Cash Converters International Limited ABN 39 069 141 546 — Annual Report for the year ended 30 June 2017 — cashconverters.com Contents — 4 6 8 10 12 18 60 61 62 63 64 65 Corporate directory Chairman’s report Chief Executive Officer’s report Highlights Operating and financial review Directors’ report Corporate governance Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements 111 Directors’ declaration 112 Auditor’s independence declaration 113 Independent auditor’s report 118 Additional securityholder information “ At the heart of any business is its people and I would like to thank and applaud the team at Cash Converters, both colleagues and franchisees, for their resilience through a period of change and their ongoing commitment to success in the future.” — Mark Reid CEO 2 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 3 Corporate directory — Directors Mr Stuart Grimshaw Non-Executive Chairman Mr Peter Cumins Executive Deputy Chairman Mr Lachlan Given Non-Executive Director Mr Kevin Dundo Non-Executive Director Ms Andrea Waters Non-Executive Director Ms Ellen Comerford Non-Executive Director Company Secretary Mr Brad Edwards Registered and Principal Office Auditors Level 18, Citibank House 37 St Georges Terrace Perth WA 6000 Australia Tel: +61 8 9221 9111 Web: www.cashconverters.com Share Registrar Australia: Computershare Investor Services Pty Ltd Level 11 172 St Georges Terrace Perth WA 6000 Australia Tel: 1300 850 505 Deloitte Touche Tohmatsu Brookfield Place, Tower 2 123 St Georges Terrace Perth WA 6000 Australia Stock Exchange Australian Securities Exchange Exchange Plaza 2 The Esplanade Perth WA 6000 Australia ASX code: CCV 4 | Cash Converters International Limited – Annual Report 2017 4 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 5 Chairman’s report — Last year I wrote about the challenges This restructuring of the management and The issue of reputational risk that the banks banks in refusing to provide services to Cash 3. Continued investment in technology and encountered through that period and the Board teams has been achieved seamlessly have used against your Company is a Converters, then surely all capital markets data analytics will continue to enhance our steps being taken to return the Company to its and reflects the strong passion each member mysterious viewpoint when they will not even should be closed to these banks, given underwriting capabilities. primary strengths. The first stage was removing has for the Company. The shift in focus to a allow the Company to open transactional the significant reputational risks they now ourselves from the corporate store model in more diversified lending business that has seen accounts with them. Ironically, when reviewing represent. the UK and reverting to a master franchise a reduced reliance on the SACC product, while the performance of the banks over the past arrangement – this means the Company only developing the additional medium term loan few years, what is evident is a focus on has corporately owned stores in Australia. The and Green Light Auto car financing, will see driving profitability at the expense of sound Company recorded a profit in the UK for the a more stable income position evolve as we reputational risk management. We have first time as a result of these changes. grow these businesses. We have continued to seen media commentary around allegations invest in risk management systems and people concerning: 4. The demand for credit from our customer base will not disappear. Discussion in In addition, UBS in a recent survey introduced certain circles focusing on eliminating the the subject ‘mortgage books are worse than provision of credit to this segment without believed’. The basis of this survey appears to consideration of the impact on the wider revolve around a number of loan applications economy or the lives of those concerned, being ‘soft’ on expenditure disclosures and is ill-informed and misguided. When people aggressive on income assumptions – the UBS who have never had an issue in obtaining to provide the pre-requisite under-pinning governance to grow these businesses at the right pace, with the right amount of risk being both understood and underwritten. A number of our customers remain unable to obtain credit from banks – which has been a benefit to us and we thank the banks for this. However, while we continue to serve this segment, the banks continue to determine that Cash Converters represent ‘reputational risk’ to their businesses, notwithstanding we (and the sector) are subject to a high level of compliance scrutiny and regulatory oversight. It is somewhat ironic that the banks, and this is all banks, can maintain a view of what industries are most appropriate to the economy. When the commentators talk about the ‘quadropoly’ of banking, we can see it most evident in the consistent herd-like behaviour exhibited in approaches to issues such as these. Our customers make up a significant part of the Australian economy and need immediate access to cash for emergencies such as car problems, medical emergencies or utility bills. We are able to provide comfort to our customers in a very short time as opposed to the banks who take a long time and inevitably say ”no”. We are there for our customers, consistently. The next step was to revitalise the management team and Board. There were many layers of action that occurred: 1. Peter Cumins moved from the role of CEO and Managing Director to that of Executive Deputy Chairman, focusing on the growth of the international franchise business. 2. Mark Reid was appointed as Chief Executive of the Company, previously Chief Executive Australia. 3. There were numerous management changes including the retirement of the CFO at the time, Ralph Groom, who was replaced by Martyn Jenkins, previously CEO of the UK operations. 4. We have a relatively new management team in place under Mark Reid’s guidance and each executive comes with unique and broad experience which will benefit the Company over the coming years. 5. We also have rejuvenated the Board and dramatically increased the diversity with the appointment of Andrea Waters (who Chairs the Audit and Risk Committee) and Ellie Comerford (who chairs the Remuneration and Nomination Committee). 6. At last year’s AGM, we acknowledged the long service of Reginald Webb who has been outstanding over many years in supporting the Company and assisting it through some challenging times. • Life insurance claims being rejected due to survey found that roughly 29% of the $1.7 credit, start determining how people who a supposed policy of rejecting or restricting legitimate claims being paid, through harsh and restrictive policy definitions. trillion of outstanding housing debt was based cannot get access to credit should behave, on information that was not factual or accurate. then we have a problem. Notwithstanding the apparent tightening in We believe that the customers we serve are • Financial advice being provided to credit standards that should make access an integral part of the fabric of this wonderful individuals on the investment of their life savings that benefited the financial return to the adviser or bank rather than the individual who had entrusted their life or retirement savings to these institutions. • Remuneration targets at branch levels that were based on objectives inconsistent with the approach of ‘what is best for the customer’. • The use of benchmarks in establishing repayment capacity of borrowers when a more focused investigation of expenditure may have been more appropriate. • ASIC’s Federal Court case which alleges the rigging of the BBSW interest rates in order to drive profits which may effectively harm small businesses and institutions whose lending is based off these rates. • AUSTRAC’s Federal Court case against a bank, alleging that they failed in their compliance and enabled transfers of large sums to suspected terrorist organisations and drug cartels. The breadth of these issues is breathtaking and continues to drive consumer apathy towards these large institutions. If we were to use the same underlying reasoning as the to credit harder, the respondents to the UBS nation and we are proud to serve them. mortgage survey found that applicants were We have a terrific group of employees who finding it easier to get credit than before. As are passionate about the Company and its the apparent credit tightening occurred, the customers and this will continue to lay the banks moved interest rates up. The foregoing foundation for future sustainable growth. UBS survey would suggest that an ability to increase profits, while not materially altering credit standards, was a determined outcome. The winner of this is the banks and the loser the customer! We continue to see this trend in approaches by the banks in trading off profitability for consumer well-being. For these same institutions to determine your Company is not worthy of their support, is difficult to comprehend. As always, I thank our shareholders for their support and patience, and believe we are positioned to benefit from changes made to our operating model over the ensuing years. There were four key principles I mentioned last year and they continue to hold: Stuart Grimshaw Chairman 1. We respect our customers and without us they have to borrow from friends and families or worse, the bottom of the shadow finance industry. 2. We are transparent on pricing which is governed by a high degree of regulatory oversight and imposed legislative conditions. Contrast this with recent comments by the RBA in its submission to the Productivity Commission, stating that competition in banking is being restricted by bundling of products, particularly with cross-subsidisation “obscuring the pricing of individual products”. “We are there for our customers, consistently.” — 6 | Cash Converters International Limited – Annual Report 2017 6 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 7 Chief Executive Officer’s report — The 2017 financial year was one of a transition What was important was delivering a positive Corporate strategy update Operational compliance Looking ahead for Cash Converters, as we continued the result, off lower revenue, and to finish the year roll-out of our growth strategy and maintained with a strong cash position ($80.6 million, up our drive to become the most trusted personal 9.5%) to fund the ongoing growth plan and finance lender and second hand retail goods strategic realignment of the business. provider in our markets. Cash Converters undertook a significant restructure of its leadership team during FY 2017, ensuring the capabilities of the team were aligned to the needs of the business to The Company continued to focus on, and Our expectations for FY 2018 are to see the invest in, improving its compliance and risk strategy take hold and build on the success management procedures as we strive to achieved in FY 2017. As the new loan products be leaders in our sector and to consistently continue to gather momentum, we anticipate Of course, a further measure of performance achieve its strategic objectives. operate at, or exceed, regulatory standards. a stronger second half to the year, with the Pleasingly, we are beginning to see is share price and, while a number of factors encouraging signs that the strategy is having impact share price, we believe the strength the desired effect, which includes improving of the Cash Converters strategy is becoming the quality of our loan book and building a better understood by the market and sustainable platform for long-term profitable reflected in share price appreciation since growth. early June 2017. The transformation of Cash Converters to During FY 2017 Cash Converters successfully become the leading and most trusted provider implemented a comprehensive Income and of personal finance and second hand retail goods has required the implementation of a Expenditure (I&E) assessment platform which has considerably enhanced its ability to match first half putting down the building blocks for the longer-term growth, and so a comparable result for the first half of 2018 to the second half of 2017 is expected. strategy focused on a number of key initiatives the right loan product to customers depending I am genuinely excited now that we have built that were addressed in FY 2017 and will on their circumstances, ultimately improving a foundation for sustainable and profitable The best evidence that we are achieving our However, at the heart of any business is continue throughout FY 2018, including: the overall quality of the Company’s loan book. growth and, with a continued focus on strategic objectives came in the Company’s its people and I would like to thank and delivery of an FY 2017 NPAT of $20.6 million, applaud the team at Cash Converters, both which was in line with guidance and a colleagues and franchisees, for their resilience significant improvement on the 2016 financial through a period of change and their ongoing year (FY 2016 $5.3 million loss). commitment to success in the future. A fall in Revenue and EBITDA from personal Product development finance and store operations for the financial year were expected outcomes of the Company’s deliberate plan to transition the loan book to higher quality, lower risk products, as part of a more sustainable model overall. We have developed new products to reflect the transition of the loan book, evidenced by the Medium Amount Credit Contract (MACC) product which, since its introduction in November 2016, grew to a $13.4 million A profitable contribution from the first full year loan book. • Evolving the brand, product range and channels to market; • Growth of Cash Converters’ international business; • Transforming the Company’s digital capabilities across sales and marketing; • Continued improvement of our risk management processes and procedures; and • Placing our customer at the centre of everything we do. of the UK operations functioning as a master franchise, and the investment in New Zealand producing its first full year profit, have seen the franchise division strengthen considerably over the prior year. A strategic outcome of introducing the MACC product has been its attraction to a new It is our firm view that successful delivery segment of the addressable market, with more across these key initiatives will position Cash than 30% of approved applications for the Converters for sustainable growth in revenue MACC product coming from customers new to and profit whilst providing a better customer experience, more relevant and appropriate products and services, and ultimately, stronger sustainable returns for our shareholders. Cash Converters. In addition, growth in loan volumes through the Green Light Auto (GLA) vehicle finance business was very encouraging and is expected to continue to increase as we grow our finance broker / car dealer network. We remain extremely confident that this part of our business will be a key pillar in the future growth of Cash Converters. The Company’s investment in online marketing and product delivery saw online lending volumes surpass in-store loans for the first time in January 2017, demonstrating the value of committing investment to this fast-growing channel. This strategic decision resulted in a reduction in the overall loan book and a change in the product mix. As a result a notable reduction was experienced in the Personal Finance net our customers, investing in our brand and technology, and with a revitalised management team, the encouraging progress made in FY 2017 will continue throughout FY 2018. bad debt expense and the Company expects We thank you for your continued support and the bad debt expense to continue to reduce as look forward to sharing in the future success of the overall shift in the product mix of the loan Cash Converters. book improves. Global professional services firm, Deloitte Touche Tohmatsu Limited (Deloitte), was commissioned to conduct an independent review of our processes and procedures during the year, with a specific focus on the personal loans and finance operations within Cash Converters. Pleasingly, Deloitte’s assessment in an interim report (dated 6 June 2017) did not identify any key deficiencies of updated systems, processes, policies and training procedures against the relevant legislative and compliance obligations under the Enforceable Undertaking (EU). This review is ongoing and we anticipate closing out the process with no adverse findings when the final report is due in November 2018. Sincerely, Mark Reid CEO “We are beginning to see encouraging signs that the strategy being implemented is having the desired effect.” — 8 | Cash Converters International Limited – Annual Report 2017 8 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 9 Highlights For the year ended 30 June 2017 — New MACC loans launched. $15m advanced in first 7 months. Pawn broking revenues up 3.3%. Fourth consecutive year of growth. 