Company Financial Analysis - Billabong Company

Billabong International Limited Financial report ended 30 June 2014 Appendix 4E Preliminary final report Name of entity BILLABONG INTERNATIONAL LIMITED ABN Financial year ended 17 084 923 946 30 JUNE 2014 Comparative Financial year ended 30 JUNE 2013 Results for announcement to the market Results $A'000 Revenues from continuing operations Up 1.6% to 1,125,454 Loss from ordinary activities after tax attributable to members Down 72.8% to (233,712) Net loss for the period attributable to members Down 72.8% to (233,712) Dividends Amount per security Franked amount per security Tax rate for franking Current period – 2014 Final dividend --- --- n/a Interim dividend --- --- n/a Previous corresponding period – 2013 Final dividend --- --- n/a Interim dividend --- --- n/a The Board has not declared a final ordinary dividend for the year ended 30 June 2014. The Dividend Reinvestment Plan (DRP) remains suspended.

NTA backing 2014 2013 Net tangible asset backing per ordinary security $0.18 $0.11 Billabong International Limited Financial report ended 30 June 2014 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: 28 August 2014 Neil Fiske Chief Executive Officer Billabong International Limited ABN 17 084 923 946 Contents Page Directors’ report 2 Auditor’s independence declaration 49 Corporate governance statement 50 Financial report 59 Directors’ declaration 164 Independent auditor’s report to the members 165 Shareholder information 167 : : FULL FINANCIAL REPORT 2013 - 14 Directors’ report : : Billabong International Limited 2013-14 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 2014.

Directors The following persons were Directors of the Company during the whole of the financial year and up to the date of this report:

G.S. Merchant H. Mowlem S.A.M Pitkin I. Pollard N. Fiske was appointed as Chief Executive Officer (CEO) and Managing Director on 21 September 2013 and continues in office at the date of this report.

J. Mozingo was appointed as Non-Executive Director on 4 November 2013 and continues in office at the date of this report.

A. Doshi was appointed as an Alternate Director to J. Mozingo on 10 December 2013 and continues in office at the date of this report.

M. Wilson was appointed as Non-Executive Director on 4 November 2013 and continues in office at the date of this report.

T. Casarella was appointed as an Alternate Director to M. Wilson on 10 December 2013 and continues in office at the date of this report.

C. Paull was a Non-Executive Director from the beginning of the financial period until her resignation on 30 January 2014.

A.G. Froggatt was a Non-Executive Director from the beginning of the financial period until his resignation on 4 November 2013.

J. Rogers was appointed as a Non-Executive Director on 23 July 2013 and continued as a Director until his resignation on 4 November 2013.

K. Schwartz was appointed as a Non-Executive Director on 23 July 2013 and continued as a Director until his resignation on 4 November 2013.

P. Naude was an Executive Director from the beginning of the financial period until his resignation on 5 August 2013. He was on leave of absence from 19 November 2012 to the date of his resignation.

L. Inman was an Executive Director from the beginning of the financial period until her resignation on 2 August 2013.

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 2014. The Dividend Reinvestment Plan (DRP) remains suspended. Directors’ report : : Billabong International Limited 2013-14 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 Australasia, 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 424 retail stores as at 30 June 2014 in regions / countries around the world including but not limited to:

North America (64 stores), Europe (111 stores), Australia (128 stores), New Zealand (35 stores), Japan (45 stores) and South Africa (23 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 has online retail including the sites www.swell.com and www.surfstitch.com (refer to matters subsequent to the end of the financial year).

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 2013 and any public announcements made by the Company during the financial year.

On 23 July 2013 the Company announced it had sold the DaKine brand and its operations to Altamont for a purchase price of $70 million. The results of DaKine have been reported in these financial statements as a discontinued operation.

On 23 July 2013 the Group’s interest in Nixon was restructured so as to reduce the Group’s commitment to purchase previously agreed volumes of product in exchange for make good payments and the dilution of the Group’s interest in Nixon Joint Venture from 48.5% to 4.85%. As a result Nixon is no longer treated as an associate.

