 1590
Christchurch 8140
New Zealand
Telephone
64-3-379-7720
Website
www.scalescorporation.co.nz
Auditor
Deloitte Limited
Level 4
151 Cambridge Terrace
Christchurch 8013
Bankers
ANZ Bank New Zealand Limited
Level 3
ANZ Centre
267 High Street
Christchurch 8011
Rabobank New Zealand Limited
Level 23
157 Lambton Quay
Wellington 6011
Westpac New Zealand Limited
Level 4
The Terrace
83 Cashel Street
Christchurch 8011
Solicitors
Anthony Harper
Level 9
HSBC Tower
62 Worcester Boulevard
Christchurch 8013
Chapman Tripp
23 Albert Street
Auckland 1010
Corporate Advisor
Maher & Associates
17 Albert Street
Auckland 1010
Share Registry
Computershare Investor Services Limited
Level 2, 159 Hurstmere Road
Takapuna
North Shore City
Auckland 0622
52 Cashel Street, Christchurch 8013, New Zealand
www.scalescorporation.co.nz
Scales Corporation Limited
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.