87% brand awareness. New assessing platform and guidelines implemented. Retail sales up 2.9% with online revenues up 16.3%. New leadership. New strategy. Positioned for growth. Green Light Auto Finance loan book up to $20.1m. Positioned for profitable FY 2018. United Kingdom United Kingdom operating as a master franchise. UK operations contributed $1.7m of EBITDA to the group. New Zealand The company’s 25% equity investment in New Zealand returned its first full year profit. A contribution of $314k. Cash Converters International Limited – Annual Report 2017 | 11 Operating and financial review For the year ended 30 June 2017 — CASH AND CASH EQUIVALENTS $80.6m — EBITDA AS % OF REVENUE 16.8% — NET PROFIT AFTER TAX $20.6m — EPS (BASIC) 4.2¢ — NET BAD DEBT 8.8% — 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 16 countries around the world. In the prior year, the Company completed a significant restructure of its operations in the UK and the Carboodle vehicle leasing business in Australia. Cash Converters UK returned to a master franchise operation and the Carboodle business changed its business model to Green Light Auto Finance, offering secured vehicle finance loans. The costs associated with these restructures, together with their operational results were reflected in the prior year accounts as discontinued operations. There are no further impacts of the discontinued operations in the current year results. Financial performance process for personal loans and cash advances financial services business. Financial Services The Company reports a full year net profit after tax of $20.618 million compared to a prior year loss after tax of $5.272 million. The prior year included the effects of the restructure and an ASIC compliance provision associated with the enforceable undertaking the Company entered into with ASIC in November 2016. in Australia that reduced lending volumes – Administration and Financial Services – significantly during the year, resulting in lower Personal Loans have been amalgamated interest revenues for the financial services into a single segment, Personal Finance. This operations. All other segment operations’ more accurately reflects the operations of EBITDA exceeded the prior year, with the business and reflects changes to internal increases in retail sales, pawn broking interest management reporting during the period and and vehicle finance revenue. allows a more accurate allocation of costs for Revenue from continuing operations was down Segment performance from $311.599 million in 2016 to $271.473 There has been a change in presentation million for the current financial year. This of the segmental financial information anticipated and forecast decrease in revenue this year and a corresponding change to is due to changes made to the assessing last year’s comparatives in respect to the all personal finance activities where resources were previously shared. A summary of consolidated revenues and results by significant segment is set out below: Segment revenues Segment EBITDA results Franchise operations Store operations Personal finance Vehicle financing Totals before head office costs Head office (i) Totals after head office costs Depreciation, amortisation and impairment Finance costs Profit before income tax Income tax expense Profit after tax from continuing operations Loss from discontinued operations Profit / (loss) for the year 2017 $’000 20,199 124,222 117,191 9,393 271,005 468 271,473 2016 $’000 20,589 129,312 151,897 8,146 309,944 51 309,995 2017 $’000 10,490 17,549 49,472 (408) 77,103 (31,378) 45,725 (8,123) (9,404) 28,198 (7,580) 20,618 – 20,618 2016 $’000 6,925 23,541 65,858 (4,599) 91,725 (44,028) 47,697 (6,867) (9,659) 31,171 (5,277) 25,894 (31,166) (5,272) (i) Head office segment results for the year ended 30 June 2016 include ASIC compliance provision of $12.500 million 12 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 13 Operating and financial review For the year ended 30 June 2017 — Significant events The intended consequence of this new its new providers to improve efficiency and Franchise operations segment also includes the New Zealand the appeal of non-recourse secured lending In November 2016, the Company entered into an Enforceable Undertaking (EU) with ASIC. An expense of $12.500 million was provided for in the prior year. During the current year, the Company incurred additional costs to meet its obligations under the EU through investment in the Risk and Compliance function as well as one-off costs to effect the customer remediation program forming part of the EU. The most significant change to the business occurred in the Personal Finance division in Australia, where a comprehensive review of the Small Amount Credit Contract (SACC) lending was completed, culminating in the roll out across the network of an enhancement to the Company’s loan origination and management software. This removed the use of benchmarks in the assessing process and allows the business to conduct a detailed analysis of the customer’s income and expenditure through analysis of the customer’s bank statements. assessing process was a significant reduction customer experience. in the volume of loans approved. This has impacted personal finance revenue in the year, but has begun to improve the overall quality of the loan book and reduce bad debts. Throughout the year, the Company incurred costs that it categorises as outside its normal operating expenses and has listed these in the table below, to provide a ‘Normalised EBITDA’ To address this strategic reduction in SACC that more accurately reflects the underlying lending, the business has also expanded the performance of the business. Specifically range of financial products. In November 2016, itemised below are the compliance provision the business introduced larger loans (from and associated costs, for the FY 2016 year the $2,000 to $5,000). These products, regulated $12.500 million relates to the EU remuneration under the Medium Amount Credit Contract and penalty, in the current year, the $2.088 (MACC) provision of the National Consumer million relates to the additional costs associated Credit Protection Act 2009 in Australia, are with the call centre deployed to manage offered to higher income customers with a the remediation program, the costs of the lower credit risk profile. Transactional banking facilities were successfully migrated from Westpac during the year, taking full utilisation of new service providers for banking and payment services. Since the transition, the business has continued to develop its relationship with independent expert and changes made to systems to meet the reporting requirements of the EU. The Class action legal fees of $3.973 million relate to the ongoing defence of the Queensland Class actions. EBITDA from continuing operations Normalisation adjustments Restructure costs Other costs outside normal operating costs Compliance provision and associated expenses Class action legal fees EBITDA normalised 2017 $’000 45,725 1,740 – 2,088 3,973 53,526 2016 $’000 47,697 2,228 3,246 12,500 2,442 68,113 Franchise operations encapsulate royalties and licence fees from 16 countries, franchised Cash Converters operations, as well as Cash Converters UK Ltd (CCUK), a wholly owned subsidiary of the Company, which during the previous financial year was restructured to return to a master franchise operation. All income from CCUK is now reflected in the franchise operating segment. This segment also includes fees from 83 franchisee owned stores in Australia. operations, in which the Company holds a growing as access to other forms of credit are 25% equity interest, and which contributed being restricted. Pawn loans advanced for the a profit of $314 thousand to the division, year were also up 5.2% on the prior year. compared to a prior year loss of $1.392 million. Store operations Corporate stores – United Kingdom The outcome of the strategic review in the Store operations combines the performance previous year means there are no corporate of the 71 Company-owned Cash Converters store results for the UK in the FY 2017 result. stores in Australia. Revenue from these stores The comparative figures are included in is derived from the retailing of new and second discontinued operations for FY 2016 and hand goods both in-store and online, as well include the restructure costs of $22.668 million. The total number of franchised stores globally cash advance short term loans. Stores also Personal finance as interest from pawn broking loans and now stands at 659 with 83 stores in Australia, receive commission from successful personal The personal finance operations incorporate 196 in the UK and 380 throughout the rest of loan applications processed in-store and the trading results of Mon-E Pty Ltd (Mon-E) the world. The Company continues to look for referred to the Company’s Personal Finance and Cash Converters Personal Finance Pty opportunities to expand its franchise network, business. Store operations also receive a Ltd (CCPF). The UK Finance Division ceased both in Australia and internationally. The share of income from successful online loan issuing new loans in May 2016, and therefore performance of this segment remains steady applications. with long term franchise agreements in place driving consistent year on year revenue. No new franchisees were added during the year. The 2017 performance of the corporate stores in Australia contributed a segment EBITDA of does not form part of the Group’s continuing operations. All UK revenues are incorporated in the franchising operations. $17.548 million, a decrease of $5.992 million Mon-E is responsible for providing the EBITDA for the franchise operations for the from the FY 2016 result. This decrease was the administration services for the Cash Converters year was $10.490 million, an increase of result of the reduction in cash advance lending, network in Australia to offer small cash $3.566 million over the prior year. CCUK which saw outgoings reduce by 33.4% as a advance loans to their customers (average loan reported full year EBITDA of $1.746 million result of the changes to the assessing criteria. size of $398, FY 2016 $403) and the platform (2016: $12.984 million loss), which now Personal loan commissions to stores also to refer personal loans from stores to CCPF for includes only franchise operations, and is decreased as a result of the new lending assessing. attributed to the franchise segment for the processes, however the launch of larger loans current year. CCUK ceased to offer personal in November 2016 helped to offset some of loans in May 2016, and throughout the year this decrease. Overall, net store commissions the loan book has been wound down. The were down 35.0% on FY 2016. The cash advance principal loaned is financed by the corporate stores and the individual franchisees for the cash advances provided by their stores. Mon-E receives commission remaining loans outstanding at 30 June 2017 have been handed over to third party debt recovery agents and hence are fully provided for in the financial statements. All other areas of the store network saw from the store network for each cash advance improved performance during the year, processed through their systems as a with retail sales up 2.9% on the previous percentage of fees earned by the store and corresponding year to $74.824 million. Online successfully collected. Australian franchise operations contributed retailing continues to grow significantly up $4.074 million of revenue (FY 2016 $4.034 16.3% on FY 2016 and Webshop sales million). The franchisee business continues contributing 8.5% of total retail revenues (2016: to drive strong sales, with retail revenues 7.5%). During 2017, the online offering from across the franchise stores up 3.9% on the Cash Converters was expanded to provide previous year. International franchise revenues increased by $265 thousand to $739 thousand for the year, as some international fee negotiations completed and new stores in France, South the ‘What’s it Worth’ service. This enables customers to submit images of items they may wish to sell and the stores provide an indicative valuation for the customer to sell the goods or obtain a secured pawn broking loan against. Africa and Spain opened in the prior year Pawn broking revenues also continue to contributed a full year of fees. The Franchise increase, up 3.3% on the prior year, with CCPF provides unsecured loans originated through the franchise and corporate store networks and directly from customers online. The loans are underwritten, and the principal funded, by CCPF, which pays a commission to the stores (both corporate and franchise) for the generation of the lead and processing the application in-store. During the period under review the segment EBITDA from continuing operations in this division was $49.471 million (2016: $65.858 million), down $16.387 million (24.9%) on last year. 14 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 15 Operating and financial review For the year ended 30 June 2017 — Personal loans – Australia From a channel perspective, both stores and Vehicle financing The Company’s personal finance business experienced the greatest change during 2017. At the start of the year, the Company began a comprehensive review of its underwriting process and related risk appetite. The culmination of this work was the launch in November 2016 of the offering of larger loans (under the MACC lending rules) of up to $5,000, and in April 2017, the roll out of the Company’s comprehensive Income and Expenditure platform. These changes were aimed to improve the quality of the customer base and provide a stable and sustainable lending model to facilitate future growth. The Income and Expenditure platform, an expansion of the Company’s in-house developed software system, has allowed the business to completely remove the use of benchmarks in assessing affordability of customer loans, replacing them with the comprehensive analysis of the customers’ bank statements and hence arriving at a more accurate credit decision, through arriving at a more accurate assessment of the suitability and affordability of customers’ loan applications. Aimed to appeal to higher income customers, providing higher value loans, the MACC product has grown over the seven months since launch to comprise 16.4% of the total personal loan book, with $15.043 million advanced and an outstanding book of $13.370 million at 30 June 2017. online remain vital to the Personal Finance business with a relatively even split of 52.3% in-store advances and 47.7% online advances during the year. As a distribution channel, online loans have exceeded in-store lending for the first time in January 2017. Store originated loans do still make up 51.9% of the outstanding loans at 30 June 2017 (2016: 54.6%). Despite the business overhauling its underwriting and risk appetite during the year, it is clear from application numbers that demand for the SACC product is still high, with total applications increasing by 8.2% year on year. Also, during the year the Company made the decision to outsource its collection activity to Collection House Limited (ASX: CLH), based in Brisbane. Leveraging the core capabilities of Collection House to manage the collections process has allowed Cash Converters to focus upon its core service delivery to its customers. The combined contribution from improved lending and the efforts of Collection House, has seen the total bad debts written off, net of recoveries, falling from $32.774 million in FY 2016 to $29.899 million in FY 2017 an 8.8% improvement. Bad debt levels are projected to continue to decrease over the coming year, as the composition of the loan book continues to shift away from those loans written before the changes to the assessment process. Personal loans – United Kingdom In May 2016, the UK business stopped With the focus for 2017 on quality not quantity advancing principal in regard to personal for the personal lending business, the personal loans. Throughout the following year, the loan book has fallen from $98.719 million at 30 UK collections team continued collecting on June 2016 to $81.355 million at 30 June 2017, the book. A total of £3.981 million has been a drop of 17.6%, with lending of SACCs falling collected to 30 June 2017. The outstanding 31.3% during the year. The reduction in lending balance was fully provided for in the restructure has had a significant impact on revenues, with costs reported in the FY 2016 financials. This a $32.795 million decrease from FY 2016. balance has now been outsourced to third Due to the revenue recognition for MACC party collection agents and the Company loans being over the life of the loans, these anticipates a small percentage to be recovered loans have yet to provide a significant uplift in over the coming year. revenue. The uplift in revenue from MACC will be evidenced in the subsequent financial year as the book starts to mature. Green Light Auto Finance is the Company’s vehicle financing business. In March 2016, the business ceased to offer its Carboodle vehicle lease product. These leases are continuing to be managed by the business to their scheduled completion. As at 30 June 2017 there were 435 leases still active (30 June 2016: 781). The new product offered by Green Light Auto since March 2016 is a traditional secured vehicle loan. The GLA products are offered through a range of brokers, car dealerships and Cash Converters stores, as well as directly to customers online. The loans range from $5,000 to $50,000 over a term of up to 7 years, with an average loan advanced of $18,322 over 56 months. Total advances in the 2017 year were $17.058 million (2016: $3.104 million) taking the vehicle finance loan book to $20.100 million at 30 June 2017 (30 June 2016: $3.327 million). The business is working to improve efficiency and systems to position itself for significant growth over the coming years, with its migration to the CCPF loan processing platform already underway. Total revenue from the vehicle financing operations for the year was up 15.3% to $9.393 million with an EBITDA loss of $408 thousand, an improvement from a normalised EBITDA loss of $2.371 million for FY 2016 (normalising for the costs of the restructure of $2.228 million). Corporate costs Corporate costs consist