On 19 September 2013 the Company announced that it had entered into binding agreements with the Centerbridge Partners, L.P. and Oaktree Capital Management, L.P. Consortium (“C/O Consortium”) in relation to long term financing. The refinancing included a new term loan of US$360 million which was used in part by the Company to replace the US$294 million bridge loan facility which had been provided pursuant to a July 2013 agreement with Altamont Capital Partners and entities sub-advised by GSO Capital Partners (together with Altamont the “Altamont Consortium”). On 4 November 2013 the Group announced that it had entered an agreement to sell its Canadian retail chain, West 49, to YM Inc. The Group also announced that it had entered into an approximate CA$34 million non-exclusive wholesale agreement with YM Inc. over the next two years. On 6 February 2014 the Company announced it had sold West 49 to YM Inc. for a purchase price of CA$3 million. The results of West 49 have been reported in these financial statements as a discontinued operation.

On 16 December 2013 the Company refinanced prior indebtedness additional to the term loan with an asset-based multicurrency revolving credit facility of up to US$100 million arranged by GE Capital. In the preparation of the 31 December 2013 interim financial report the Group identified a deferred tax liability totalling $45.0 million which should have been derecognised at 30 June 2012. Accordingly a restatement of prior period financial statements has been reported in this full financial report for the year ended 30 June 2014. For details regarding the restatement refer to note 3 of the financial statements for more information.

On 30 January 2014 shareholders voted to support the strengthening of the Company’s balance sheet by approving the issue of $135 million of ordinary equity (“C/O Placement”) to the C/O Consortium in order to reduce debt and provide a stronger financial platform for the turnaround plan outlined by the Company’s CEO Neil Fiske at the AGM on 10 December 2013. On 6 February 2014 $135 million of ordinary equity at $0.41 per share was issued resulting in the issuance of 329,268,294 shares to the C/O Consortium with the proceeds subsequently used to pay down the term loan.

On 26 February 2014 the Company announced a non-underwritten pro-rata accelerated renounceable entitlement offer (“2014 Rights issue”) for eligible shareholders to subscribe for 3 new ordinary shares for every 8 existing ordinary shares at an issue price of $0.28 per new share with such shares to be issued on, and rank for dividends after 1 April 2014. As a result, 180.4 million new shares were issued, resulting in gross cash proceeds of $50.5 million. 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. Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 4 Operating and Financial Review (continued) Group financial performance The Group results for the period and the prior corresponding period (pcp) include certain significant items including impairment charges, costs associated with the various control and/or refinancing proposals announced over the last two years and the restructuring of the Group’s operations pursuant to the various strategic reform programs announced in August 2012 and December 2013. Refer to note 8 of the financial statements for more information in relation to these items.

During the period the Group sold its interest in the DaKine brand (sale completed 23 July 2013) and its Canadian retail chain West 49 (sale completed 6 February 2014). The segment results are presented on a basis including all significant items and including the operations of DaKine and West 49 for the relevant period of ownership. The results also include significant tax charges in relation to the write off of deferred tax assets and the non-recognition of tax losses. See Table A “Segment Results As Reported – Including significant items and discontinued operations”.

In order to provide users with additional information regarding the continuing operations excluding the aforementioned significant items the segment results are also presented on a basis which excludes the significant items and excludes DaKine and West 49 from both the current year and pcp. The table also removes the aforementioned significant tax charges and the tax effect on significant items to give a normalised tax result. See Table B “Adjusted Segment Results (As Reported) – Excluding significant items and discontinued operations”.

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 prior period comparative. The constant currency comparatives are not compliant with Australian Accounting Standards. See Table C “Adjusted Segment Results (Constant Currency) - Excluding significant items and discontinued operations”.

