Billabong financials

Billabong International Limited Financial report ended 30 June 2015

Appendix 4E

Preliminary final report Name of entity BILLABONG INTERNATIONAL LIMITED

ABN Financial year ended 17 084 923 946 30 JUNE 2015 Comparative Financial year ended 30 JUNE 2014 Results for announcement to the market

Results $A'000

Revenues from continuing operations Up 2.8% to 1,056,130

Profit from ordinary activities after tax attributable to members Up

n/a to 4,150

Net profit for the period attributable to members Up n/a to 4,150

Dividends Amount per security

Franked amount per security

Tax rate for franking

Current period – 2015

Final dividend --- --- n/a

Interim dividend --- --- n/a

Previous corresponding period – 2014

Final dividend --- --- n/a

Interim dividend --- --- n/a The Board has not declared a final ordinary dividend for the year ended 30 June 2015. The Dividend Reinvestment Plan (DRP) remains suspended.

NTA backing 2015 2014 Net tangible asset backing per ordinary security $0.12 $0.14

Billabong International Limited Financial report ended 30 June 2015

Compliance statement This report is based on the consolidated financial report which has been audited. Refer to the attached full financial report for all other disclosures in respect of the Appendix 4E.

Signed: ............................................................ Date: 27 August 2015 Neil Fiske Chief Executive Officer

Billabong International

Limited ABN 17 084 923 946

Contents Page Directors’ report 2

Auditor’s independence declaration 46

Corporate governance statement 47

Financial report 48

Directors’ declaration 139

Independent auditor’s report to the members 140

Shareholder information 142

: : FULL FINANCIAL REPORT 2014 - 15

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 2

Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Billabong International Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2015. Directors The following persons were Directors of the Company during the whole of the financial year and up to the date of this report: I. Pollard N. Fiske G.S. Merchant H. Mowlem J. Mozingo S.A.M Pitkin M. Wilson A. Doshi (Alternate to J. Mozingo) T. Casarella (Alternate to M. Wilson) Principal activities During the year the principal continuing activities of the Group consisted of the wholesaling and retailing of surf, skate, snow and sports apparel, accessories and hardware, and the licensing of the Group trademarks to specified regions of the world. Dividends – Billabong International Limited No dividends were paid to members during the financial year. The Board has not declared a final ordinary dividend for the year ended 30 June 2015. The Dividend Reinvestment Plan (DRP) remains suspended.