of corporate related activities such as IT, Business Development, Finance, HR, Risk and Internal Audit, Legal, Marketing, Board and leadership team. The business is positioning itself for future growth and does not anticipate a significant reduction in Corporate costs in the short term, however comprehensive cost and efficiency strategic initiatives are being pursued. During the current year, the Company has invested in enhancing resource and capability in its Risk and Compliance function to ensure the business is best positioned to continue to execute its strategy to be the most compliant operator in the industry. Financial Position Summarised Financial Position Cash at bank Loan receivables Other receivables Inventories Other assets and intangibles Total assets Borrowings Other liabilities Total liabilities Total equity Operating cash flow Gearing (net debt / equity) 2017 $’000 80,571 101,970 31,051 20,991 164,262 398,845 107,237 30,769 138,006 260,839 43,534 10.2% 2016 $’000 73,609 104,521 39,417 17,612 189,332 424,491 133,984 48,222 182,206 242,285 30,074 24.9% Basic earnings per share from continuing operations (cents) Basic earnings per share from continuing and discontinued operations (cents) Return on equity 4.21 cents 4.21 cents 7.9% 5.37 cents (1.09 cents) 10.7% Receivables (trade and personal loans) the year, the Company has drawn down Outlook Outstanding loan receivables (personal loans and vehicle finance loans) for the year have decreased from $104.521 million to $101.970 million due to the decrease in SACC outgoings during the year, and offset by the increase in vehicle finance. Other trade receivables reflect the run-off of the Carboodle leases and the repayment of the loans provided to franchisees in the UK for the purchase of corporate stores in 2016. the facility to $45.500 million at the end of FY 2017 (FY 2016 $68.750 million), a net repayment in borrowings of $23.250 million. The Company is in negotiations to enable other loan products offered by the business to be funded. The increase in free cash and reduction in borrowings has reduced the gearing rate to 10.2% (FY 2016 24.9%). Cash flows Other assets and intangibles Operating cash flows have increased Capital investment continued throughout 2017, with $8.162 million of investment in capital expenditure, largely in software development. Inventories are also up 19.2% due to increased demand for in-store buying and a slight reduction in the pawn broking redemption rates. Borrowing and gearing The Company has been successfully operating its $100 million securitisation facility with Fortress Investment Group since it replaced Westpac’s facility in March 2016. As the facility is linked to the SACC personal significantly due to the reduced lending volumes of SACCs, and overall cash receipts from customers far exceeding the outgoings during the year, with cash and cash equivalents at year end at $80.571 million (FY 2016 $73.609 million). Free cash of $59.988 million is held after the exclusion of restricted cash deposits held as security for the transactional banking facilities together with cash held in trust for the securitisation facility. This has been achieved while funding the growth in MACCs and vehicle finance lending to the sum of $33.470 million not funded from the loan book, and the decrease in lending during securitisation facility. The 2017 financial year has been one of significant transformation, and forms the baseline for the future growth of the business as it executes its strategic objectives in the years ahead. Focussing on compliance and risk, whilst ensuring value and an exemplary customer experience, Cash Converters is looking forward to sustainable growth in its financial services products as it continues to offer greater flexibility to new and existing customers. Significant investment is planned into digital services and improving the customer experience at Cash Converters, whether in-store or online. A sustainable growth strategy will see the turnaround of Cash Converters over the coming years, with new leadership in place to facilitate the drive to achieve ongoing profitability for the Company and increased returns for its shareholders, underpinned by the ambition to be the most trusted lender in our sector. 16 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 17 Directors’ report For the year ended 30 June 2017 — The directors of Cash Converters International Limited submit the following report of the Company for the financial year ended 30 June 2017. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows: Information about directors The following persons held office as directors of the Company during the whole of the financial year and until the date of this report unless otherwise stated: Mr Grimshaw joined the Board in 2014 and was appointed Non-Executive Chairman on 10 September 2015. Mr Grimshaw is currently the Chief Executive Officer of EZCORP Inc. Prior to joining EZCORP in November 2014, Mr Grimshaw was the Managing Director and Chief Executive Officer of Bank of Queensland Limited (BOQ). During his tenure at BOQ he initiated fundamental changes to BOQ’s culture, operating model and strategic direction and established a strong track record of execution. In addition, a strong capital and provisioning strategy resulted in two credit rating upgrades to A-, and BOQ has been well supported by the equity markets with two global equity offerings successfully raising close to $800 million. In Mr Grimshaw’s time at the bank, BOQ attracted and developed exceptional talent across the top four management levels and a unique culture and brand that is now well recognised by the market. During his 30-year career in financial services, Mr Grimshaw has held a wide variety of other roles across many functions of banking and finance, including eight years at the Commonwealth Bank of Australia (CBA). At CBA, he started as Chief Financial Officer and over time became Group Executive, responsible for core business lines including Institutional and Business Banking as well as Wealth Management (Asset Management and Insurance). Prior to joining CBA, he worked for the National Australia Bank and was the Chief Executive Officer of Great Britain, with responsibility for large UK consumer banks Yorkshire Bank and Clydesdale Bank. Mr Grimshaw represented New Zealand at the 1984 Olympics in Field Hockey and has a Bachelor of Commerce and Administration (Victoria University, Wellington, New Zealand) and an MBA (Melbourne University, Australia). He has also completed the Program for Management Development at Harvard Business School. Over the past 3 years Mr Grimshaw has held directorships with the following listed companies: Company EZCORP Inc Commenced 3 November 2014 Ceased – Mr Stuart Grimshaw Non-Executive Chairman — Appointed director 1 November 2014 Appointed Chairman 10 September 2015 Mr Cumins joined the Company in August 1990 as Finance and Administration Manager when the Company had just 23 stores, becoming General Manager in March 1992. He became Managing Director in April 1995. Mr Cumins moved from this role to the role of Executive Deputy Chairman on 23 January 2017. Mr Cumins is a qualified accountant, and has overseen the major growth in the number of franchisees in Australia as well as the international development of the Cash Converters franchise system. His experience in the management of large organisations has included senior executive positions in the government health sector, specifically with the Fremantle Hospital Group, where he was Finance and Human Resources Manager. Over the past 3 years Mr Cumins has held a directorship with the following listed company: Company EZCORP Inc Commenced 28 July 2014 Ceased – Mr Given joined the Board in 2014. He is the Executive Chairman of EZCORP Inc (a major shareholder in the Company) and also a Director of The Farm Journal Corporation, a 134 year old pre-eminent US agricultural media company; Senetas Corporation Limited (ASX: SEN), the world’s leading developer and manufacturer of certified, defence-grade encryption solutions; CANSTAR Pty Ltd, the leading Australian financial services ratings and research firm; and RateCity.com Pty Ltd, one of Australia’s largest Internet based financial services comparison organisations. Mr Given began his career working in the investment banking and equity capital markets divisions of Merrill Lynch in Hong Kong and Sydney where he specialised in the origination and execution of a variety of M&A, equity and equity-linked and fixed income transactions. Mr Given graduated from the Queensland University of Technology with a Bachelor of Business majoring in Banking and Finance (with distinction). Over the past 3 years Mr Given has held directorships with the following listed companies: Company Commenced Ceased Senetas Corporation Limited 20 March 2013 EZCORP Inc 18 July 2014 – – Mr Peter Cumins Executive Deputy Chairman — Appointed director April 1995 Mr Lachlan Given Non-Executive Director — Appointed director 22 August 2014 18 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 19 Directors’ report For the year ended 30 June 2017 — Mr Kevin Dundo Non-Executive Director — Appointed director 20 February 2015 Mr Dundo joined the Board on 20 February 2015. Mr Dundo practises as a lawyer and specialises in the commercial and corporate field, with experience in the mining sector, the service industry and the financial services industry. He is a member of the Law Society of Western Australia, Law Council of Australia, Australian Institute of Company Directors and a Fellow of the Australian Society of Certified Practising Accountants. Mr Dundo is currently a Non-Executive Director of ASX-listed Imdex Limited (ASX: IMD) and Non- Executive Chairman of ASX-listed Red 5 Limited (ASX: RED). Mr Dundo is a member of the Company’s Audit and Risk Committee and Remuneration and Nomination Committee, and until 24 February 2017 was the Chair of the Remuneration Committee. Over the past 3 years Mr Dundo has held directorships with the following listed companies: Company Imdex Limited Red 5 Limited Commenced 14 January 2004 29 March 2010 Ceased – – Ms Waters is a Chartered Accountant with an extensive career at KPMG, with 16 years as a Financial Services Audit Partner (until 2012), specialising in managed investments and superannuation. She has extensive experience with audit committees, and using this knowledge, she is a professional non-executive director, with a strong passion for implementing and improving governance and audit structures within business operations. Ms Waters is also an accredited facilitator for Australian Institute of Company Directors’ Company Director Course. Ms Waters is also a non-executive director of Bennelong Funds Management Ltd (also Chair of the Audit and Risk Committee), Care Super and CityWide Service Solutions (also Chair of the Audit Committee). She has previously been a non-executive director of Chartered Accountants Australia and New Zealand, Lord Mayor’s Charitable Foundation and Cancer Council Victoria. Ms Waters holds a Bachelor of Commerce from the University of Melbourne, is a Fellow of Chartered Accountants Australia and New Zealand, is a graduate member of the Australian Institute of Company Directors and the Australian Institute of Superannuation Trustees. Ms Waters is Chair of the Company’s Audit and Risk Committee and a member of the Remuneration and Nomination Committee. Over the past 3 years Ms Waters has not held directorships with any listed companies other than Ms Andrea Waters Non-Executive Director — Appointed director 9 February 2017 Cash Converters International Limited. Ms Comerford has over 30 years of financial services experience across a range of banking and insurance businesses. Most recently Ms Comerford was Chief Executive Officer and Managing Director of Genworth Australia, an ASX top 200 listed company, successfully leading the company through an IPO in 2014. She has also held various positions with leading global title and specialty insurance company First American Financial Corporation, both in Australia and internationally, including CEO and Managing Director for the Australian and New Zealand operations, and Chief Operating Officer for the international division. Prior to this, she was at Citigroup for approximately 14 years. Ms Comerford brings significant experience in enhancing performance culture within businesses with a commitment to promoting diversity and she is a member of Chief Executive Women. Ms Comerford is also a non-executive director of Hollard Holdings Australia and Hollard Insurance Company in Australia and Heartland Bank Limited in New Zealand and certain of its subsidiaries in Australia. Ms Comerford is Chair of the Company’s Remuneration and Nomination Committee and a member of the Audit and Risk Committee. Over the past 3 years Ms Comerford has held directorships with the following listed companies: Company Commenced Ceased Genworth Mortgage Insurance Australia Limited 20 February 2012 9 October 2015 Heartland Bank Limited (NZX) 1 January 2017 – Ms Ellen Comerford Non-Executive Director — Appointed director 9 February 2017 Mr Reginald Webb Non-Executive Director — Appointed 1997, retired 14 February 2017 Mr Webb joined the Board as a director in 1997 and was the Non-Executive Chairman from 2005 until he retired from that position on 10 September 2015. Mr Webb retired from the Board on 14 February 2017, having made a very significant contribution in helping to guide the Company over the 20 years of his directorship. Over the past three years Mr Webb has not held directorships with any listed companies other than Cash Converters International Limited. Directors’ shareholdings The following table sets out each director’s relevant interest in shares and options in shares of Cash Converters International Limited as at the date of this report: Directors Mr S Grimshaw Mr P Cumins Mr L Given Mr K Dundo Ms A Waters Ms E Comerford Fully paid ordinary shares Number Share options Number – 7,575,694 – 3,730,000 – – – – – – – – 20 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 21 Directors’ report For the year ended 30 June 2017 — Company Secretary Mr Brad Edwards Appointed 30 June 2017 — With a background in law, Mr Edwards has extensive private practice and corporate experience, During the financial year, there have been two significant changes to the operations of the business: Changes in state of affairs most notably with the Bank of Queensland Group for 15 years, where he held the roles of Company Secretary and General Counsel. His career encompasses financial services, including retail franchising, regulatory matters, dispute resolution and class action litigation, capital markets and mergers and acquisitions. i) the Company made a substantial change to its lending processes both in-store and online, with the implementation of new software and procedures; and ii) The launch of larger MACC (Medium Amount Credit Contract) loans to customers from $2,000 to $5,000. The impact of these changes has seen a reduction in lending in the short term and income from SACC (Small Amount Credit Contract) loans. However, the MACC loan book is increasing and the combined effect of these changes is to improve the overall credit quality of the loan books. Subsequent events There have been no events subsequent to the reporting date requiring disclosure in this report. Future developments Likely developments in expected results of the Group’s operations in subsequent years and the Group’s business strategies are referred to elsewhere in this report. In the opinion of the directors, any further information on those matters could prejudice the interest of the Company and has therefore not been included in this report. Dividends The directors of the Company paid a fully franked final dividend of one cent per share on 28 October 2016. On 22 August 2017 the Company announced that there would be no final dividend in respect of the financial year ended 30 June 2017. Shares under option or issued on exercise of options Details of unissued shares or interests under option as at the date of this report are: Issuing entity under option Class of shares of option date Number of shares Exercise price determination Vesting Cash Converters International Limited Cash Converters International Limited Cash Converters International Limited 102,166 6,194,448 6,458,766 Ordinary Ordinary Ordinary Nil Nil Nil 1 Jul 2017 30 Jun 2018 30 Jun 2019 The performance rights above are in substance share options with an exercise price of nil, which vest and are immediately exercised into ordinary shares once certain performance / vesting conditions are met. The holders of these performance rights do not have the right, by virtue of the performance right, to participate in any share issue or interest issue of the Company or of any other body corporate. Mr Ralph Groom Appointed 1995, resigned 30 June 2017 — Mr Groom joined Cash Converters in August 1995. Previously he was the Finance Director and Company Secretary of Tony Barlow Australia Limited, a publicly listed retailer, where he was responsible for all financial and secretarial matters. Mr Groom is a Fellow of the Chartered Institute of Management Accountants (UK) (ACMA), a Fellow of Certified Practicing Accountants (FCPA) and a Fellow of the Chartered Institute of Secretaries and Administrators (FCIS). Principal activities The principal activity of Cash Converters International Limited and its subsidiaries (the Group) is that of a franchisor of second hand goods and financial services stores, a provider of secured and unsecured loans and the operator of a number of corporate stores in Australia, all of which trade under the Cash Converters name. Country master franchise licences are also sold to licensees to allow the development of the Cash Converters brand but without the need for support from Cash Converters International Limited. Review of operations The Group’s net profit attributable to members of the parent entity for the year ended 30 June 2017 was $20.618 million (2016: $5.272 million loss) No shares have been issued as a result of the exercise of share options or performance rights during or since the end of the financial year. after a charge for income tax of $7.580 million (2016: $5.277 million). A review of the Group’s operations and financial performance has been provided on pages 12 to 17. Indemnification and insurance of directors and officers During the financial year, the Company paid a premium in respect of a contract insuring the directors of the Company, the Company Secretary and all executive officers of the Company and of any related body corporate against a liability incurred as such a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as such an officer or auditor. 