Table A: Segment Results As Reported – Including significant items and discontinued operations Segment revenues Segment EBITDAI* 2014 2013 2014 2013 $’000 $’000 $’000 $’000 Australasia 480,500 471,764 14,593 4,362 Americas 537,969 636,764 (48,988) 19,527 Europe 199,041 232,064 (20,754) (25,065) Third party royalties 2,842 2,759 2,842 2,759 Discontinued operation – adjustment to onerous supply agreement in relation to Nixon --- --- --- (3,482) Segment revenues / EBITDAI* 1,220,352 1,343,351 (52,307) (1,899) Share of net loss after-tax of associate --- (4,979) Less: Net interest expense (34,205) (12,434) Depreciation and amortisation (39,654) (45,473) Fair value adjustment on reclassification of West 49 as held for sale during the year (17,718) --- Impairment charge (29,255) (766,499) Loss before income tax expense (173,139) (831,284) Income tax expense (66,794) (31,718) Loss after income tax expense (239,933) (863,002) Loss attributable to non-controlling interests 6,221 3,461 Loss attributable to members of Billabong International Limited (233,712) (859,541) * 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). Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 5 Operating and Financial Review (continued) Table B: Adjusted Segment Results (As Reported) – Excluding significant items and discontinued operations Adjusted EBITDAI by Segment: 2014 Excluding significant items $’000 2014 Excluding significant items and discontinued operations* $’000 2013 Excluding significant items $’000 2013 Excluding significant items and discontinued operations* $’000 Australasia 34,573 34,573 31,947 31,947 Americas 17,638 23,56438,013 46,877 Europe (8,124) (8,469) (74) (10,439) Third party royalties 2,842 2,842 2,759 2,759 Adjusted EBITDAI 46,929 52,510 72,645 71,144 Share of net loss after-tax of associate --- --- (4,979) (4,979) Less: Depreciation and amortisation (39,654) (37,698)(45,473) (40,287) Net interest expense (34,205) (34,122) (12,434) Adjusted net (loss)/profit before income tax benefit/(expense) (26,930) (19,310) 9,759 Adjusted income tax benefit/(expense) 6,443 (1,339)(5,551) Adjusted net (loss)/profit after income tax benefit/(expense) (20,487) (20,649) 4,208 Loss attributable to non-controlling interest 6,221 6,2213,461 Adjusted net (loss)/profit attributable to members of Billabong International Limited (14,266) (14,428) 7,669 * Excludes DaKine, West 49 and Nixon (discontinued operation - adjustment to onerous supply agreement).

The Group results for the period and the pcp include certain significant items including impairment charges, costs associated with the various control and/or refinancing proposals announced over the last two years and the restructuring of the Group’s operations pursuant to the various strategic reform programs announced in August 2012 and December 2013 (consulting costs, inventory write downs and redundancies) and other significant costs comprising but not limited to, fair value adjustments for assets held for sale during the period and the impairment of brands, goodwill and in the prior year investment and property, plant and equipment (collectively significant items). Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 6 Operating and Financial Review (continued) Table C: Adjusted Segment Results (Constant Currency)** - Excluding significant items and discontinued operations Adjusted EBITDAI by Segment: 2014 Excluding significant items $’000 2014 Excluding significant items and discontinued operations* $’000 2013 Excluding significant items $’000 2013 Excluding significant items and discontinued operations* $’000 Australasia 34,573 34,57332,072 32,072 Americas 17,638 23,564 42,615 51,943 Europe (8,124) (8,469)931 (11,098) Third party royalties 2,842 2,842 2,759 2,759 Adjusted EBITDAI 46,929 52,51078,377 75,676 Share of net loss after-tax of associate --- --- (4,979) (4,979) Less: Depreciation and amortisation (39,654) (37,698)(44,421) (38,933) Net interest expense (34,205) (34,122) (13,397) Adjusted net (loss)/profit before income tax benefit/(expense) (26,930) (19,310)15,580 Adjusted income tax benefit/(expense) 6,443 (1,339) (8,862) Adjusted net (loss)/profit after income tax benefit/(expense) (20,487) (20,649) 6,718 Loss attributable to non-controlling interest 6,221 6,221 3,461 Adjusted net (loss)/profit attributable to members of Billabong International Limited (14,266) (14,428)10,179 ** 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.

