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1 2017 Australian Pharmaceutical Industries LimitedABN: 57 000 004 320 TABLE OF CONTENTSANNUAL REPORT 2017 Message from the Chairman and CEO ..1 Priceline Sisterhood Foundation ..6 Directors Report ..8 Lead Auditor s Independence Declaration ..32 Consolidated Income Statement ..33 Consolidated Statement of Comprehensive Income ..34 Consolidated Statement of Financial Position ..35 Consolidated Statement of Cash Flows ..36 Consolidated Statement of Changes in Equity ..37 Notes to the Financial Statements ..38 Directors Declaration ..79 Independent Auditor s Report ..80 Shareholder Information ..85 Corporate Directory ..88 Enriching life as the most inspirational choice for health, beauty and Pharmaceutical Industries Limited Annual Report 2017 The Directors present their report together with the financial report of Australian Pharmaceutical Industries Limited ( the Company ) and of the consolidated entity, being the Company and its controlled entities, for the year ended 31 August 2017 and the Auditor s report has a focused growth strategy centred on two key first is building Priceline Pharmacy s position as Australia s favourite mass market health and beauty retailer.

2 In the face of subdued consumer sentiment and intensified competition we continued to evolve all aspects of our customer offering, particularly our in-store product range and service capabilities, in both health and second is ensuring that our pharmacy distribution business continues to deliver steady and sustainable growth in the face of ongoing Pharmaceutical Benefits Scheme (PBS) reforms. We increased our investment in the development of professional services as this area is increasingly important for pharmacists future remuneration and we also expanded our distribution footprint to help deliver more timely and efficient stock management for our growing customer base. API s significant infrastructure investments in prior years meant we could further streamline our business to weather the challenging conditions in both retailing and pharmacy distribution. Of equal importance to our operating results is that our focus on capital management has seen us achieve further improvements in working capital and record zero reported net debt ahead of schedule.

3 We continue to evaluate a range of options for future capital allocation to optimise value for shareholders. MESSAGE FROM THE CHAIRMAN AND CEOPETER ROBINSON AND RICHARD VINCENTWe are pleased to present to shareholders the Company s annual report for the financial year ended 31 August 2017 Annual Report 2017 Australian Pharmaceutical Industries Limited1 OPERATIONAL PERFORMANCEF inancial highlights Underlying1 net profit after tax of $ million, up on the underlying NPAT for the prior year; Underlying earnings before interest, tax, depreciation and amortisation of $ million, an increase of on the prior year; Underlying return on capital employed up 140 basis points to ; Underlying return on equity up 20 basis points to ; Net cash was positive by $ million; and, Dividends paid to shareholders were up 17% for the year to cents per Priceline Pharmacy network finished the financial year at 462 stores, increased by a net 20 stores on the previous year.

4 Retail register sales1 for the period were up to $ billion, but like for like store sales1 were down on the previous year by Including dispensary, total retail sales for the network were $ billion for the financial year, up 5% on the last financial store network grew both revenue and market share in health, with both dispensary and over-the-counter medicines delivering positive results. The beauty category also grew during the year but at a slower rate than previous years due to depressed consumer sentiment which has a more pronounced impact in discretionary categories. MESSAGE FROM THE CHAIRMAN AND CEOCONTINUEDD uring 2017 we implemented phase-one of our Sister Club relaunch, introducing tiering and increased benefits for members. We have since commenced phase two, an investment that will maximise our ability to deliver timely, personalised offers to million members. Our new generation store format roll-out is gathering pace, further differentiating the brand from its competitors via dedicated service counters and personal spaces to test and try new products.

5 Ensuring our store experience remains superior is particularly important in the current trading environment. Our pharmacy distribution business delivered very pleasing revenue growth of When normalised for the effect of PBS reforms and Hepatitis C medicines, sales revenue was up on the previous financial opened a new Distribution Centre in Western Australia at a total cost of $5 million. The new DC will service our growing base of independent pharmacists in that State. Our Soul Pattinson, Pharmacist Advice and our program for independent pharmacies, Club Premium, expanded their membership base during the New Zealand manufacturing business improved earnings in the 2nd half of the year as the benefits of new manufacturing contracts flowed through, but overall sales declined by and gross profit by compared to the prior year. The decline in performance was largely due to the change in scheduling of codeine-based products in Australia.