22 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 23 Directors’ report For the year ended 30 June 2017 — Directors’ meetings The number of meetings of directors and meetings of committees of directors held during the year and the number of meetings attended by each director were as follows: Remuneration Report (audited) 1. Letter from the Chair of the Remuneration and Nomination Committee 2. Persons addressed and scope of the Remuneration Report Directors Board of directors Audit and Risk Committee Nomination Committee 3. Context of and changes to KMP remuneration for FY 2017 and into FY 2018 Held Attended Held Attended Held Attended 4. Overview of Cash Converters’ Remuneration Governance Framework and strategy Remuneration and Mr S Grimshaw Mr P Cumins Mr L Given Mr K Dundo Ms A Waters Ms E Comerford Mr R Webb Non-audit services 13 13 13 13 4 4 9 13 13 13 13 4 4 9 3 – 3 5 2 2 3 3 – 3 5 2 2 3 2 – 2 5 3 3 2 2 – 2 5 3 3 2 The directors are satisfied that the provision of non-audit services, during the year, by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. 5. Planned executive remuneration for FY 2017 (non-statutory disclosure) 6. Vested / awarded incentives and remuneration outcomes in respect of the completed FY 2017 period (non-statutory disclosure) 7. Performance outcomes for FY 2017 including STI and LTI assessment 8. Changes in KMP-held equity 9. Non-Executive Director fee policy rates for FY 2017 and FY 2018 and fee limit 10. Remuneration records for FY 2017 (statutory disclosures) 11. Employment terms for KMPs 12. Other remuneration-related matters The directors are satisfied that the provision of non-audit services during the year by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001, as the nature of the services was limited to income tax and indirect tax compliance, transaction / 13. External remuneration consultant advice compliance related matters and generic accounting advice. All non-audit services have been reviewed and approved to ensure they do not impact the integrity and objectivity of the auditor, and none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Details of the amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in note 6.6 to the financial statements. Rounding off of amounts The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financials / Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument, amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. Auditor’s independence declaration The auditor’s independence declaration is included on page 112. 24 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 25 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) 1. Letter from the Chair of the Remuneration and Nomination Committee 2. Persons addressed and scope of the Remuneration Report Dear Shareholders This remuneration report, which forms part of the directors’ report, sets out in accordance with section 300A of the Corporations Act, for the year We are pleased to present our FY 2017 Remuneration Report for Cash Converters International Limited. The Board is focused on continuing to deliver improved performance and pursue growth plans to enhance value to shareholders. To do this the Board is ended 30 June 2017: (i) the Company’s governance relating to remuneration; also committed to achieving a comprehensive remuneration framework that is focused on driving a performance culture and linking remuneration to the (ii) the policy for determining the nature and amount or value of remuneration of Key Management Personnel (KMP); achievement of the strategy and business objectives and ultimately generating improved returns for shareholders. Financial performance during the year met expectations with a turnaround to achieve net profit after tax of $20.6 million despite the significant changes to the business. Key aspects to this delivery include: strengthening our digital presence, broadening our personal finance product offering, striving to achieve being the most compliant lender in our sector and achieving growth within the auto finance business. This year, parallel with the turnaround in the Company’s financial performance, the Company has undertaken several strategic management changes in relation to Key Management Personnel (KMP). The Company executed on succession plans to appoint Mr Mark Reid as Chief Executive Officer of the Company overall (previously CEO Australia) effective 23 January 2017 and transition Mr Peter Cumins to the role of Executive Deputy Chairman focused on international expansion. The Company has also expanded expertise in the executive leadership team with the addition of executive resources across areas such as risk and compliance management, marketing and digital, distribution, operations, project management and people and culture management – all considered key to delivering a continued and sustained improvement in value for shareholders. (iii) the various components or framework of that remuneration; (iv) the prescribed details relating to the amount or value paid to KMP, as well as a description of any performance conditions; (v) the relationship between the policy and the performance of the Company. The Company has also provided additional information to assist shareholders in obtaining an accurate and complete understanding of the Company’s approach to the remuneration of KMP. KMP are the non-executive directors (NEDs), executive directors and senior executive employees who have authority and responsibility for planning, directing and controlling the activities of the Group. On that basis, the following roles / individuals are addressed in this report: The Board believes that it is essential to attract, engage and retain executives with appropriate competencies and capabilities. It is also essential for remuneration to reflect the contributions made to the achievement of results. The Board will continue to review our remuneration governance Non-executive directors Position framework and remuneration strategy to strengthen the alignment between executive remuneration and outcomes for shareholders. The Board continues to engage with key external stakeholders and seeks to respond to feedback as a critical part of the goal of improving linkages between executive remuneration and returns to shareholders. Over previous years, responsiveness to feedback has produced the following: • Review and redesign of Remuneration Governance Framework policies and procedures. • • Redesign of Short Term Incentive (STI) and Long Term Incentive (LTI) plans to be more closely aligned to sustainable shareholder value creation. Improved disclosure of incentive plan design features. • External remuneration benchmarking of KMP. Key outcomes of execution of our remuneration governance framework and remuneration strategy during FY 2017 include the provision of: • Expanded disclosure of the criteria under which the short-term incentive payments are awarded. • Additional transparency on calculation of normalised financial metrics used in determining short-term incentive outcomes for FY 2017. • Enhanced availability on our website of policies and procedures encompassed in our remuneration governance framework. • Benchmarking of remuneration for the expanded KMP group. Priorities for FY 2018 will look to include the further review and shaping of the total reward framework for KMP to ensure alignment with strategy and long term value creation for shareholders. The Board recognises that FY 2017 has seen significant changes and challenges for the Company and for shareholders. With improved financial performance and having completed much of the transition to the new leadership team, the Board is confident that the organisation structure and associated remuneration arrangements are an appropriate response to the Company’s circumstances and provide a solid foundation for the continued improvement in performance and creation of shareholder value over the long term. Yours faithfully, Ellen Comerford Chair, Remuneration and Nomination Committee Mr Stuart Grimshaw Chairman and non-executive director Audit and Risk Committee member (to 24 February 2017) Nomination Committee Chairman (to 24 February 2017) Mr Lachlan Given Non-executive director Audit and Risk Committee member (appointed 1 August 2016, to 24 February 2017) Mr Kevin Dundo Chairman of Audit and Risk Committee (to 24 February 2017) Audit and Risk Committee member Chairman of Remuneration Committee and Nomination Committee member (to 24 February 2017) Ms Andrea Waters Non-executive director (appointed 9 February 2017) Chair of Audit and Risk Committee (appointed 24 February 2017) Remuneration and Nomination Committee member (appointed 24 February 2017) Ms Ellen Comerford Non-executive director (appointed 9 February 2017) Chair of Remuneration and Nomination Committee (appointed 24 February 2017) Audit and Risk Committee member (appointed 24 February 2017) Mr Reginald Webb Non-executive director (retired 14 February 2017) Audit and Risk Committee member (retired 14 February 2017) Remuneration Committee and Nomination Committee member (retired 14 February 2017) Executive director Mr Peter Cumins Managing Director (to 23 January 2017) Executive Deputy Chairman (from 23 January 2017) 26 | Cash Converters International Limited – Annual Report 2017 26 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 27 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Senior Executives classified as KMP Position Mr Mark Reid Chief Executive Officer – Australia (to 23 January 2017) Chief Executive Officer (effective 23 January 2017) Mr Martyn Jenkins Chief Operating Officer – Financial Services Australia (appointed 1 July 2016) Chief Financial Officer (effective 3 July 2017) Mr Shane Prior Chief Operating Officer – Stores Mr Nathan Carbone (1) Chief Risk Officer (effective 1 July 2016) The Company strengthened the calibre of the Board through the year and also addressed external stakeholders’ views in regard to board composition, with the appointment of two new independent non-executive directors (NEDs), Ms Ellen Comerford and Ms Andrea Waters. This brings the total number of directors to six with the number of NEDs to five, three of whom are considered independent. The focus of the Board has been to continue to improve governance, oversight and compliance with policies and practices developed by the Company and to ensure continued independent input on KMP remuneration decision-making processes. The Board is focused on continuing the implementation of its renewed strategy and this involves significant transitioning from previous business models and approaches. The successful delivery of this strategy requires strong leadership and additional capabilities in the leadership team. To attract and retain the best possible talent to the leadership team, the Company needs to ensure its remuneration offering reflects the complex and diverse nature of the business and the challenges facing the business to achieve its strategic objectives. The Board has endorsed the addition to, and enhancement of, KMP resources with expertise across a range of key functions and disciplines, including risk management, distribution, digital and marketing, technology, operations, project management and people and culture management, Ms Alice Manners Chief Manager Digital, Marketing and Product (from 24 February 2017) to support the successful delivery of the strategic objectives of the Company. The following should be noted with regards to significant changes Mr Brad Edwards Mr Ralph Groom General Counsel (from 6 June 2017) Company Secretary (effective 30 June 2017) Chief Financial Officer (resigned 3 July 2017) and Company Secretary (resigned 30 June 2017) in the executive team and structure: • Corresponding with the Company’s current strategy, the long serving Managing Director, Mr Peter Cumins, is in the process of transitioning to an Executive Deputy Chairman role, where he is focusing on growing the international franchising business. His successor, Mr Mark Reid, previously the Chief Executive Officer – Australia, was appointed as Chief Executive Officer effective 23 January 2017. This process is expected to be completed during FY 2018, with the incumbents, and the Board, taking a cautious and staged approach to ensure a successful transition that preserves the core business built over time by Mr Cumins, while giving Mr Reid an opportunity to explore new business opportunities with the support of his predecessor. Mr Glen Fee Chief Information Officer (resigned 3 July 2017) • Mr Ralph Groom, previously the Chief Financial Officer and Company Secretary, and Mr Glen Fee, Chief Information Officer, departed the business in July 2017. Mr Michael Cooke Group Legal Counsel (retired 31 August 2016) • Having been with the Company since 2013 in key roles both in Australia and United Kingdom, Mr Martyn Jenkins was appointed to the role of Other appointments / changes that have occurred to the KMP during or since the end of the financial year are: Mr Sam Budiselik (2) Chief Operating Officer – Personal Finance (became KMP 3 July 2017) Ms Myrrhine Cutten Chief Human Resources Officer (became KMP 3 July 2017) (1) Mr Carbone commenced working with the Company on 20 June 2016. In his role as Chief Risk Officer, he was KMP for the duration of the financial year on a contract basis to 31 December 2016 and permanent from 1 January 2017. Chief Financial Officer effective 3 July 2017. • • Mr Brad Edwards joined the Company on 6 June 2017 as General Counsel and was appointed as Company Secretary effective 30 June 2017. Additional members who have joined the executive team during FY 2017 or since the year end are Mr Nathan Carbone, Chief Risk Officer; Ms Alice Manners, Chief Digital, Marketing and Product; Mr Sam Budiselik, Chief Operating Officer – Personal Finance; Mr Warren Willis, Head of Transformational Change; Mr James Miles, Chief Technology Officer; and Ms Myrrhine Cutten, Chief Human Resources Officer. Market capitalisation is one of the factors that influence external assessments of the appropriateness of remuneration, and it is understood that external groups tend to see it as primary indication of the size and status of the Company, and the field in which the Company is competing for talent. In this regard it is noted that the market capitalisation of the Company decreased from $211 million at the end of FY 2016 to approximately $155 million as at the end of FY 2017. As a result of this, the remuneration packages being offered to some of the senior executives, may appear to be less well aligned (2) Mr Budiselik was previously KMP in 2016 and resigned effective 30 June 2016. Mr Budiselik worked with the Company in a consultant with market capitalisation at 30 June 2017, and related peers, than has been the case in previous reports. Given the additions to KMP during FY 2017 capacity during 2017 and, with the appointment to the role of Chief Operating Officer – Personal Finance has become KMP in FY 2018. and since, the Company has undertaken internal benchmarking utilising data sourced from GRG Remuneration Guide 2017 and from AON Hewitt Data 3. Context of and changes to KMP remuneration for FY 2017 and into FY 2018 3.1 Matters identified as relevant context for remuneration governance in FY 2017 and into FY 2018 As is required by regulation, the KMP remuneration structures that are detailed in this report are those that prevailed over FY 2017. The following outlines important context for the decisions that were made in relation to remuneration for / during FY 2017, the outcomes of which are presented in this report. Those changes already made in respect of FY 2018 or anticipated to be implemented during the remainder of FY 2018 will be commented on to the extent relevant to an evaluation of remuneration for FY 2017, with full details given as part of the FY 2018 Annual Report. The Board has previously undertaken to make continuous improvements to remuneration governance, policies and practices applied to KMP of the Centre to review the remuneration packages for KMP to ensure alignment with its remuneration policy. Further benchmarking analysis will be conducted in relation to overall remuneration during FY 2018. 