*** Excludes DaKine, West 49 and Nixon (discontinued operation - adjustment to onerous supply agreement).

Adjusted EBITDAI excludes pre-tax significant items of $99.2 million (note 8 pre-tax significant items of $146.2 million less fair value adjustment on reclassification of West 49 as held for sale during the year of $17.7 million and impairment charges of $29.3 million) and $74.5 million (note 8 pre-tax significant items of $841.0 million less impairment charges of $766.5 million) for the years ended 30 June 2014 and 30 June 2013 respectively. Refer to note 8 of the full financial report 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 and impairment charges Net Loss After Tax for the year ended 30 June 2014 was $233.7 million compared to a Net Loss After Tax of $859.5 million in the prior corresponding period (pcp). The 2014 and 2013 financial years were impacted by the abovementioned significant items, impairment charges and the sale of DaKine and West 49.

Group performance excluding significant items and excluding DaKine and West 49 Group sales to external customers of $1,119.2 million, excluding third party royalties, represents an as reported 1.5% increase on the pcp. In constant currency terms Group revenues decreased 5.0% on the pcp. In constant currency terms, sales revenue in Australasia increased 1.1% compared with the pcp, the Americas decreased 9.9% and Europe decreased 7.5%.

Consolidated gross margins were 51.6% (53.0% in the pcp).

Adjusted EBITDAI excluding discontinued operations of $52.5 million for the period compares to $71.1 million for the pcp.

This is a decrease of 26.2% (a decrease of 30.6% in constant currency terms). Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 7 Operating and Financial Review (continued) The Adjusted EBITDAI excluding discontinued operations was highlighted by:

 In Australasia Adjusted EBITDAI was up $2.6 million (8.2%) compared to the pcp with revenues being 1.9% higher than the pcp in as reported terms (1.1% in constant currency terms), with cost savings achieved through the Group’s store closure program and the exit from some of the smaller Asian territories. Comparable store sales were up 1.3% on the pcp.

 In Americas Adjusted EBITDA was down $23.3 million (49.7%) compared to the pcp. Revenue was down 1.7% compared to the pcp in as reported terms (9.9% in constant currency terms) largely as a result of weakness in the Canadian market. There were also lower results from South America (including Peru and Chile which were restructured in November and December 2013 by closing the Group’s owned and operated operations in favour of the appointment of a distributor). In the United States weak trading conditions were experienced in retail and across most brands.  In Europe Adjusted EBITDAI was up $2.0 million compared to the pcp. The Adjusted EBITDAI of $8.5 million of losses includes $7.3 million of losses for Surfstitch. Comparable store sales were up 5.9% on the pcp.

Share of associates The Group’s interest in Nixon was restructured in July 2013 and as a result Nixon is no longer treated as an associate. Group performance including significant items and including DaKine and West 49 Group sales to external customers of $1,217.5 million, excluding third party royalties, represents a 9.2% decrease on the pcp in as reported terms or a decrease of 15.3% in constant currency terms.

At a segment level, in as reported terms, sales revenue in the Americas decreased 15.5% and Europe decreased 14.2% compared with the pcp reflecting the DaKine and West 49 revenues included for the whole of the pcp however only for the period 1 July 2013 to 23 July 2013 and 1 July 2013 to 6 February 2014 respectively in the current year. Australasia increased 1.9% on the pcp.