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 3

Operating and Financial Review Group overview The Group’s business is the wholesaling and retailing of surf, skate, snow and sports apparel, accessories and hardware currently comprising multiple brands and retail banners over three key reporting segments being Asia Pacific, Americas and Europe. The Group’s brands at year-end included Billabong, Element, RVCA, Kustom, Palmers, Honolua, Xcel, Tigerlily, Sector 9 and Von Zipper. The Group operates 404 retail stores as at 30 June 2015 in regions/countries around the world including but not limited to: North America (60 stores), Europe (102 stores), Australia (123 stores), New Zealand (30 stores), Japan (46 stores) and South Africa (27 stores). Stores trade under a variety of banners including but not limited to: Billabong, Element, Surf Dive ‘n’ Ski (SDS), Jetty Surf, Rush, Amazon, Honolua, Two Seasons and Quiet Flight. The Group also operates online retail ecommerce for each of its key brands. Significant changes in the state of affairs The statement below should be read in conjunction with note 41 (events occurring after the balance sheet date) of the annual report for the year ended 30 June 2014 and any public announcements made by the Company during the financial year. On 5 September 2014 the Group sold its 51% stake in the multi-brand ecommerce business SurfStitch.com in Australia and Europe (“SurfStitch”) and its 100% ownership of Swell.com in North America (“Swell”). Refer to note 10 of the financial statements for detailed disclosure in relation to these divestments. Other than matters dealt with in this report there were no significant changes in the state of affairs of the Group during the financial year. Group financial performance The Group results for the period and the prior corresponding period (“pcp”) include certain significant items including but not limited to contingent consideration and fair value adjustment charges and costs associated with the various control/refinancing proposals and strategic reform programs announced during the years ended 30 June 2013 and 30 June 2014. Refer to note 8 of the financial statements for detailed disclosure in relation to these items. During the period the Group sold its 51% stake in the multi-brand ecommerce business SurfStitch and its 100% ownership of Swell. During the year ended 30 June 2014, the Company made the decision to write off the majority of its deferred tax assets (net of deferred tax liabilities) as it was estimated that it was not probable for taxable profits to be generated in a period where the conditions for utilisation of the assets would be met including continuity of ownership tests. During the year ended 30 June 2015, the Company maintains this same position in most tax jurisdictions with the exception of Australia and Japan where it has been estimated that previously unrecognised temporary differences will now meet the conditions for utilisation of these assets. The reinstatement of these deferred tax assets resulted in a tax benefit of $16.8 million. In order to provide users with additional information regarding the continuing operations excluding the aforementioned significant items and to help understand the impact of these events on the results of the Group (and the impact of currency movements on the translation of the Group’s international operations into AUD), the segment results are presented in three separate tables. Table A presents the segment results on a basis including all significant items and including the operations of SurfStitch and Swell (and in the pcp DaKine and West 49) for the relevant period of ownership. See Table A “Segment Results As Reported – Including significant items and discontinued operations”. Table B presents the results excluding significant items and discontinued operations (SurfStitch and Swell are excluded from both the current year and pcp and previously divested businesses DaKine and West 49 are removed from the pcp). See Table B “Adjusted Segment Results – Continuing Operations As Reported – Excluding significant items and discontinued operations”. Table C presents the results on the same basis as in Table B but on a constant currency basis (i.e. using the current period monthly average exchange rates to convert the prior period foreign earnings) to remove the impact of foreign exchange movements from the Group’s performance against the pcp. The constant currency comparatives are not compliant with Australian Accounting Standards. See Table C “Adjusted Segment Results – Continuing Operations (Constant Currency) – Excluding significant items and discontinued operations”.

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 4

Operating and Financial Review (continued) Table A: Segment Results As Reported – Including significant items and discontinued operations

Segment revenues Segment EBITDAI* 2015 2014 2015 2014 $’000 $’000 $’000 $’000

Asia Pacific 428,476 480,500 10,461 14,593 Americas 455,565 537,969 15,345 (48,988) Europe 179,699 199,041 25,937 (20,754) Third party royalties 3,461 2,842 3,461 2,842 Segment revenues / EBITDAI* 1,067,201 1,220,352 55,204 (52,307) Less: Net interest expense (28,354) (34,205) Depreciation and amortisation (33,489) (39,654) Fair value adjustment on reclassification of West 49

as held for sale during the prior year

--- (17,718) Impairment charge (3,040) (29,255)

Profit/(loss) before income tax expense (9,679) (173,139) Income tax benefit/(expense) 12,231 (66,794) Profit/(loss) after income tax expense 2,552 (239,933) Loss attributable to non-controlling interests 1,598 6,221 Profit/(loss) attributable to members of Billabong International Limited 4,150 (233,712)

* Segment Earnings Before Interest, Taxes, Depreciation, Amortisation and Impairment (EBITDAI) excludes inter-company royalties and sourcing fees and includes an allocation of global overhead costs (which include corporate overhead, international advertising and promotion costs, central sourcing costs and foreign exchange movements). Table B: Adjusted Segment Results – Continuing Operations As Reported – Excluding significant items and discontinued operations

Adjusted EBITDAI by Segment:

2015 Excluding

significant items and discontinued

operations* $’000

2014 Excluding

significant items and discontinued

operations* $’000

Asia Pacific 29,446 33,391 Americas 27,180 25,192 Europe 5,592 (1,080) Third party royalties 3,461 2,842 Adjusted EBITDAI 65,679 60,345 Less: Depreciation and amortisation (32,831) (34,458) Net interest expense (28,340) Adjusted net profit/(loss) before income tax benefit 4,508 Adjusted income tax benefit/(expense) (1,497) Adjusted net profit/(loss) after income tax benefit 3,011 Loss attributable to non-controlling interest --- Adjusted net profit/(loss) attributable to members of Billabong International Limited 3,011

* Excludes SurfStitch, Swell, DaKine and West 49. The Group results for the period and the pcp include certain significant items including but not limited to contingent consideration and fair value adjustment charges, costs associated with the various control/refinancing proposals and strategic reform programs announced during the years ended 30 June 2013 and 30 June 2014 (collectively significant items). Refer to note 8 of the financial statements for detailed disclosure in relation to these items.

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 5

Operating and Financial Review (continued) Table C: Adjusted Segment Results – Continuing Operations (Constant Currency)** – Excluding significant items and discontinued operations

Adjusted EBITDAI by Segment:

2015 Excluding

significant items and discontinued

operations* $’000

2014 Excluding

significant items and discontinued

operations* $’000

Asia Pacific 29,446 33,557 Americas 27,180 30,079 Europe 5,592 (1,447) Third party royalties 3,461 2,842 Adjusted EBITDAI 65,679 65,031 Less: Depreciation and amortisation (32,831) (34,521) Net interest expense (28,340) Adjusted net profit/(loss) before income tax benefit 4,508 Adjusted income tax benefit/(expense) (1,497) Adjusted net profit/(loss) after income tax benefit 3,011 Loss attributable to non-controlling interest --- Adjusted net profit/(loss) attributable to members of Billabong International Limited 3,011

* Excludes SurfStitch, Swell, DaKine and West 49. ** Due to a significant portion of the Group’s operations being outside Australia, the Group is exposed to currency exchange rate translation risk i.e. the risk that the Group’s offshore earnings and assets fluctuate when reported in Australian Dollars. The Group’s segment information for the prior period has therefore also been presented on a constant currency basis (i.e. using the current period monthly average exchange rates to convert the prior period foreign earnings) to remove the impact of foreign exchange movements from the Group’s performance against the pcp. The constant currency comparatives are not compliant with Australian Accounting Standards. Adjusted EBITDAI excludes pre-tax significant items of income and expense. Refer to note 8 of the financial statements for detailed disclosure in relation to these items. Comments on the operations and the results of those operations are set out below: Consolidated result including significant items Net Profit After Tax for the year ended 30 June 2015 was $4.2 million compared to a Net Loss After Tax of $233.7 million in the prior corresponding period (pcp). The results were impacted by the abovementioned significant items in both years (including impairment (2015: $3.0 million; 2014: $29.3 million) and tax (2015: benefit $13.7 million; 2014: expense $73.2 million) and in 2014 the fair value adjustment ($17.7 million), refinancing ($43.7 million)) and the sale of SurfStitch and Swell in the current year and DaKine and West 49 in the pcp. Group performance excluding significant items and excluding discontinued operations Group sales to external customers of $1,048.4 million, excluding third party royalties, represents an as reported 2.6% increase on the pcp. In constant currency terms Group revenues decreased 0.6% on the pcp. In constant currency terms, sales revenue in Asia Pacific decreased 0.4%, the Americas decreased 0.4% and Europe decreased 1.7% compared with the pcp. Consolidated gross margins were 53.0% (53.2% in the pcp). Adjusting for the impact of divestments consolidated gross margins were 52.7% (51.6% in the pcp). Adjusted EBITDAI excluding discontinued operations of $65.7 million for the period compares to $60.3 million for the pcp. This is an increase of 8.8% (an increase of 1.0% in constant currency terms).