3.2 Key remuneration matters identified and adjustments made or planned in response, since the previous report During FY 2017 the following KMP remuneration-related matters were identified by the Board and are being considered and / or actioned during the reporting period and into FY 2018: • Opportunities to continue to improve remuneration governance and disclosure in relation to STI and LTI incentive arrangements as follows: – Disclosure of specific dollar values for the financial performance target measures and stretch / maximum STI where applicable. – Greater clarity on non-financial targets and individual key performance targets as they relate to STI awards. – Greater clarity of use of normalised financial metrics in the STI plan and how individual / non-financial measures are linked to value creation Company, as well as other employees, to ensure appropriateness to the circumstance of the Company as it evolves over time. for shareholders. During FY 2016 and FY 2017 the Board sought and received feedback from both stakeholder and independent consultant views of KMP remuneration governance and practices, including taking note of feedback from proxy advisors, and has sought to be responsive to that feedback. The main themes are dealt with here. – Transparency in the use of a normalised EPS vesting condition in the LTI plan and disclosure of those amounts excluded at the Board’s discretion. 28 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 29 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) • Remuneration of the Executive KMP: – During FY 2017, the transition strategy involved both the Managing Director and CEO Australia fulfilling the MD / CEO function of the Company, consistent with the intention to smooth the impact of the change of management over a year or more. – The remuneration package for the CEO was adjusted in January 2017 taking into account additional responsibilities and benchmarking input against the comparator at the P50 and in line with the Company’s Senior Executive Remuneration Policy. – During the year, various adjustments to remuneration have been made for some executive KMP in line with changes to roles and the new senior leadership structure reporting to the CEO role. For some executives, this resulted in increases to remuneration packages to reflect the expanded scope, complexity or accountability of their roles. Other executive KMP who joined the Company during FY 2017 have been employed on terms believed to be consistent with policy and appropriate to attract the level of capabilities and expertise for the role. – Having completed much of the transition to the new leadership team reporting to the CEO, the Board is confident that the current structure and associated remuneration arrangements is an appropriate response to the Company’s circumstances. – Further benchmarking of KMP executives (including the Executive Deputy Chairman and CEO) is to be conducted in FY 2018 to evaluate the remuneration packages appropriate to the specific job responsibilities and ensure alignment with both strategy and shareholder interest and compliance with the Company’s remuneration policy. • NED remuneration: – During FY 2017 no changes have been made to the remuneration received by non-executive directors and the Board will not be seeking an increase to the aggregate fee limit (AFL) for NED remuneration (AFL $800,000 approved by shareholders at the Annual General Meeting 2015). – The Board recently reviewed the current remuneration levels for NEDS and believes that the levels are in line with remuneration policy. • Remuneration policies and procedures: – The Company has sought to improve shareholder engagement and provide further transparency by publishing its formal policies and procedures as they relate to KMP remuneration, on the Company website, and feedback from shareholders regarding this material is welcome. – It is recommended that this material be considered as part of forming an opinion regarding the appropriateness of the remuneration practices of the Company. • STI Financial Measures and Normalisation of financial metric calculations for incentive plans: – For FY 2018 and beyond, the Board is evaluating the financial measures used as part of the STI arrangements, currently normalised EBITDA. – Consideration will be given to utilising Net Profit after Tax as a financial measure as this is generally taken to be of greater interest to shareholders. • Review of incentive plans: – Given the changes to the Senior Executive team and the evolution of the business strategy, both the STI and LTI remuneration policy will be considered by the Board during FY 2018. – The Board aims to ensure incentive arrangements for KMP are designed appropriately to motivate enhanced and sustainable performance, build on the risk culture, execute on strategy and ultimately increase shareholder value. – In order to do so, in FY 2018 the Board will review remuneration matters such as relativity of STI and LTI to total remuneration, and the appropriateness of LTI vesting conditions in view of the Company’s current circumstances. 4. Overview of Cash Converters’ Remuneration Governance Framework and strategy 4.1 Transparency and engagement Remuneration and Nomination Committee Members; Stakeholder groups including proxy advisors; The Board seeks input regarding the governance of KMP remuneration from a wide range of sources, including: • Shareholders; • • • External remuneration consultants (ERCs); • • Company management. Other experts and professionals such as tax advisors and lawyers; and 4.2 Remuneration and Nomination Committee Charter The Remuneration and Nomination Committee Charter (the Charter) was reviewed and approved by the Board in May 2017. The Charter governs the operation of the Remuneration and Nomination Committee (the Committee). It sets out the Committee’s role and responsibilities, composition, structure and membership requirements. The purpose of the Committee, as it relates to remuneration, is to assist the Board by: • providing advice in relation to the remuneration packages of Senior Executives and NEDs, equity-based incentive plans and other employee benefit programs; developing and maintaining the policies and other documents that guide and govern KMP remuneration decisions, practices and outcomes; determining and reviewing the nature of the Company’s disclosure or communication of remuneration practices and policies; regularly reviewing the Company’s recruitment, retention and termination policies, superannuation arrangements, succession plans, and the performance of the Board and Senior Executives; and reviewing the Company’s diversity policy and monitoring diversity within the Company, including monitoring and appraising the size and composition of the Board. • • • • The Committee has the authority to retain outside legal or other professional advice or assistance on any matters within its terms of reference. The Board recognises the importance of ensuring that any recommendations given to the Committee provided by remuneration consultants are provided independently of those to whom the recommendations relate. Further information about the parameters under which external remuneration consultants are engaged is provided in Section 4.11. 4.3 Senior Executive Remuneration Policy and Procedure The Senior Executive Remuneration Policy and Procedure applies to Senior Executives who are defined as follows: • Executive Directors; • Chief Executive Officer (CEO); • • Those roles classified as executive KMP; and Executive Leadership Team (ELT) members who are the direct reports to the CEO – roles that are business unit, functional, or expertise heads (who may or may not be KMP). The policy outlines the Company’s intentions regarding Senior Executive remuneration, as well as how remuneration is intended to be structured, benchmarked and adjusted in response to changes in the circumstances of the Company, and in line with good governance. Broadly the policy describes the following in relation to Senior Executives: • Remuneration should be composed of: – Fixed Annual Reward (inclusive of salary, superannuation, allowances, benefits and any applicable fringe benefits tax (FBT)) (FAR); – STI which provides a reward for performance against annual objectives; – LTI which provides an equity-based reward for performance against indicators of shareholder benefit or value creation, over a three-year period; – In total the sum of the elements will constitute a total remuneration package (TRP). Both internal relativities and external market factors should be considered. Total remuneration packages should be structured with reference to market practices and the circumstances of the Company at the time. FAR policy mid-points should be set with reference to P50 (the median or the middle) of the relevant market practice. TRPs at Target (being the FAR plus incentive awards intended to be paid for targeted levels of performance) should be set with reference to P75 (the upper quartile, the point at which 75% of the sample lies below) of the relevant market practice so as to create a strong incentive to achieve targeted objectives in both the short and long term. Remuneration will be managed within a range so as to allow for the recognition of individual differences such as the calibre of the incumbent and the competency with which they fulfil a role (a range of +/- 20% is specified in line with common market practices). Termination benefits will generally be limited to the default amount allowed for under the Corporations Act (without shareholder approval). • • • • • • The following outlines a summary of Cash Converters’ formal Remuneration Governance Framework that has resulted from those engagements and related considerations. The complete framework can be accessed on the Company’s remuneration governance portal at www.cashconverters.com/Governance/ RemunerationCommittee, and a channel for direct feedback (remuneration@cashconverters.com) is provided. Shareholders, proxy advisors and other interested parties are invited to consider this information as part of forming a judgement regarding the remuneration policies, procedures and practices of the Company. 30 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 31 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) The policy also outlines the procedure that should be undertaken to review Senior Executive remuneration and determine appropriate changes. • The measurement period should be three years, noting that with annual grants of overlapping measurement periods, the need for longer periods Changes to remuneration resulting from annual reviews are generally to be determined in relation to: • external benchmarking; • whether current remuneration for the incumbent is above or below the policy midpoint / benchmark – those below the midpoint will tend to receive higher increases; • • • is mitigated (continuous improvement framework). Non-executive directors are not eligible to participate in the LTI Plan. Participants should be provided with an offer letter / invitation, an explanatory booklet and a copy of the LTIP Rules. There should be two measures of long-term performance, one that best reflects internal measures of performance and one that best reflects • the competence of the incumbent in fulfilling their role which determines their positioning within the policy range – higher calibre incumbents are external measures of performance (see Section 4.13 for indicators selected). intended to be positioned higher in the range; and • A termination of employment will trigger a forfeiture of some or all the unvested rights held by an executive depending upon the circumstances of • any changes to internal relativities related to role / organisation design that have occurred since the previous review. the termination. Those that are not forfeited will be held for possible vesting, based on performance relative to the vesting conditions following the 4.4 Non-Executive Director Remuneration Policy and Procedure end of the measurement period. • The Board retains discretion to trigger or accelerate payment or vesting of incentives provided the limitation on termination benefits as outlined in The Non-Executive Director Remuneration Policy and Procedure applies to non-executive directors of the Company in their capacity as directors and the Corporations Act is not breached. as members of committees, and may be summarised as follows: • Remuneration may be composed of: – Board fees; – Committee fees; – Superannuation; – Other benefits; and – Equity (if appropriate at the time, currently not applicable). • • Remuneration will be managed within the aggregate fee limit (AFL) or fee pool approved by shareholders of the Company; Guidelines regarding when the Board should seek adjustment to the AFL such as in the case of the appointment of additional NEDs; • Remuneration should be reviewed annually; • • Termination benefits will not be paid to NEDs; A policy level of Board Fees (being the fees paid for membership of the Board, inclusive of superannuation and exclusive of committee fees) will be set with reference to the P50 (median or middle) of the market of comparable ASX-listed companies; • Committee fees may be used to recognise additional contributions made by members of committees to the work of the Board. The inclusion of these fees should result in outcomes that, when combined with Board Fees, should cluster around the P50 of the market of comparable ASX-listed companies; • In relation to the Board Chair, a higher positioning in the market, such as P75, is appropriate for the Company. 4.7 Defining threshold, target and stretch for incentive purposes In relation to the design, implementation and operation of incentives, the Board is of the view that there should, where possible, be a range of performance and reward outcomes identified and defined. These should be set with regard to the elasticity of the measure, the impact of the measure on shareholder value creation and the ability of Senior Executives to influence the measure. In order to create clarity and consistency, the following concepts and principles are generally intended to the design of incentive scales: • “Threshold”, being a minimum acceptable outcome for a “near miss” of the target, associated with a fraction of the target reward appropriate to the threshold outcome (generally around 80% probability of achievement); • “Target”, being a challenging but achievable outcome, and which is the expected outcome for a Senior Executive / team that is of high calibre and high performing (generally 50% – 60% probability of achievement); and • “Stretch” (the maximum) levels of objectives, which is intended to be a “blue sky” or exceptional outperformance, not expected to be achieved, the purpose of which is to create a continuous incentive to outperform when outperformance of the Target has already been achieved (generally 10% – 20% probability of achievement). This is particularly important for shareholders to understand when comparing with other companies whose maximum levels of incentives may be associated with a planned or target outcome. Awards for outcomes between these levels should generally be scaled on a pro rata basis dependent on actual performances. This is intended to provide a motivating opportunity to attain a reward, and to ensure that reward outcomes align with performance, under a range of circumstances. The policy also outlines the procedure that should be undertaken to review non-executive director remuneration and determine appropriate changes. It is recognised that there is a link between the budget setting culture of the Company and the setting of incentive hurdles. In this regard, the Board is confident that budgets developed, and agreed to are sufficiently challenging but also achievable, given the circumstances of the Company at the 4.5 Short-Term Incentive Policy and Procedure The Short-Term Incentive Policy of the Company, since the commencement of the policy in FY 2016, is that an annual component of executive remuneration should be at-risk and allow the Company to modulate the cost of employment to align with individual and Company performance while motivating value creation for shareholders. Key aspects of the policy are as follows: Participants will include Senior Executives and other participants who may be invited from time to time. Non-executive directors are excluded from participation in the STI Plan. • • • STI should be paid in cash unless deferral applies. The Board has the discretion to determine, as part of any offer, that upon calculation of the awards some portion of achieved STI is to be deferred. 4.9 Securities Trading Policy time of each budget. 4.8 Clawback policy The Board currently holds the view that a clawback policy is not appropriate since the intention of such policies is to return funds to shareholders in the case of an employee causing material misstatements in the financial reports of the Company. The cost and complexity of implementing arrangements that would make it possible for the Company to recover such funds therefore outweigh any possible benefit. • A termination of employment will trigger a forfeiture of some or all of unearned STI entitlements depending upon the circumstances of the termination. Amounts that are not forfeited will be tested and potentially paid based on actual performance during employment relative to target performance to the end of the measurement period (i.e. pro rata). The Company’s Securities Trading Policy sets out the guidelines for dealing in any type of Company securities by the Company’s KMP. It also summarises the law relating to insider trading which applies to everyone, including to all Company employees as well as to KMP. Under the current policy, KMP may only trade during a “trading window” (with some limited exceptions as set out in the policy). The following periods in • The Board retains discretion to trigger or accelerate payment or vesting of incentives provided the limitation on termination benefits as outlined in a year are “trading windows”, unless otherwise determined by the Board: the Corporations Act is not breached. 