EBITDAI of $52.3 million loss for the period compares to $1.9 million loss for the pcp. The DaKine and West 49 EBITDA was included in the whole of the pcp, however only for the period 1 July 2013 to 23 July 2013 and 1 July 2013 to 6 February 2014 respectively in the current year period and the current period includes $99.2 million of significant items (pcp $74.5 million of significant items). In addition to the significant items and DaKine and West 49 differences the comparison is impacted by the trading matters noted above. Significant items Pre-tax significant items for the year ended 30 June 2014 of $146.2 million includes $17.7 million of fair value adjustment on reclassification of West 49 as held for sale during the year, $29.3 million impairment charges and $99.2 million of items impacting EBITDAI. Pre-tax significant items for the year ended 30 June 2013 of $841.0 million includes $766.5 million of impairment charges and $74.5 million of items impacting EBITDAI. Refer to note 8 of the full financial report for detailed disclosure in relation to these items. Depreciation and amortisation expense Depreciation and amortisation expense excluding significant items and excluding DaKine and West 49 decreased 6.4% in reported terms compared to the pcp primarily due to a reduction in property, plant and equipment following the retail store closure program and the write down of asset carrying values in prior years.

Fair value adjustment on reclassification of West 49 as held for sale during the year 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 classified as 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 has been recognised in relation to the sale of West 49. This loss includes the reclassification of the foreign currency translation reserve to the income statement ($4.0 million) and the recognition of the provision for onerous contracts ($2.2 million). Impairment charge expense As a result of the impairment review of intangible assets, the values of brands and/or goodwill in several Cash Generating Units were written down to their recoverable amounts, being either their value in use or fair value less costs to sell. For the year ended 30 June 2014, this resulted in an impairment charge amounting to $28.9 million (pcp $593.5 million). Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 8 Operating and Financial Review (continued) As a result of the impairment review of fixed assets and other intangibles an impairment charge of $0.4 million for the year ended 30 June 2014 (pcp $43.4 million) was recognised to write down these assets to their recoverable amount.

In the pcp in relation to the investment in Nixon Investments, LLC based on the then current forecasts of the business and having regard to the differential capital structure referred to in the full financial report, the Group wrote down its investment by $129.6 million in the year ended 30 June 2013. For the years ended 30 June 2014 and 30 June 2013 these items collectively resulted in a total impairment charge of $29.3 million and $766.5 million respectively.

Net interest expense The increase in net interest expense from $12.4 million to $34.2 million was driven primarily by the new financing arrangements that have been entered into during the year ended 30 June 2014. The $34.2 million includes interest on 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 2014 Rights issue in February and March 2014 respectively. Income tax expense The aggregate income tax expense for the year ended 30 June 2014 was $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 has been estimated that it is not probable for income tax profits to be generated in a period where the conditions for utilisation of the assets will be met. The charge taken during the period for the write off of the deferred tax assets was $45.2 million.

Consolidated balance sheet, cash flow items and capital expenditure Working capital at $150.2 million represents 13.6% of the prior twelve months’ sales (excluding DaKine wholesale external sales and West 49 external sales) stated at year end exchange rates, being 3.3% lower compared to the pcp of 16.9%. This reduction is largely a result of the sale of DaKine and West 49, liquidation of surplus inventory, increased provision levels, improved debtors collections and the restructure of operations in certain territories.

Cash outflow from operating activities was $76.6 million, compared to an inflow of $11.9 million in the pcp, principally reflecting the impact of the costs of the refinancing with finance costs of $92.3 million in the current period (which included approximately $55 million of significant items which are not expected to recur) compared to $20.5 million in the pcp. Receipts from customers net of payments to suppliers and employees of $22.5 million were 15.0% lower compared to $26.5 million in the pcp.

Cash inflow from investing activities of $17.6 million includes the proceeds from the sale of DaKine, West 49 and other immaterial divestments.

Net debt decreased from $206.6 million in the pcp to $74.3 million, principally reflecting the aforementioned C/O Placement, 2014 Rights issue, proceeds from sale of businesses offset in part by refinancing costs and deferred consideration payments.