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 6

Operating and Financial Review (continued) The Adjusted EBITDAI excluding discontinued operations was impacted by:

 In Asia Pacific Adjusted EBITDAI was down $3.9 million (11.8%) compared to the pcp with revenues being 0.3% lower than the pcp in as reported terms (0.4% in constant currency terms), with the effect of the lower AUD impacting gross margins in the wholesale business, while a weaker retail performance saw comparable store sales trading lower in Australia by 4.7% compared to the pcp.

 In Americas Adjusted EBITDAI was up $2.0 million (7.9%) compared to the pcp (down $2.9 million or 9.6% in constant currency terms). Revenue was up 8.1% compared to the pcp in as reported terms (down 0.4% in constant currency terms). This result reflects improvement in the US market with brands Billabong and RVCA showing sales growth on the pcp on a like for like basis however Element has remained weak during the year. In particular the second half performance in the Americas showed improvement compared to the first half. In constant currency terms sales in the second half were up 0.4% and Adjusted EBITDAI grew from $18.7 million to $22.0 million. This improvement reflected better performance on the pcp from each of Billabong and RVCA with wholesale external USA sales growing 13.7% and 15.3% respectively in the second half. Whilst Element sales in the Americas were below the prior year some positive signs are seen in the forward orders. As well the negative effects from the Canadian market (including the impact of the sale of West 49 retail operations) abated in the second half relative to the first half. Gross margins in the second half were ahead of the prior year and overhead costs down compared to the pcp.

 In Europe Adjusted EBITDAI was up $6.7 million compared to the pcp which is the result of a significant improvement in gross margins (from 48.4% to 55.2%) on the pcp due to focus on key accounts and territories and contracting the customer set to reduce low margin customers/unprofitable business.

Group performance including significant items and including discontinued operations Group sales to external customers of $1,063.7 million, excluding third party royalties, represents a 12.6% decrease on the pcp in as reported terms or a decrease of 14.9% in constant currency terms. At a segment level, in as reported terms, sales revenue in the Americas decreased 15.3%, Europe decreased 9.7% and Asia Pacific decreased 10.8% compared with the pcp reflecting the SurfStitch and Swell revenues included for the whole of the pcp however only for the period 1 July 2014 to 5 September 2014 in the current year and the West 49 revenues included for the period 1 July 2013 to 6 February 2014 however not in the current year. The prior year also has DaKine revenues included for the period 1 July 2013 to 23 July 2013. EBITDAI of $55.2 million for the period compares to a $52.3 million loss for the pcp. The current year includes significant items expense of $8.0 million compared to an expense of $99.2 million for the pcp. In addition to the significant items and divestment differences the comparison is impacted by the trading matters noted above. Significant items Pre-tax significant items for the year ended 30 June 2015 of $11.0 million includes $3.0 million of impairment charge and $8.0 million of items decreasing EBITDAI. Pre-tax significant items for the year ended 30 June 2014 of $146.2 million includes $17.7 million of fair value adjustment to assets held for sale, impairment charge of $29.3 million and $99.2 million of items decreasing EBITDAI (which included costs of $43.7 million associated with the various control/refinancing proposals announced during the years ended 30 June 2013 and 30 June 2014). Refer to note 8 of the financial statements for detailed disclosure in relation to these items. Depreciation and amortisation expense Depreciation and amortisation expense of $32.8 million (excluding significant items and excluding divestments) decreased 4.7% in reported terms compared to the pcp ($34.5 million). Fair value adjustment on reclassification of West 49 as held for sale during the year – relates to the year ended 30 June 2014 On 4 November 2013 the Group announced that it had entered into an agreement to sell its Canadian retail chain, West 49, to YM Inc. As at 31 December 2013 West 49 was reported as an asset held for sale and a discontinued operation. The assets were adjusted to their fair value with a $17.7 million expense recognised based on information available at 31 December 2013 balance sheet date using the terms of the sales agreement. In addition to the fair value adjustment of $17.7 million, a loss on sale of $10.1 million was recognised in relation to the sale of West 49. This loss included the reclassification of the foreign currency translation reserve to the income statement ($4.0 million) and the recognition of a provision for onerous contracts ($2.2 million).