4.6 Long-Term Incentive Policy and Procedure The Long-Term Incentive Policy of the Company, since the commencement of the policy in FY 2016, is that an annual component of remuneration of executives should be at-risk and based on equity in the Company to ensure that executives hold a stake in the Company to align their interests with those of shareholders and share risk with shareholders. Key aspects of the policy are as follows: • The LTI should be based on Performance Rights that vest based on an assessment of performance against objectives. • • • • 6 weeks commencing 24 hours immediately after the day of release of the half-yearly results announcement to the ASX Limited (ASX); 6 weeks commencing 24 hours immediately after the day of release of the yearly results announcement to the ASX *; 6 weeks commencing 24 hours immediately after the day of release of a disclosure document offering equity securities in the Company; or another date as declared by the Board in the circumstances that the Board is of the view that the market can reasonably be expected to be fully informed on that date. * the release of the yearly results announcement is determined by the Board as being the release of the audited Financial Report 32 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 33 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) 4.10 Equity Holding Policy The Board has previously seen an equity holding policy as unnecessary since KMP executives received a significant component of remuneration in the form of equity and executive directors generally have had material equity holdings. The subject of share ownership by KMP will form part of remuneration governance considerations in FY 2018. 4.11 Executive remuneration consultant engagement policy and procedure The Company has adopted an executive remuneration consultant (ERC) engagement policy and procedure which is intended to manage the interactions between the Company and ERCs, so as to ensure their independence and that the Remuneration and Nomination Committee will have clarity regarding the extent of any interactions between management and the ERC. This policy enables the Board to state with confidence whether or not the advice received has been independent, and why that view is held. The policy states that ERCs are to be approved and engaged by the Board before any advice is received, and that such advice may only be provided to a non-executive director. Interactions between management and the ERC must be approved, and will be overseen by the Remuneration and Nomination Committee when appropriate. 4.12 Variable executive remuneration – Short-term Incentive plan (STIP) Aspect Purpose Plan, Offers and Comments The STI Plan’s purpose is to give effect to an element of remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to increase the commitment of Senior Executives to deliver and outperform annual business plans, to align their interests with shareholders, reinforce a performance culture and create a strong link between performance and reward, encourage a pursuit of sustainable improvements in Group performance, encourage teamwork and co-operation among executive team members and maintain a stable executive team by helping retain key talent. These objectives aim to be achieved by a simple plan that rewards participants for performance relative to key performance indicators (KPIs) derived from annual business plans. Measurement Period The Company’s financial year (12 months). Award Opportunities FY 2017 Invitations The Managing Director (now Executive Deputy Chairman) was offered a target-based STIP equivalent to 50% of Base Salary for Target performance, with a maximum / stretch opportunity of up to 93% of Base Salary. The CEO of Australia (now Chief Executive Officer) was offered a target-based STIP equivalent to 50% of Base Salary for Target performance, with a maximum / stretch opportunity of up to 80% of Base Salary. The outgoing Chief Financial Officer and Company Secretary was offered a target-based STIP equivalent to 30% of Base Salary for Target performance, with a maximum / stretch opportunity of up to 51% of Base Salary. Other Senior Executives who are KMP were offered a target-based STIP in a range equivalent to 20 – 40% of their Base Salary for Target performance. Aspect Plan, Offers and Comments Key Performance Indicators (KPIs), Weighting and Performance Goals FY 2017 Invitations FY 2017 Invitations to participate in the STIP were based on a number of KPIs set for each executive, summarised as follows and showing the weighting for target performance. Standards of performance are presented later in this report. Managing Director and Chief Executive Officer • Normalised Group EBITDA – 60% • Ensure the Company meets its obligations in relation to the Enforceable Undertaking – 15% • Ensure the Company achieves its milestones as set out in its 3 year plan – 15% • Individual Effectiveness – 10% Chief Executive Officer of Australia • Normalised Australian Divisional EBITDA – 40% • Implement undertakings committed to under the Enforceable Undertaking & achieve the milestones that fall within FY 2017 – 30% • Implement the underwriting and collection efficiency gains identified in the 2016 financial services review – 10% • Normalised Group EBITDA – 10% • Individual Effectiveness – 10% The KPI assessments are tailored to each executive to provide specific objectives relevant to their area of responsibility and business unit, as well as shared objectives such as financial performance of the business unit or Company set with reference to the annual budget for the financial year. The KPI metrics for FY 2017 for Other Senior Executives were consistently grouped into key metrics including Financial, Operations & Customer, and Risk & Compliance. Financial target metrics were based on normalised Group consolidated and divisional EBITDA and accounted for a minimum weighting of the overall KPI result of 45%. Refer to Section 7.2 dealing with incentive outcomes for the standards of performance that applied. For the Executive Deputy Chairman and CEO, the Normalised EBITDA KPI is calculated according to the following scale: Performance level % of Normalised EBITDA Budget % of Target STI award Threshold Target Stretch / Maximum Comments 95% 110% 140% 50% 100% 200% The Board selected these measures as being those that are expected to drive economic profitability, and ultimately shareholder value creation over the long term, within a financial year period. One of the concerns expressed by external stakeholders in relation to the STIP was that little information was given regarding how individual / non-financial measures linked to value creation for shareholders. Such measures are selected as being linked to the execution of the Company’s current strategy, and relevant to each role. More detail is provided in this regard in the latter section of this report dealing with incentive outcomes for the reporting period. Refer Section 7.2. Plan Gate & Board Discretion For each Measurement Period the Board will have the discretion to either abandon the plan or adjust award payouts if the Company’s overall performance during the Measurement Period was substantially lower than expectations and resulted in significant loss of value for shareholders. A specified gate condition may apply to offers of STI such that no award will be payable in relation to any KPI if the gate condition is not met or exceeded. FY 2017 Invitations A gate of 90% of budget normalised EBITDA applied so that no STI would be payable if this condition was not met or exceeded. 34 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 35 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Aspect Plan, Offers and Comments Award Determination and Payment Cessation of Employment During a Measurement Period Change of Control Calculations are performed following the end of the Measurement Period and the auditing of Company accounts. Awards will generally be paid in cash in the September following the end of the Measurement Period. They are to be paid through payroll with PAYG tax and superannuation deducted as appropriate. Deferral of STI is not a current component of the STI Plan on the basis that the mix of STI and LTI should be appropriately weighted, with overlapping measurement periods that mitigate the risk of short-termism. In the event of cessation of employment due to dismissal for cause, all entitlements in relation to the Measurement Period are forfeited. In the event of cessation of employment due to resignation, all entitlements in relation to the Measurement Period are forfeited, unless the termination is classified as “Other” (good leaver) in the discretion of the Board (see below). In the case of cessation of employment in other circumstances (good leaver) the award opportunity will be reduced proportionately to reflect the portion of the Measurement Period worked. The actual award earned will not be calculated until after end of the financial year, along with other participants. The Board retains discretion to trigger or accelerate payment or vesting of incentives in the case of a termination, provided that the limitations on termination benefits as outlined in the Corporations Act are not breached. In the event of a Change of Control, including a takeover, the Board may in its discretion decide to: • terminate the STIP for the Measurement Period and pay pro rata awards based on the completed proportion of the Measurement Period and taking into account performance up to the date of the Change of Control, or continue the STIP but make interim non-refundable pro rata Awards based on the completed proportion of the Measurement Period and taking into account performance up to the date of the Change of Control, or • • allow the STIP to continue. Fraud, Gross Misconduct etc. Clawback If the Board forms the view that a Participant has committed fraud, defalcation or gross misconduct in relation to the Company, then all entitlements in relation to the Measurement Period will be forfeited. The Board currently holds the view that a clawback policy is not appropriate. Refer to Section 4.8 for discussion regarding this policy. 4.13 Variable executive remuneration – Long-Term Incentive Plan (LTIP) – Performance Rights Plan Aspect Purpose Plan Rules, Offers and Comments The LTI Plan’s purpose is to give effect to an element of Senior Executive remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to ensure that Senior Executives have commonly shared goals related to producing relatively high returns for Shareholders. Other purposes of the LTI Plan is to assist Senior Executives to become Shareholders, provide a component of remuneration to enable the Company to compete effectively for the calibre of talent required for it to be successful and to help retain employees, thereby minimising turnover and stabilising the workforce such that in periods of poor performance the cost is lesser (applies to non-market measures under AASB2). Currently the Company operates a Rights plan for the purposes of the LTIP. Form of Equity The current Rights plan includes the ability to grant: a) Performance Rights, which are subject to performance related vesting conditions, for the purposes of the LTIP. b) Retention Rights, which are subject to service related vesting conditions, (not currently used). c) Deferred Rights which are not subject to vesting conditions but which are subject to disposal restrictions that attach to the Shares that result from Rights being exercised (not currently used). The LTIP is based on grants of Performance Rights. The Rights are Indeterminate Rights and confer the right (following valid exercise) to the value of a Company Share at the time, either: • Settled in Shares that may be issued or acquired on-market, or • Settled in the form of cash, at the discretion of the Board (a feature intended to ensure appropriate outcomes in the case of terminations). No dividends accrue to unvested Rights, and no voting rights are attached. Aspect LTI Value Plan Rules, Offers and Comments The Board retains discretion to determine the value of LTI to be offered each year, subject to shareholder approval in relation to Directors, when the Rights are to be settled in the form of a new issue of Company shares. The Board may also seek shareholder approval for grants to Directors in other circumstances, at its discretion. FY 2017 Invitations In relation to the previous MD / CEO, Performance Rights with a Target value equivalent to 75% and a maximum / stretch value of 150% of the Base Salary were granted. No additional grants have been made upon the change of role to the Executive Deputy Chairman position. The new CEO was offered Performance Rights with a Target value equivalent to 30% and a maximum / stretch value of 60% of FAR eligible to be granted as part of his remuneration package for the role of CEO – Australia. No additional grants have been made in relation to the change to the CEO role. The outgoing CFO and Company Secretary was offered Performance Rights with a Target value equivalent to 50% and a maximum / stretch value of 100% of the Base Salary eligible to be granted as part of his package for the role of CFO and Company Secretary. For other Senior Executives Performance Rights with a Target value equivalent to 5% and a maximum / stretch value of 10% of the Base Salary were granted. It is important to note that only around half of the grants are expected to vest (refer to definition of Target). Comments The number of LTI Rights to be granted is calculated with reference to the maximum / stretch LTI, divided by the Right value (valued as ignoring vesting conditions). This produces a mathematically identical outcome to the following formula: Number = Base package x Target LTI% x Tranche Weighting ÷ Right Value ÷ Target Vesting% The equity-based rights value is the Share price at the time of the calculation (a VWAP calculation is used), less the expected value of dividends that will not accrue to Right holders (Rights are not eligible to receive dividends). This is equivalent to a Black-Scholes value ignoring any vesting conditions. The Board sought and received shareholder approval in relation to the FY 2017 grant to the then Managing Director at the 2016 AGM. Measurement Period The Measurement Period will include three financial years unless otherwise determined by the Board (which would only apply in exceptional circumstances). FY 2017 Invitations The Measurement Period is from 1 July 2016 to 30 June 2019. FY 2018 Invitations The Measurement Period will be from 1 July 2017 to 30 June 2020. Comments Three-year Measurement Periods combined with annual grants will produce overlapping cycles that will promote a focus on producing long term sustainable performance / value improvement and mitigates the risk of manipulation and short-termism (continuous improvement). Because of the timing of grants, the life of the Right may be less than 3 years at times, however this does not impact the Measurement Period over which performance is measured. 