Cash Converters International Limited

ABN 39 069 141 546

Financial Report

For the year ended 30 June 2019

cashconverters.com.au

Contents

Corporate directory

3

Operating and financial review

4

Directors' report

11

Corporate governance

31

Consolidated statement of profit or loss and other comprehensive income

32

Consolidated statement of financial position

33

Consolidated statement of changes in equity

34

Consolidated statement of cash flows

35

Notes to the financial statements

36

Directors' declaration

84

Auditor's independence declaration

85

Independent auditor's report

86

These financial statements have been organised into the

Each section sets out the accounting policies

following six sections:

applied in producing the relevant notes, along with

details of any key judgements and estimates used

1.

Basis of preparation

or information required to understand the note.

2.

Financial performance

The purpose of this format is to provide readers

3.

Assets and liabilities

with a clearer understanding of what drives the

4.

Capital structure and financing costs

financial performance and financial position of the

5.

Group structure

Group.

6.

Other items

Cash Converters International Limited

2

Annual Financial Report 2019

Corporate directory

Directors

Auditors

Mr Stuart Grimshaw

Non-Executive Chairman

Deloitte Touche Tohmatsu

Mr Peter Cumins

Executive Deputy Chairman

Brookfield Place, Tower 2

Mr Kevin Dundo

Non-Executive Director

123 St Georges Terrace

Mr Lachlan Given

Non-Executive Director

Perth WA 6000

Australia

Company Secretary

Stock Exchange

Mr Brad Edwards

Australian Securities Exchange

Registered and principal office

Level 40, Central Park

152-158 St Georges Terrace

Level 11, Citibank House

Perth WA 6000

37 St Georges Terrace

Australia

Perth WA 6000

Australia

ASX code:

CCV

Tel:

+61 8 9221 9111

Web:

www.cashconverters.com

Share registrar

Computershare Investor Services Pty Ltd

Level 11

172 St Georges Terrace

Perth WA 6000

Australia

Tel:

1300 850 505

Cash Converters International Limited

3

Annual Financial Report 2019

Operating and financial review

For the year ended 30 June 2019

Cash Converters International Limited (the Company) and entities controlled by the Company and its subsidiaries (the Group) is a diverse group generating revenues from franchising, store operations, personal finance and vehicle finance, supported by a corporate head office in Perth, Western Australia. The Company operates in Australia and the United Kingdom and also has an equity interest of 25% in Cash Converters New Zealand. There is a franchise presence in a further 15 countries around the world.

Financial Performance

The Company reports revenue growth of 8.2% to $281.565 million (2018: $260.345 million), and a full year net loss after tax of $1.692 million compared to a prior year profit after tax of $22.503 million. The profit and loss statement includes adjustments that the Company categorises as outside its normal operating activity and has listed these items below, to provide a comparative result that more accurately reflects the underlying performance of the business. The effect of these items in aggregate reduced the net profit after tax by $22.387 million. Excluding these adjustments, the profit after tax of the Company was $20.695 million, and EBIT before adjustments was $39.754 million (2018: $43.512 million).

Across the Group, the year ended 30 June 2019 (FY 2019) saw gross loan books increase by 27.9% to $220.490 million (2018: $172.339 million), with the most significant increases seen in the vehicle financing business, Green Light Auto (GLA) which increased by over 70%. Personal loan growth was most prevalent in online lending, with the Medium Amount Credit Contract (MACC) online loan book increasing by 40.0%. The Small Amount Credit Contract (SACC) loan book now comprises only 43.4% of the total loan receivables of the Group, down from 49.7% at 30 June 2018.

Whilst the strong growth in lending has driven the top line revenue growth across the personal finance and vehicle finance businesses, the year has been impacted by an increase in arrears and write-offs of loans. Combined with this increase has been the adoption of AASB 9 'Financial Instruments', the effect of which has been to apply further increases to the provisions for doubtful debt based on the arrears profile and expected credit loss. As the business experienced an increasing trend of arrears and loan write-offs during the year, all credit decisioning has been reviewed and more stringent credit criteria applied across the products offered. Investment in data analytics has provided deeper insights into the propensity of customers to repay, which has driven down acceptance rates in the second half of the year. The vehicle financing business has overhauled its risk scorecard and product pricing to ensure an acceptable risk profile as it expands its broker network and continues to grow the loan book.