6 We have responded with a range of over-the-counter alternatives which we expect to improve our performance in 2018. Underlying NPAT of $ million was up on the prior To be read in conjunction with FY17 Results Announcement 19 October Pharmaceutical Industries Limited Annual Report 20172 Underlying year dividends17%MESSAGE FROM THE CHAIRMAN AND CEOCONTINUEDOur BrandsAnnual Report 2017 Australian Pharmaceutical Industries Limited3 The Company has increased total dividend payments by a compound annual growth rate of in the last three Landscape The Government initiated review into Pharmacy Remuneration and Regulation handed down an Interim Report, with the Final Report now pending. Unfortunately, the Interim Report largely ignored the wholesaling sector s evidence-based recommendations on the policy settings required to ensure a cost effective and sustainable pharmaceutical distribution system that delivers equality of access to vital medicines for all Australians.

7 We have been heartened by subsequent discussions with the Department and the Minister and we are optimistic that we will achieve a satisfactory summaryWe ended the financial year with a reduction in reported net debt at balance date of $ which has been a source of constant improvement. This was achieved by improvements in our working capital and cash conversion cycle. The latter was down another days to 22 days at the year end. The cost of doing business as a percentage of revenue declined to , a 20 basis points improvement on last Company generated $102 million in free cash, up 22% on FY16, which enabled the payment of debt and ongoing investments in the Company s key programs. Other than stay-in-business capital expenditure, such as store refits, future investments will be focussed on furthering our in-store retail offer and on our Sister Club Company has increased total dividend payments by a compound annual growth rate of in the last three years.

8 This reflects the ongoing improvement in the overall financial position of the Company. The dividends of cents per share in 2017 represented a 65% payout ratio, increasing from 60% in is also worth recognising that the Company s long term focus is making API a safer place to work. The emphasis on this in our stores, Distribution Centres and offices has yielded further reductions in both the Total Recordable Injury Frequency Rate as well as Lost Time Injury Frequency Rate over the last financial year. Safety is the responsibility of every staff member at API so we can create the safest environments for our teams and anyone visiting our Social ResponsibilityThe Priceline Sisterhood Foundation is API s major Corporate Social Responsibility program. During the year approximately $400,000 dollars was raised for the Foundation due to the joint efforts of API staff and our Priceline Pharmacy franchisees. The Foundation actively supported five key charities during the year: Dementia Australia, Look Good Feel Better, Hear to Listen, The Children First Foundation, and Perinatal Anxiety and Depression Australia.

9 The Foundation has raised more than $ million since its inception in 2011 and is an integral part of the API and Priceline Pharmacy FROM THE CHAIRMAN AND CEOCONTINUEDA ustralian Pharmaceutical Industries Limited Annual Report 20174 Leadership succession After ten years Stephen Roche stepped down as CEO and managing Director and the Board appointed API s General Manager of Business Development, Operations and Strategy, Richard Vincent to the role. The Board reiterates its thanks to Stephen for his leadership of the Company and for the smooth transition to our new CEO and managing Company announced in September of this year that Mark Smith had been appointed as a Non-executive Director and, subject to Mr Smith s election at the 2017 Annual General Meeting, the Board intends to confirm Mark s appointment as Chairman of the Board, effective from that date. Finally, on behalf of all API Directors, our congratulations and thanks to all our people for their commitment and dedication to delivering another solid result in such a dynamic operating environment.

10 We look forward to their ongoing commitment to implementing our strategy as we face into another challenging R Robinson Chairman Richard C Vincent managing Director and Chief Executive OfficerAnnual Report 2017 Australian Pharmaceutical Industries Limited5 The Priceline Sisterhood was initially formed in 2011 with its purpose being to give back to the community and, specifically, to provide support to women and their families. Charity Partners were selected that covered a range of causes that were close to the hearts of women; coming from the results of a national survey that had more than 25,000 female 2014 the Priceline Sisterhood Foundation Limited was established to allow for tax deductible donations. The Foundation has an independent Board of Directors and the patron of the Foundation is Ita Buttrose. More than $3 million has been raised since inception and all funds raised go directly to our Charity Priceline Sisterhood Foundation todayThe Foundation has a desire to help more Australian women and their families by supporting those who are affected by conditions such as cancer and mental health.