36 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 37 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Aspect Plan Rules, Offers and Comments Aspect Plan Rules, Offers and Comments Vesting Conditions The Board has discretion to set vesting conditions for each offer. Performance Rights that do not vest will lapse. Vesting Conditions Comments FY 2017 Invitations Except as indicated below, a participant must remain employed by the Company during the Measurement Period and the performance conditions must be satisfied for Rights to vest. (continued) The FY 2017 Invitations included: • a tranche (50% weighting) with a total shareholder return (TSR) vesting condition, based on indexed TSR (iTSR), and a tranche (50% weighting) with normalised earnings per share compound annual growth (NESPG) vesting condition, as follows: • % of Tranche Vesting against a vesting scale. Tranche 1 Performance level Stretch > Target % < Stretch Target > Threshold Threshold < Threshold Tranche 2 Performance level Stretch > Target % < Stretch Target > Threshold Threshold < Threshold Cash Converters International’s TSR as % XAOAI TSR for the Measurement Period ≥200% > 150% & <200% 150% >100% & <150% 100% <100% 100% Pro rata 50% Pro rata 25% Nil Cash Converters International’s Normalised Earnings Per Share Compound Annual Growth Rate % of Tranche Vesting ≥20% > 16% & <20% 16% >12% & <16% 12% <12% 100% Pro rata 50% Pro rata 25% Nil Normalised EPS will relate to normal operations and will exclude abnormal items as determined by the Board in its discretion. See Section 7.3 for further details in regard to normalisation. The Board recognises that it is important that shareholders understand why the LTI vesting conditions selected are appropriate to the circumstances of the Company, and therefore seeks to be transparent in this regard. While the measure that has strongest alignment with shareholders is Total Shareholder Return (TSR), it is recognised that absolute TSR is influenced by overall economic movements. Therefore grants of LTI will be offered to executives that vest based on indexed TSR (iTSR) which removes market movements irrelevant to the performance of the Company from assessments of the Company’s TSR performance and avoids windfall gains from changes in broad market movements in share prices. The internal measure of performance that is understood to be well accepted by stakeholders and which the Board encourages management to focus on, is earnings per share (EPS), which will be assessed on a growth rate basis The Comparator Group for the assessment of the iTSR vesting conditions is the S&P / ASX All Ordinaries Accumulation Index (abbreviated to XAOAI, also referred to as Total Return index). This group was selected because it is the best indicator of broad economic sentiment and market movements, which are to be effectively removed from the assessment of the Company’s TSR via the iTSR measure. Retesting None of the grants made in respect of the reporting period included a retesting feature. Plan Gate & Board FY 2017 Invitations Discretion A gate of Company TSR being positive for the measurement period applied to both vesting conditions, before performance against the vesting conditions is assessed to ensure that the LTI will not reward executives when shareholders have lost value. The Board retains discretion to adjust vesting outcomes in the circumstances that the outcomes from applying the vesting scales alone would be likely to be seen as inappropriate. Amount Payable for No amount is payable by participants for Performance Rights. The target value of Rights is included in Performance Rights assessments of remuneration benchmarking and policy positioning. This is standard market practice and consistent with the nature of Performance Rights. Exercise of Vested Performance Rights Under the plan rules, vested Performance Rights are exercised automatically following vesting. Rights that are not exercised, lapse. Exercised Rights will be satisfied in the form of ordinary Company shares, except where the Board exercises its discretion to settle in the form of cash. Disposal Restrictions etc. Rights may not be disposed of or otherwise dealt with while they remain Rights i.e. prior to exercise. All shares acquired by Participants as a consequence of exercising vested Rights, shall be subject to a dealing restriction (Restricted Shares) being that such Restricted Shares may not be disposed of or otherwise dealt with until: a) The time specified by the Company’s securities trading policy with regards to when executives and directors may deal in securities of the Company, and b) The time at which dealing in securities of the Company is permitted under the Corporations Act having regard to division 3 of Part 7.10 (insider trading restrictions). Cessation of Employment In the event of cessation of employment in the circumstances of a bad leaver, all unvested Performance Rights will be forfeited. In the case of Special Circumstances (good leaver) the grant of Performance Rights made in the year of the termination will be pro rata forfeited for the period with remaining rights to be tested at the end of the measurement period along with other participants. Other grants made in previous years will be unaffected by the termination. The Board retains discretion to trigger or accelerate payment or vesting of Performance and / or Retention Rights in the case of a termination of the employment of a Participant. 38 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 39 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Aspect Plan Rules, Offers and Comments Change of Control If in the opinion of the Board a change of control event has occurred, or is likely to occur, the Vesting Conditions of the Company attached to the Tranche at the time of the Offer will cease to apply and: a) unvested Performance Rights granted in the financial year of the Change of Control will lapse in the proportion that the remainder of the financial year bears to the full financial year, b) all remaining unvested Performance Rights will vest in accordance with the application of the following formula (noting that negative results will be taken to be nil): Number of Performance Rights to Vest Unvested Performance Rights = x (Share Price at the Change of Control – Offer Share Price) ÷ Offer Share Price a) any unvested Performance Rights than do not vest in relation to (b) will lapse unless otherwise determined by the Board, b) all unvested Retention Rights will vest, and c) disposal restrictions applied to Deferred Rights by the Company and specified as part of the terms of the LTI will be lifted (including the removal of any Company initiated CHESS holding lock if applicable), unless otherwise determined by the Board and participants notified in writing. Clawback The Board currently holds the view that a clawback policy is not appropriate. Refer to Section 4.8 for discussion regarding this policy. 5. Planned executive remuneration for FY 2017 (non-statutory disclosure) The disclosures required under the Corporations Act (including regulations) and prepared in accordance with applicable accounting standards do not necessarily provide shareholders with an understanding of the intended remuneration in a given year. For example, the LTI disclosed is not reflective of the remuneration opportunity for the year being reported on, due to the requirements of AASB 2. Therefore, the following table is provided to ensure that shareholders have an accurate understanding of the Board’s intention regarding the remuneration offered to executives during FY 2017, as at target performance, to facilitate an assessment of the alignment between performance and reward. In this regard, the definition of Target needs to be considered, as provided in this report. Generally, there are opportunities for incentives to exceed the target levels outlined here, as discussed in the relevant sections, however stretch / maximum incentives are designed to be unlikely to occur. The incentive levels presented are based on the policy at the time of determining remuneration for the year, and in the case of LTI, translated into a number of rights at the time of the grant calculation. 5.1 Planned executive remuneration at target FAR Target STI opportunity Target LTI opportunity Amount % of TRP % of FAR STI amount % of TRP % of FAR LTI amount % of TRP Total Target Remuneration Package (TRP) $ % % $ % % $ % $ Mr P Cumins Mr M Reid* Mr M Jenkins Mr S Prior Mr N Carbone Mr R Groom Mr G Fee 864,618 495,517 280,633 292,933 321,308 435,802 322,665 45% 63% 76% 73% 89% 57% 88% 48% 416,993 29% 145,351 27% 33% 12% 75,000 97,920 39,000 29% 126,880 9% 29,203 22% 19% 21% 24% 11% 17% 8% 72% 28% 4% 4% 0% 46% 5% 625,489 139,465 12,500 12,240 – 201,620 14,602 33% 18% 3% 3% 0% 26% 4% 1,907,100 780,333 368,133 403,093 360,308 764,302 366,470 * Mr Reid’s stated FAR reflects his contract as at 1 July 2016. The FAR was amended upon change of role effective 23 January 2017 with an increase from $495,517 to $620,633 and STI target increased to 50%. The above table only includes those KMP who were eligible for STIs and LTIs during the year. KMP employed after 1 January 2017 were not eligible for participation in STIP. 5.2 Planned executive remuneration at maximum FAR Maximum STI opportunity Maximum LTI opportunity Amount % of TRP % of FAR STI amount % of TRP % of FAR LTI % of Remuneration amount TRP Package (TRP) Total Maximum $ % % $ % % $ % $ Mr P Cumins Mr M Reid* Mr M Jenkins Mr S Prior Mr N Carbone Mr R Groom Mr G Fee 864,618 495,517 280,633 292,933 321,308 435,802 322,665 30% 48% 74% 70% 89% 41% 84% 89% 771,436 53% 261,632 27% 33% 12% 75,000 97,920 39,000 49% 215,693 9% 29,203 27% 25% 20% 24% 19% 21% 8% 145% 1,250,978 56% 278,930 9% 8% 0% 93% 9% 25,000 24,480 – 403,239 29,203 43% 27% 6% 6% 0% 38% 8% 2,887,032 1,036,079 380,633 415,333 360,308 1,054,734 381,071 * Mr Reid’s stated FAR reflects his contract as at 1 July 2016. The FAR was amended upon change of role effective 23 January 2017 with an increase from $495,517 to $620,633 and STI target increased to 50%. The above table only includes those KMP who were eligible for STIs and LTIs during the year. KMP employed after 1 January 2017 were not eligible for participation in STIP. 6. Vested / awarded incentives and remuneration outcomes for KMP in respect of the completed FY 2017 period (non-statutory disclosure) The statutory disclosure requirements and accounting standards make it difficult for shareholders to obtain a clear understanding of what the actual remuneration outcomes for executives were in relation to a given reporting period. It should be noted that typically STI for a reporting period is paid after the end of the financial year / reporting period, following audit, and that LTI vesting is similarly delayed. The following table brings these outcomes back to the year of performance to which the outcome relates, and which is the reporting period i.e. STI is presented as being part of the remuneration for the year in which performance was tested, and LTI would be presented as being part of the remuneration for the year during which performance testing was completed. 40 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 41 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Name & role Year FAR (cash and equity) (i) year (ii) (TRP) period (iii) broadening our personal finance product offering, striving to achieve being the most compliant lender in our sector, and achieving growth within the completion of of measurement remuneration change in value Financial performance during the year met expectations despite the significant changes to the business and its circumstances delivering a profit financial year period / financial package during vesting of $20.618 million for FY 2017 up from a loss of $5.272 million in FY 2016. Key aspects to this delivery include strengthening our digital presence, Total STI Value of LTI vested Gain / loss on awarded following following completion Total vested LTI from 7. Performance outcomes for FY 2017 including STI and LTI assessment 7.1 Company performance % of TRP $ % of TRP $ 2017 2016 874,942 71% 364,875 864,246 100% – 29% 0% 2017 ^550,923 66% *285,046 34% Mr P Cumins Executive Deputy Chairman Managing Director Mr M Reid Chief Executive Officer Chief Executive Officer – Australia 2016 #323,825 87% 47,500 13% 278,318 296,012 79% 86% 75,833 50,000 21% 14% 292,933 287,453 86% 87% 39,168 41,500 12% 13% ~321,308 – 89% 0% 39,000 – 11% 0% Mr M Jenkins Chief Operating Officer – Personal Finance General Manager – UK Mr S Prior Chief Operating Officer – Stores Mr N Carbone Chief Risk Officer N/A Mr R Groom Chief Financial Officer & Company Secretary Mr G Fee Chief Information Officer 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 $ – – – – – – 8,143 – – – % of TRP $ 0% 0% 0% 0% 0% 0% 2% 0% 0% 0% 1,239,818 864,246 835,969 371,325 354,151 346,012 340,244 328,953 360,308 – 447,865 80% 38,064 432,367 100% – 321,639 320,688 91% 92% 16,062 28,631 7% 0% 4% 8% 73,446 – 13% 0% 559,375 432,367 16,286 – 5% 0% 353,987 349,319 (i) This is the value of the total STI award calculated following the end of the Financial Year (ii) This is the value as at time of the calculation of the grant of the LTI (using a Right value of $0.96) that vested in relation to the completion of the specified financial year, noting that vesting is determined and occurs following the end of the Measurement Period i.e. number that vested multiplied by the undiscounted Right Value (iii) This is the number of LTI Rights that vested following the completion of the Financial Year, multiplied by the closing Share Price on the date of vesting (being $0.315), less the grant value ^ Remuneration adjusted 23 January 2017 from FAR $495,517 to $620,633 * Includes $35,625 ex gratia payment during FY 2017 # Part year employment from 2 November 2015 to 30 June 2016 ~ Based on contract role from 1 July 2016 to 31 December 2016 and permanent role from 1 January 2017 to 30 June 2017 Details regarding the assessments of performance that gave rise to the incentive outcomes for FY 2017 are given below. $ – – – – – – (5,466) – – – (49,296) – (10,931) – auto finance business. During the reporting period the Company has delivered on a number of key objectives: • • Successful launch of new Medium Amount Credit Contract (MACC) loan products Growth of the Green Light Auto finance business • Growth in retail and pawn broking revenues • UK operations returned to profitability • • • Expanded leadership team, bringing new insights and capabilities New electronic assessing platform to improve compliance and adherence to responsible lending requirements Fulfilment of Enforceable Undertaking requirements The following outlines the performance of the Company over the year ended 30 June 2017 and the previous four financial years in accordance with the requirements of the Corporations Act: Year ended 30 June 2017 $’000 2016 $’000 2015 $’000 2014 $’000 2013 $’000 Revenue from continuing operations 271,473 311,599 288,666 331,669 272,723 Net profit before tax from continuing operations Net profit / (loss) after tax – continuing operations – discontinued operations Profit / (loss) after tax Share price – beginning of year – end of year Dividend (i) – interim – final dividend Earnings per share from continuing and discontinued operations – basic – diluted 28,198 31,171 3,855 32,040 47,664 20,618 – 20,618 cents 43.5 31.5 – – 4.21 4.12 25,894 (31,166) (5,272) (1,255) (20,430) (21,685) cents 70.0 43.5 2.00 1.00 (1.09) (1.09) cents 108.0 70.0 2.00 – (4.69) (4.69) 21,132 – 21,132 cents 107.0 108.0 2.00 2.00 5.67 5.56 32,870 – 32,870 cents 64.5 107.0 2.00 2.00 8.09 7.92 (i) Franked to 100% at 30% corporate income tax rate. 42 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 43 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) The table below sets out the comparison between Cash Converters internal targets set by the Company compared to actual performance for the key performance metrics that are the main drivers of incentive outcomes in FY 2017. This gives some indication of a correlation between planning and outcomes. Year ended 30 June 2017 2016 Actual EBITDA $’000 Budgeted EBITDA $’000 45,725 47,697 44,210 73,969 Name & role FY 2017 KPI summary Award outcomes FY 2017, paid FY 2018 KPI summary Weighting % Threshold Target Stretch Target award $ Achievement Awarded $ Total STI award $ Mr P Cumins Executive Deputy Chairman Normalised Group EBITDA 60% 95% budget 110% budget 140% budget 250,200 100% 250,196 For FY 2017, the normalised EBITDA result, for the purpose of incentive plan calculation, was $49.108 million. Refer to Section 7.3 for information on normalisation adjustments. 7.2 Links between performance and reward including STI and LTI determination The remuneration of executive KMP is intended to be composed of three parts as outlined earlier, being: Operational objectives Individual effectiveness • • • FAR, which is not intended to vary with performance but which tends to increase as the scale of the business increases (i.e. following success), STI, which is intended to vary with indicators of annual Company and individual performance, and LTI, which is intended to deliver a variable reward based on long-term measures of Company performance. Mr M Reid (1) Chief Executive Officer Normalised Australian EBITDA Short Term Incentives The Board believes there are strong links between internal measures of Company performance and the payment of short-term incentives. The STI achieved in relation to the FY 2016 period, was paid during the FY 2017 period in September 2016. As a result of the FY 2016 full year result being below expectations, only a small number of individual and operational STI payments were made and, as previously reported, on average equated to 12% of the maximum award opportunity. The STI achieved in relation to the FY 2017 period being completed will be paid after the end of the period (i.e. during FY 2018, usually in September). On average 78.4% of the target award opportunity or 47.3% of the maximum award opportunity available was paid. This level of award was considered appropriate under the STI plan since the objectives were set and offers made in relation to the achievement of each KPI at the beginning of the financial year, and the majority of those objectives were met. Mr M Jenkins Chief Operating Officer – Financial Services Australia In relation to the completed FY 2017 period the payment of STI was calculated as follows: Operational objectives Individual effectiveness Group normalised EBITDA Normalised Group and Australian EBITDA Operational objectives Behaviours Mr S Prior Chief Operating Officer – Stores Normalised Divisional and Australian EBITDA Operational objectives Behaviours Mr N Carbone (2) Chief Risk Officer Normalised Divisional and Australian EBITDA Operational objectives Behaviours 30% Pro rata Achieved Achieved 125,100 Meets expectations Above expectations Outstanding 41,700 Partially achieved Meets expectations 93,825 364,875 20,850 95% budget 110% budget 140% budget 105,020 100% 105,020 10% 40% 40% Pro rata Achieved Achieved 105,020 Achieved 10% 10% Meets expectations Above expectations Outstanding 26,255 Meets expectations 95% budget 110% budget 140% budget 26,255 Achieved 249,420 105,050 13,125 26,255 63% N/A 110% N/A 75,833 100% 75,833 75,833 27% 10% 45% 45% 10% 45% 45% 10% N/A N/A N/A N/A N/A N/A N/A N/A Achieved Achieved 110% Achieved Achieved 110% Achieved Achieved N/A N/A N/A N/A N/A N/A N/A N/A 97,920 40% 39,168 39,168 39,000 100% 39,000 39,000 44 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 45 Mr R Groom Chief Financial Officer & Company Secretary Normalised Group EBITDA Operational objectives Individual effectiveness Mr G Fee Chief Information Officer Normalised Divisional and Australian EBITDA Operational objective Operational effect 30% 10% 45% 45% 10% Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Name & role FY 2017 KPI summary Award outcomes FY 2017, paid FY 2018 In relation to the completion of the FY 2017 reporting period, previous grants of equity made under the