Strategy and future performance The strategies and prospects for the Group’s existing business operations are outlined below. On 21 September 2013 Mr Neil Fiske was appointed as CEO and managing director. Since his appointment he has put in place a new executive leadership team and on 10 December 2013 he announced a Turnaround Strategy to improve the financial performance of the Group specifically highlighting a focus on the following key strategic priorities: Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 9 Operating and Financial Review (continued) Turnaround Strategy Part Description Brand  Re-orient the company to building strong global brands. Put the brand view first  Sort the portfolio: the big three (Billabong, Element, RVCA) and emerging brands  Tailor specific strategies based on size, potential, life cycle, role in the portfolio, geography  Leverage the creativity and uniqueness of the brand founders  Focus on the authentic core youth consumer (board sport fanatic/influencer)  Implement brand management processes and disciplines Product  Build a strong merchant front end to the business  Develop clear assortment strategies o Best At / Win At / Compete At – category plans o Strategic line architecture o Key item distortion o Major product launches o Right balance of global vs regional mix  Fewer, bigger, better styles leading to 25% plus 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; own the multi-channel customer; develop advanced CRM  Re-mix spend toward digital, CRM and demand generation  Invest ahead of biggest growth opportunities (example: RVCA and Billabong women’s)  Increase marketing spend to competitive levels with savings made across the Group Omni-Channel  Prioritise bran before multi-bran  Build the mono-brand direct to consumer platform (retail + digital + CRM) to drive approximately 30% of sales within the next five years. Use stores and web to lead the brand  Evaluate strategic options for multi-brand Ecommerce  Develop wholesale channel win-back strategy  Drive retail profitability closures, productivity, rent, speciality retail disciplines, inventory management  Unify platforms for scale benefits – cost and capability Supply Chain  Configure supply chain for speed 4 times inventory turns  Move to fewer, bigger, better suppliers  Diversify out of China for cost and capability  Segment by channel and merchandise type  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  Identify target for cost reductions to fund the “marketing war chest”  Drive inventory and other working capital improvement; focus on cash flow conversion  Prioritise capital expenditure towards customer facing and enabling projects  Manage the “profit cube” (brand / product X channels X geography) Directors’ report : : Billabong International Limited 2013-14 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 image of the Group’s brands. The Group addresses this risk through keeping abreast of economic and consumer data/research, innovative product development and brand building. Also refer to the aforementioned Turnaround Strategy which details the key priorities for future performance surrounding Brand, Product and Marketing. Fashion Failure to design and deliver products that appeal to customers. The Group addresses this risk through consumer data/research, innovative product development and brand building. Also refer to the aforementioned Turnaround Strategy which details the key priorities for future performance surrounding Brand, Product and Marketing.

Macro-economic environment The financial performance of the Group will fluctuate due to various factors including movements in the Australian and international capital markets, interest rates, foreign currency exchange rates, inflation, Australian and international economic conditions (including any significant and extended economic downturn in Australia, Asia, North America, Europe, South America and Africa), change in government, fiscal, monetary and regulatory policies, prices of commodities, investor perceptions and other factors that may affect the Group's financial position and earnings.

Currency fluctuations The Group receives revenue in more than ten different currencies and movements in these currencies could have an impact on the Group's profitability. This risk arises when assets and liabilities, and forecasted purchases and sales are denominated in a currency other than the functional currency of the respective entities. As sales are mainly denominated in the respective local currency which is the functional currency, the major transactional exposure is in relation to inventory purchases, other than for the United States of America, where inventory purchases are typically denominated in United States Dollars (USD). This risk is mitigated to an extent by hedging, but significant movements in the USD still can impact the comparability and profitability of seasons between financial years.

Competition The Group competes for discretionary income spend. The Group's performance may be adversely affected by competitors' actions, for example, by lowering their sale prices or creating new product lines that are more attractive in the marketplace or by agreeing to pay more for production, other services or talent and employment costs.