A summary of consolidated revenues and results by significant segment is set out below:

Segment revenues

Segment EBITDA results

2019

2018

2019

2018

$'000

$'000

$'000

$'000

Franchise operations

19,124

19,606

11,420

12,404

Store operations

118,216

118,540

13,897

15,787

Personal finance

125,136

109,490

38,415

46,677

Vehicle financing

18,160

11,969

866

2,574

Totals before head office costs

280,636

259,605

64,598

77,442

Head office

929

740

(43,315)

(27,666)

Totals after head office costs

281,565

260,345

21,283

49,776

Depreciation, amortisation and impairment

(13,222)

(7,683)

Finance costs

(10,427)

(10,822)

Profit / (loss) before income tax

(2,366)

31,271

Income tax benefit / (expense)

674

(8,768)

Profit / (loss) for the year

(1,692)

22,503

Cash Converters International Limited

4

Annual Financial Report 2019

Operating and financial review

For the year ended 30 June 2019

Significant adjustments

As referenced above, the result for the year has been impacted by a number of adjustments that do not reflect the normal operating performance of the business. Details are outlined below and summarised in the following table:

2019

2018

$'000

$'000

Earnings before interest & tax (EBIT)

8,061

42,093

Adjustments:

McKenzie class action settlement

16,400

-

Class action legal fees

3,151

2,749

Credit risk review

5,059

-

Restructuring costs

1,492

-

Accelerated amortisation & depreciation

3,546

-

UK IT Project

1,558

-

Other costs

487

(1,330)

Adjusted EBIT

39,754

43,512

The most significant event in the year was the settlement of the McKenzie class action in November 2018. The Company reached a settlement of $16.400 million for the action. The Lynch proceeding remains outstanding and following the trial in November 2018, the Company awaits judgement, the outcome of which is still unknown. Legal fees were incurred during the year of $3.151 million (2018: $2.749 million) in defence of the actions. Whilst the Lynch proceeding remains outstanding there will continue to be some additional fees through FY 2020.

With the increase in arrears and bad debts written off during the year, the business completed a comprehensive review of the loan books with external consulting assistance. The outcome of these reviews was a complete change to the credit scorecard of GLA and significant changes to the credit modelling for personal finance. The reviews also critically assessed the recoverability of loans in arrears and determined that a number of accounts should be written off. The net impact of these write-offs increased the net debt expense by $5.059 million ($1.450 million for personal finance and $3.609 million for GLA). Accelerating these write-offs also impacted the modelling for provisions under AASB 9 through a change to the loss rates and expected credit loss profile.

The change of CEO during the year and additional restructuring to the leadership team resulted in $1.492 million of restructuring costs for the year, including payments to the outgoing CEO and additional compensation for forfeited entitlements of the incoming CEO (details of which are included in the Remuneration Report).

The new CEO initiated a series of reviews of IT projects, software assets and operational processes. One outcome from these reviews was the decision to abandon a software development project in the UK, resulting in total costs of $1.558 million being expensed in the year. The pace of change in the technology landscape and the continued reinvestment in the Company's core platforms also resulted in a revision to the expected useful life of the capitalised software and accelerated amortisation and depreciation of $3.546 million. This reduced the carrying value of intangible software assets to $16.771 million.

Other costs expensed in the year were the net of:

  1. increases to inventory and pawnbroking provisions for the corporate store assets of $1.410 million, reflecting updates to the estimates used to measure their recoverable value and the prevailing age of the assets; and
  2. a credit to the profit and loss of $923 thousand due to the business not meeting the vesting criteria on the long-term incentive (LTI) plan for the options which were due to vest on 30 June 2019. The costs previously expensed in relation to the tranche of options linked to normalised earnings per share growth (NEPSG) were credited to the profit and loss. A further $574 thousand of costs associated with the tranche of options linked to a market-linked total shareholder return vesting condition, were credited directly to retained earnings in accordance with the accounting treatment prescribed by AASB 2.

Cash Converters International Limited

5

Annual Financial Report 2019

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Cash Converters International Ltd. published this content on 29 August 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 August 2019 03:10:06 UTC