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 7

Operating and Financial Review (continued) Net interest expense The decrease in net interest expense from $34.2 million to $28.4 million was driven by the Term Loan Facility which was reduced from US$360 million to US$203.8 million following the completion of the C/O Placement and the Rights issue in February and March 2014 respectively. Income tax expense The statutory loss before tax for the year ended 30 June 2015 was $9.7 million with an income tax benefit of $12.2 million (2014 income tax expense of $66.8 million). During the year ended 30 June 2014 the Company made the decision to write off the majority of its deferred tax assets (net of deferred tax liabilities) as it was estimated that it was not probable for taxable profits to be generated in a period where the conditions for utilisation of the assets would be met including continuity of ownership tests. During the year ended 30 June 2015, the Company maintains this same position in most tax jurisdictions with the exception of Australia and Japan where it has been estimated that previously unrecognised temporary differences will now meet the conditions for utilisation of these assets. The reinstatement of deferred tax assets resulted in a tax benefit of $16.8 million. Consolidated balance sheet, cash flow items and capital expenditure Working capital at $164.5 million represents 15.2% of the prior twelve months’ sales (excluding SurfStitch and Swell external sales) stated at year end exchange rates, being 1.6% higher compared to the pcp of 13.6% (excluding West 49 and DaKine’s North America and Europe wholesale external sales). Working capital as a percentage of sales at June 2015 is higher than June 2014 in part due to the divestments being retail businesses with inherently lower working capital balances (SurfStitch and Swell working capital was still part of the Group’s balance sheet as at 30 June 2014). Cash outflow from operating activities was $14.6 million, compared to an outflow of $76.6 million in the pcp, principally because the prior year included the impact of the costs of the refinancing. Receipts from customers net of payments to suppliers and employees of $14.0 million were lower compared to $22.5 million in the pcp which is primarily due to the divestments having cash inflows in the pcp. Cash inflow from investing activities of $11.1 million includes the proceeds from the sale of SurfStitch and Swell. Net debt increased from $74.3 million in the pcp to $113.5 million, principally reflecting foreign exchange differences, significant item payments, financing charge and capital expenditure offset by proceeds from sale of SurfStitch and Swell.

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 8

Operating and Financial Review (continued) Strategy and future performance The strategies and prospects for the Group’s existing business operations are outlined below. On 21 September 2013 Neil Fiske was appointed as Chief Executive Officer and Managing Director. Since his appointment he has put in place a new executive leadership team and on 10 December 2013 announced a Turnaround Strategy to improve the financial performance of the Group specifically highlighting a focus on the following key strategic priorities:

Turnaround Strategy Part

Description

Brand  Re-orient the Company to building strong global brands, with particular focus on the biggest three (Billabong, Element, RVCA)

 Focus on the authentic core youth consumer  Implement brand management processes and disciplines  Tailor specific strategies based on the unique position of each brand, its geographic strengths,

growth potential and portfolio fit  Leverage the creativity and uniqueness of the brand founders

Product  Build a strong merchant focus for the business. Develop clear assortment strategies - category plans, key item distortion, co-ordinated product launches and optimised balance of global vs regional mix

 Fewer, bigger, better styles leading to significant reduction in product lines  Implement design to adopt ratios by category; design and assort to fixture  Elevate design and innovation

Marketing  Develop 12 month integrated marketing calendar for each region  Build customer database and establish an advanced CRM programme  Re-mix spend toward digital, CRM and demand generation  Invest ahead of biggest growth opportunities (examples: RVCA and Billabong women’s)