The Group addresses this risk by focusing on innovative product development and brand building to promote customer loyalty and remunerating employees fairly. Also refer to the aforementioned Turnaround Strategy which details the key priorities for future performance including diversification of the supply chain outside of China.

Seasonal factors Part of the Group's business is seasonal in nature and prolonged unseasonal weather conditions in a particular region may adversely affect sales in that region.

Product sourcing and delivery A material change or disruption in the Group's product sourcing and delivery arrangements could have an adverse impact on the Group. Given the highly competitive environment of the industry and reliance on cotton prices and labour via sourcing goods manufactured in countries such as China, increases in the costs of these inputs could impact the Group’s financial results.

The Group addresses this risk by focusing on innovative product development, keeping abreast of legislative changes and maintaining long-term supplier relationships. Also refer to the aforementioned Turnaround Strategy which details the key priorities for future performance including diversification of the supply chain outside of China.

Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 11 Operating and Financial Review (continued) Risk Summary of risk On-line retailing Continued migration of consumers to on-line retail purchases may adversely impact the performance of the Group's bricks and mortar retail outlets and wholesale customers and the historically higher margin regions. The Group will address this risk by focusing on the omni-channel as part of the aforementioned Turnaround Strategy to ensure the Group has a best in class mono-brand direct to consumer platform which uses the Group’s stores and websites to lead the brands. Debt covenants Failure to comply with its financial covenants caused by a significant further decline in revenue or earnings may require the Group to seek amendments, waivers of covenant compliance or alternative borrowing arrangements.

The Group is focussed on delivering the Turnaround Strategy to mitigate this risk. C/O Consortium's involvement in the Group While the C/O Consortium has a substantial equity ownership in the Company and is therefore likely to be focused on maximising value (and therefore its incentives should be broadly aligned to those of other Shareholders), there is a risk that as a debt holder the C/O Consortium's interests may not always align with those of other Shareholders. If so, the C/O Consortium's significant holding of Shares and entitlement to nominate two Directors to the Board will mean it will be in a position to influence decisions of the Company.

The Group mitigates this risk by ensuring that the Board and all Board committees are chaired by an Independent Director, there is a majority of Independent Directors on all committees and that the C/O Consortium’s nominated directors (Mr. Mozingo and Mr. Wilson) do not have any business interest or other relationships that could materially interfere with the exercise of their independent judgement and their ability to act in the best interest of the Company. Social risk Given that the Group sources goods manufactured in countries such as China, where there have been risks surrounding the workplace health and safety standards of factories, the Group plans to implement a corporate social responsibility program under the principles of Worldwide Responsible Accredited Production (WRAP) and conducts audits of supplier factories via the Group’s Central Sourcing function.

Asset impairment The Group's assets may be required to be written down or become impaired (in accordance with relevant accounting standards), which may negatively impact the Group's financial performance and position.

The Group is focussed on delivering the Turnaround Strategy to mitigate this risk.

Proceeds from the refinancing may not provide sufficient funding to execute the Company's turnaround strategy Should the Group experience a protracted decline in earnings, there is a possibility that the quantum of debt funding available to the Company would not be sufficient to execute its turnaround strategy, which could have a negative impact on its future financial performance or position.

The Group is focussed on delivering the Turnaround Strategy to mitigate this risk.

Strategy implementation risk Given the Group’s exposure to macroeconomic conditions there exists risk that the Group’s profit improvement plans might be affected by developments in these areas. The Group does not have any dependencies on key customers given its diverse customer base. The Group maintains relationships with a number of suppliers for its products to help mitigate supply and supplier dependency risks. As the Group operates in countries across the world, the Group is impacted by macroeconomic trading conditions across all of these countries.

Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 12 Matters subsequent to the end of the financial year On 21 August 2014 the Company announced the outcome of the strategic review of its multi-brand ecommerce businesses Surfstitch.com in Australia and Europe (“Surfstitch”), and Swell.com in North America (“Swell”).

As previously announced on 6 February 2014, the review considered a range of options for both Surfstitch and Swell, as the Company moves to a direct to consumer omni-channel model across its global operations.

On 20 August the Company entered into binding documentation to sell its 51% stake in Surfstitch and its 100% ownership of Swell to a consortium of investors including Surfstitch founders Justin Cameron and Lex Pedersen (“Surfstitch Consortium”) (“Transactions”). The Transactions are inter-conditional and are subject to conditions precedent, which are typical for transactions of this type, with a funding condition which was satisfied on Monday, 25 August 2014. Completion is expected to occur in mid- September 2014. Upon completion, the Group will receive more than $35 million as a result of the Transactions, comprising sale proceeds, loan repayments and other consideration. The Group will also enter into agreements for the continued wholesale supply of products to Surfstitch and Swell. The Company expects the Transactions to be earnings accretive to the Group in terms of both EBITDA and net earnings, although the extent of the improvement is contingent upon the future sales to Surfstitch under the new supply arrangements.

The Transactions will impact the Australasia, Americas and European operating segments.

Other than those items mentioned above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature that would be likely, in the opinion of the Directors of the Group, to significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.

Likely developments and expected results of operations The Group’s strategic direction is discussed in the Strategy and Future performance section of this report. Trading to date in 2015 largely reflects the same themes as have been experienced throughout 2014. Australia and Europe continue to trade satisfactorily. In the Americas difficult conditions continue but the forward orders for Billabong and RVCA are ahead of last year and the comparable store sales in the United States, whilst still below last year, have improved relative to the most recent half. As the 2015 financial year progresses the Group is confident that the impact of the turnaround strategy will begin to be seen in the results but it is not possible at this time to quantify the extent of such impact.

Environmental regulation The Group is not subject to any significant environmental regulation or mandatory emissions reporting.

Directors’ report : : Billabong International Limited 2013-14 Full Financial Report Page 13 Information on Directors IAN POLLARD (Non-Executive Chairman) Experience and expertise Dr Ian Pollard is an actuary, Rhodes Scholar and a Fellow of the Australian Institute of Company Directors. He has held a wide range of senior business roles including as Chairman of Just Group Limited and as a Director of OPSM Group Limited and DCA Group Limited, which he founded. He is currently Chairman of RGA Reinsurance Company of Australia Limited and an executive coach with Foresight’s Global Coaching. With an extensive background in corporate finance, strategic investment and retail, Dr Pollard has chaired several public company audit committees and was a member of the ASX Corporate Governance Implementation Review Group from 2003 to 2007.

Other current directorships Milton Corporation Limited, director since 6 August 1998.

Shopping Centres Australasia Property Group, stapled securities of Shopping Centres Australasia Property Management Trust and Shopping Centres Australasia Property Retail Trust (director of responsible entity, Shopping Centres Australasia Property Group RE Limited (SCPRE)), director since 26 September 2012.

Former directorships in last 3 years No former directorships of Australian listed entities. Special responsibilities Chairman of the Board and Nominations Committee and member of Human Resource and Remuneration and Audit Committees.

Interests in shares and options 90,078 ordinary shares in Billabong International Limited.

MCNEIL SEYMOUR FISKE JR (Executive Director from 21 September 2013) Experience and expertise Neil Fiske was appointed as Chief Executive Officer and Managing Director of the Company on 21 September 2013. He has 25 years of experience in the consumer and retail industry as an operator, consultant and investor. Prior to joining the Company he was an Industry Partner to Canadian private equity firm Onex, where he acted as a senior advisor focused on retail. From 2007 to 2012 Mr Fiske was CEO of Eddie Bauer an outdoor lifestyle store chain based in the USA. From 2003 to 2007 Mr Fiske was the CEO of Bath and Body Works, a division of NYSE listed Limited Brands. From 1989 to 2003 he was in the Consumer and Retail Practice of the Boston Consulting Group. Other current directorships No other directorships of Australian listed entities.