Omni-Channel  Prioritise “brand” before “multi-brand”  Build the mono-brand direct to consumer platform (retail + digital + CRM)  Evaluate strategic options for multi-brand ecommerce  Develop wholesale channel win-back strategy  Drive retail profitability closures, productivity, rent, specialty retail disciplines, inventory

management  Unify platforms for scale benefits – cost and capability

Supply Chain  Configure supply chain for speed to improve inventory turns  Consolidate suppliers  Diversify out of China for cost and capability  Drive down distribution/logistics costs

Organisation  Develop global brand structure for the big three; foster brand specific cultures  Strengthen merchandising, design and marketing (“high leverage talent”)  Build global scale in Finance, Supply Chain, IT and Direct to Consumer platform  Rationalise general administration structure based on organisational design and spans/layers  Re-energise the organisation with focus on “offense” and “defence” agenda

Financial Discipline

 Strategy determines resource allocation and management Key Performance Indicators  Drive inventory and other working capital improvement; focus on cash flow conversion  Prioritise capital expenditure towards customer facing and enabling projects

Within the framework of the above Turnaround Strategy, the Group’s more immediate priorities included:

 Addressing the negative sales trend of the Billabong brand in the key US wholesale market;  Addressing the negative sales trend of the Element brand in the key US wholesale market, whilst continuing to

grow sales and earnings in Europe;  Re-establishing the strong sales growth for RVCA, which had slowed in 2014;  Stabilising the deteriorating financial performance of the Group’s European operations;  Regaining total control over the Group’s branded ecommerce activities; and  Reduce the Group’s exposure to multi-brand retailing where it lacked scale.

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 9

Operating and Financial Review (continued) In the year ended 30 June 2015 the Group has made satisfactory progress towards the immediate priorities outlined above and execution of the strategy more generally. Billabong and RVCA are growing again in the USA, Element is yet to return to growth in the USA but the forward sales outlook is more encouraging, Europe’s financial performance has improved markedly, the Group now has 100% control of all of its branded ecommerce businesses following the sale of SurfStitch and the sale of West 49 was completed more than twelve months ago. In the year ended 30 June 2015 the Group consolidated its reform initiatives into four major cross regional/cross brand projects that are expected to underpin the success of the Group’s turnaround over the next few years. A description and summary of these projects together with a status update is set out below:

Project/Initiative Description Status Omni-Channel  To develop true best in class Omni-

Channel retailer capability  Single view of the customer  Single view of inventory  Single back end bricks and

mortar merchandising planning systems

 World class ecommerce and Application experiences

 Effective CRM program

 Project team in place  Software supplier contracted April 2015  Planning supplier contracted June 2015  Detailed project plan in place  First launch planned for first half calendar 2016

Sourcing  To develop a global approach to product sourcing to reduce cost and improve speed to market and efficiency

 Organisational changes made  Consolidation of preferred vendors largely

complete  Global standard operating procedures adopted,

including capacity planning, to enable volume aggregation and decrease order to delivery cycles

 Vendor adoption of pre-production, production, and post-production quality assurance processes underway

 Assortment design successful in enabling cost effectiveness

Logistics  To develop a global approach to product logistics to reduce cost and improve speed to market and efficiency

 Contracts signed with third party provider to establish consolidation centres in Asia

 Distribution centre networks reformulated  Rationalisation of existing distribution centres

announced  Demand planning programs in testing to

streamline product flow Concept to Customer

 To complete a holistic process redesign of our entire design to delivery process to improve speed to market, assist more informed buying decisions, and reduce inventory markdowns

 Consistent, repeatable merchandise planning, design and development processes and calendars rolled out in North American markets, and under development globally

 Sourcing support steps incorporated into early design and development calendars to quicken order to delivery times

Directors’ report : :

Billabong International Limited 2014-15 Full Financial Report Page 10

Operating and Financial Review (continued) Material risks The material risks that have the potential to affect the financial prospects of the Group, and the manner in which the Group manages these risks, include:

Risk Summary of risk Brand Possible damage or loss of market appeal to the brands or the image of the Group’s brands.