previous LTI plan vested in relation to grants that were made on 25 September 2014 (Tranche 12) i.e. vesting during FY 2018 in relation to the performance period completed during FY 2017. This Tranche 12 is the last of the grants made under the previous LTI plan, which has been replaced with the existing LTI plan approved KPI summary Weighting % Threshold Target Stretch Target award $ Achievement Awarded $ Total STI award $ by shareholders in November 2015. The vesting conditions of Tranche 12 and performance against the conditions is as follows: 60% 95% budget 110% budget 140% budget 76,128 50% 38,064 • The executive’s responsible entity / division achieving budgeted Net Profit After Tax for the financial year ended 30 June 2017. N/A Achieved Achieved 38,064 Meets expectations Above expectations Outstanding 12,688 – – – – 38,064 The responsible entity for Mr Groom and Mr Fee is the consolidated Group of Cash Converters International Limited. Budgeted Net Profit After Tax for year ended 30 June 2017 for the Company was $20.333 million. Actual Net Profit After Tax for year ended 30 June 2017 for the Company was $20.618 million. The responsible entity / division for Mr Prior is Corporate Stores – Australia. Budgeted Net Profit After Tax for the year ended 30 June 2017 for Corporate Stores – Australia division was $5.456 million. N/A 110% N/A Actual Net Profit After Tax for the year ended 30 June 2017 for Corporate Stores – Australia division was $5.519 million. N/A N/A Achieved Achieved N/A N/A 29,203 55% 16,065 16,065 Only those participants who were employed by the Company on 1 July 2017 were deemed eligible. • Continuous employment through to vesting determination date, being 1 July 2017. (1) Pro rata during FY 2017 for change of role / salary effective 23 January 2017 (2) Pro rata during FY 2017 based on 6 months contract (target 10%) from 1 July 2016 and permanent from 1 January 2017 (target 20%) The KPIs selected were based on them reflecting and linking to the most significant matters expected to contribute to the success of the Company during FY 2017 in the case of each role. As previously outlined in this report, the KPI Metrics for FY 2017 for Other Senior Executives were tailored to specific objectives relevant to role and shared objectives of financial performance of the relevant business unit and Company set with reference Having reviewed the performance against vesting conditions and noting that the conditions had been met, the Board approved the vesting of performance rights under Tranche 12 as follows: Rights eligible to vest during FY 2018 Value of LTI that vested for FY 2017 % of grant Grant date (at grant date to the annual budget for the financial year. The KPIs were consistently grouped into key metrics including Financial, Operations & Customer, and Name Tranche Grant date completion vested Rights vested value * VWAP) Risk & Compliance. Financial target metrics were based on normalised Group consolidated and divisional EBITDA and accounted for a minimum weighting of the overall KPI result of 45%. Following the end of the Measurement Period (the financial year), the Company accounts were audited and reports on the Company’s activities during the year were prepared for the Board. The Board then assessed the extent to which target levels of performance had been achieved in relation to each KPI and used the pro-rata scales (for non-binary measures) to calculate the total award payable. This method of performance assessment was chosen because it is the most objective approach to short term incentive governance, and reflective of market best practices. As part of implementing the STI plan in FY 2016, the Board formed the view that normalised Group EBITDA, divisional EBITDA and strategy implementation, particularly in areas of risk and compliance and operations and customer services are the key short-term drivers of long term value creation for shareholders. Responding to shareholder feedback, and as noted elsewhere, the Board is considering using net profit after tax as a financial metric for FY 2018. The matter of normalisation is addressed below. During FY 2017 the Board exercised its discretion to increase the awarding of STI for Mark Reid by making an ex gratia payment of $35,625 in line with the addition to responsibilities and achievements thereon. Long Term Incentives In FY 2017 grants of equity were made to executive KMP in relation to the LTI Plan as part of remuneration for FY 2017, but did not vest due to the presence of the long-term measurement period and vesting conditions that are yet to be completed / assessed. Details are given elsewhere in this report in relation to changes in equity interests. Previous grants of equity made under the previous LTI plan (Tranches 2, 9 and 11) did not vest during FY 2017 due to the financial performance of FY 2016 year and vesting conditions not being met. Mr S Prior Mr R Groom Mr G Fee Total 12 12 12 24 Sep 2014 24 Sep 2014 24 Sep 2014 *Performance rights were valued using a binomial option pricing model. 7.3 Impact of normalisation on incentives Number 8,500 76,666 17,000 102,166 100% 100% 100% Number 8,500 76,666 17,000 102,166 $ 0.96 0.96 0.96 $ 8,143 73,446 16,286 97,875 The Board recognises that the use of normalisation to adjust indicators of profitability has been an issue of concern to some external stakeholders in recent years, particularly with regards to the calculation of incentive outcomes. It is important that there is transparency regarding this practice and the rationale for its use, and therefore the following information is provided in this regard. The Board sees it as appropriate to apply normalisation to profit measures for the purposes of incentive calculation so as to ensure that the right behaviours are motivated, and inappropriate behaviours are not motivated, in respect of the profit calculation. Generally, adjustments will be balanced so that the impact of normalisation is not skewed to create advantage e.g. if the cost of the acquisition of a new business is excluded, the revenue from the business unit will also be excluded. The Board has discretion to determine which adjustments will be appropriate given the circumstances, and business plans, and the following summarises where / how the Board exercised its discretion in relation to FY 2017 and FY 2016 outcomes: 46 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 47 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) FY 2017 net adjustments – $3.383 million • Legal expenses (excess to budget class action legal costs). • • • Risk and Compliance Project costs (excess to budget one off costs associated with EU remediation). Restructuring costs related to operating efficiency projects and permanent ongoing reduction in annual expenses. Portion of 2016 incentive and other payments expensed but not utilised and released to FY 2017 result. FY 2016 net adjustments – nil • No adjustments made. 7.4 Links between Company strategy and remuneration The Company intends to attract the superior talent required to successfully implement the Company’s strategies at a reasonable and appropriately variable cost by: • • positioning FAR (the fixed element) around relevant market data benchmarks when they are undertaken, and supplementing the FAR with at-risk remuneration, being incentives that motivate executive focus on: – short to mid-term objectives linked to the strategy via KPIs and annual performance assessments, and – long term value creation for shareholders by linking a material component of remuneration to those factors that shareholders have expressed should be the long-term focus of executives and the Board. To the extent appropriate, the Company links strategic implementation and measures of success of the strategy, directly to incentives in the way that measures are selected and calibrated. 8. Changes in KMP-held equity The following tables outline the changes in equity held by KMP over the financial year. Fully paid ordinary shares of Cash Converters International Limited Balance at 1 July 2016 Granted as remuneration Received on exercise of options Net other change Balance at 30 June 2017 Number Number Number Number Number Directors Mr P Cumins Mr S Grimshaw Mr L Given Mr K Dundo Ms A Waters (1) Ms E Comerford (1) Mr R Webb (2) Other key management personnel Mr M Reid Mr M Jenkins Mr S Prior Mr N Carbone (1) Ms A Manners (1) Mr B Edwards (1) Mr R Groom Mr G Fee Mr M Cooke (2) 10,513,030 – – – – – 1,012,500 – 3,375 – – – 84,511 249,525 102,000 – 11,964,941 (1) Opening balance at date of appointment (2) Closing balance at date of resignation – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (2,937,336) 7,575,694 – – – – – – – – – – – – (249,525) (90,000) – – – – – – 1,012,500 – 3,375 – – – 84,511 – 12,000 – (3,276,861) 8,688,080 48 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 49 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Fully paid ordinary shares of Cash Converters International Limited (continued) Performance rights of Cash Converters International Limited Balance at 1 July 2015 Granted as remuneration Received on exercise of options Net other change Balance at 30 June 2016 Balance at 1 July 2016 Granted as Options / Options lapsed Balance at remuneration rights exercised / forfeited 30 June 2017 Number Number Number Number Number Number Number Number Number Number Directors Mr P Cumins Mr S Grimshaw Mr R Webb Mr L Given Mr K Dundo Other key management personnel Mr R Groom Mr M Reid (1) Mr G Fee Mr M Jenkins Mr M Cooke Mr S Prior (1) Mr S Budiselik (1) Mr I Day (2) 10,313,030 – 1,012,500 – – 19,525 – 51,000 – – – – – 11,396,055 (1) Opening balance at date of becoming member of KMP (2) Closing balance at date of resignation – – – – – – – – – – – – – – – – – – – 230,000 – 51,000 – – 8,500 – 200,000 489,500 200,000 10,513,030 – – – – – – – 3,375 – (8,500) – – 194,875 – 1,012,500 – – 249,525 – 102,000 3,375 – – – 200,000 12,080,430 Directors Mr P Cumins Mr S Grimshaw Ms A Waters (1) Ms E Comerford (1) Mr L Given Mr K Dundo Mr R Webb Other key management personnel Mr M Reid Mr M Jenkins Mr S Prior Mr N Carbone (1) Ms A Manners (1) Mr B Edwards (1) Mr R Groom Mr G Fee Mr M Cooke (2) 3,730,000 4,572,920 – – – – – – 844,440 523,200 90,518 – – – 1,305,226 107,552 – – – – – – – 1,035,220 106,904 100,548 – – – 1,506,120 111,012 – 6,600,936 7,432,724 (1) Opening balance at date of becoming member of KMP (2) Closing balance at date of resignation – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (1,413,600) (104,192) – 8,302,920 – – – – – – 1,879,660 630,104 191,066 – – – 1,397,746 114,372 – (1,517,792) 12,515,868 50 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 51 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Performance rights of Cash Converters International Limited (continued) Terms and conditions of share-based payment arrangements affecting remuneration of KMP in the current or future financial years is set out below: Balance at 1 July 2015 Granted as Options / Options lapsed Balance at remuneration rights exercised / forfeited 30 June 2016 Tranche Grant date Grant date fair value (i) Exercise price Expiry date Vesting date Number Number Number Number Number Directors Mr P Cumins Mr S Grimshaw Mr R Webb Mr L Given Mr K Dundo Other key management personnel Mr R Groom Mr M Reid (1) Mr G Fee Mr M Jenkins Mr M Cooke Mr S Prior (1) Mr S Budiselik (1) Mr I Day (2) 6,000,000 3,730,000 – – – – 459,999 – 102,000 – 1,800,000 25,500 – 399,999 8,787,498 – – – – 1,228,560 844,440 90,552 523,200 – 82,018 – – 6,498,770 (1) Opening balance at date of becoming member of KMP (2) Closing balance at date of resignation – – – – – (230,000) – (51,000) – – (8,500) – (200,000) (489,500) (6,000,000) 3,730,000 – – – – (153,333) – (34,000) – (1,800,000) (8,500) – (199,999) (8,195,832) – – – – 1,305,226 844,440 107,552 523,200 – 90,518 – – 6,600,936 Tranche 12 (ii) Tranche 13 Tranche 14 Tranche 15 Tranche 16 Tranche 17 Tranche 18 Tranche 19 Tranche 20 25 Sep 2014 18 Nov 2015 18 Nov 2015 28 Jan 2016 28 Jan 2016 23 Nov 2016 23 Nov 2016 12 Dec 2016 12 Dec 2016 $ 0.96 0.23 0.41 0.26 0.45 0.20 0.31 0.17 0.29 $ – – – – – – – – – 01 Jul 2017 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2019 30 Jun 2019 30 Jun 2019 30 Jun 2019 01 Jul 2017 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2019 30 Jun 2019 30 Jun 2019 30 Jun 2019 (i) The grant date fair value is calculated as at the grant date using a Monte Carlo pricing model for tranches 13, 15, 17 and 19 and a binomial pricing model for other tranches. (ii) Tranche 12 is the last existing tranche under the previous LTI plan. The vesting date was previously incorrectly reported in the FY 2016 annual report as 15 September 2017. There has been no alteration of the terms and conditions of the above share-based payment arrangements since the grant date. The following table outlines the value of equity granted to KMP during the year that may be realised in the future: Name Tranche Number of rights Value at grant in current year future years Value expensed expensed in Value to be Mr P Cumins Mr M Reid Mr M Jenkins Mr S Prior Mr R Groom (i) Mr G Fee (i) Total 17 18 19 20 19 20 19 20 19 20 19 20 2,286,460 2,286,460 517,610 517,610 53,452 53,452 50,274 50,274 251,020 251,020 18,502 18,502 Per right $ 0.20 0.31 0.17 0.29 0.17 0.29 0.17 0.29 0.17 0.29 0.17 0.29 Total $ 448,832 712,415 89,805 151,494 9,274 15,644 8,723 14,714 43,552 73,469 3,210 5,415 $ $ 103,577 164,404 19,313 32,579 1,994 3,364 1,876 3,164 28,098 47,399 2,071 3,494 345,255 548,011 70,492 118,915 7,280 12,280 6,847 11,550 15,454 26,070 1,139 1,921 6,354,636 1,576,547 411,333 1,165,214 (i) Pro rata value expensed for Mr Groom and Mr Fee given their departure from the Company in July 2017 52 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 53 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) 9. Non-Executive Director fee policy rates for FY 2017 and FY 2018 and fee limit 10. Remuneration records for FY 2017 (statutory disclosures) Non-executive director fees are managed within the current annual fees limit (AFL or fee pool) of $800,000 which was approved by shareholders The following table outlines the remuneration received by directors and senior executives of the Company during the years ended 30 June 2017 and on 18 November 2015. 2016, prepared according to statutory disclosure requirements and applicable accounting standards: The following table outlines the NED Remuneration policy rates that were applicable as at the end of FY 2017. The Non-Executive Director Remuneration policy is designed to ensure that remuneration is reasonable, appropriate, and produces outcomes that fall within the fee limit, at each point of being assessed. The Board assessed the current level of NED fees and determined that no change would be applicable at this time. Function Main Board Audit and risk committee Remuneration committee Role Chair Member Chair Member Chair Member Fee including superannuation $170,000 $95,000 $15,000 $0 $15,000 $0 Short-term employee benefits employment long-term Post- Other Share- based benefits benefits payments Total Salary monetary Termination Super- and fees Cash STI benefits benefits annuation Non- 2017 $ Non-executive directors Mr S Grimshaw Mr L Given Mr K Dundo Ms A Waters (1) Ms E Comerford (1) Mr R Webb (2) Executive director 170,000 106,250 114,583 42,513 16,918 59,375 $ – – – – – – $ – – – – – – Mr P Cumins 754,056 364,875 108,626 Other executives Mr M Reid Mr M Jenkins Mr S Prior Mr N Carbone (3) Ms A Manners (4) Mr B Edwards (5) Mr R Groom Mr G Fee Mr M Cooke (6) 540,834 246,056 266,604 314,177 94,353 25,082 430,872 270,107 91,190 285,046 75,833 39,168 39,000 – – 38,064 16,062 – 11,017 8,603 11,017 3,126 3,834 – 25,010 515,910 9,991 1,871 84,240 – $ – – – – – – – – – – – – – $ – – – – 25,478 – $ – – – – – – $ – – – – – – $ 170,000 106,250 114,583 42,513 42,396 59,375 35,201 130,310 728,792 2,121,860 30,973 19,616 19,616 9,808 7,180 2,051 35,000 23,721 – – 176,213 1,044,083 5,290 4,047 82,386 20,058 437,784 360,510 366,111 105,367 27,133 – – – 282,912 1,340,260 24,782 442,284 – 93,061 – – – 12,492 13,381 – Total 3,542,970 858,048 183,095 600,150 208,644 165,520 1,315,143 6,873,570 54 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 55 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) Short-term employee benefits employment long-term Post- Other Share- based benefits benefits payments Total Salary monetary Termination Super- and fees Cash STI benefits benefits annuation Non- 2016* $ Non-executive directors Mr S Grimshaw Mr R Webb Mr L Given Mr K Dundo 157,500 107,500 97,500 125,000 Executive director Mr P Cumins 764,157 Other executives Mr R Groom Mr M Reid (7) Mr G Fee Mr M Jenkins Mr M Cooke Mr S Prior Mr S Budiselik (8) Mr I Day (9) Total 400,159 303,793 286,306 275,000 543,336 257,500 93,970 51,942 $ – – – – – – 47,500 28,631 50,000 – 41,500 – – $ – – – – 81,043 13,283 7,160 15,074 – 10,645 10,645 – 1,774 $ – – – – – – – – – – – – 270,332 270,332 3,463,663 167,631 139,624 $ – – – – $ – – – – $ – – – – $ 157,500 107,500 97,500 125,000 18,925 12,872 19,308 21,012 – 19,308 8,045 4,444 122,960 – – – – – – – – – 123,217 52,453 16,025 32,499 (447,785) 10,295 – – 555,584 423,778 365,344 378,511 106,196 339,248 102,015 328,492 (1,945,164) 2,219,046 (1) Appointed 9 February 2017 (2) Retired 14 February 2017 (3) Appointed 1 January 2017 (4) Appointed 24 February 2017 (7) Appointed 2 November 2015 (5) Appointed 6 June 2017 (6) Retired 31 August 2016 (8) Appointed February 2016, resigned 30 June 2016 (9) Retired August 2015 *Non-monetary benefits for the year ended 30 June 2016 have been adjusted to include car parking benefits to be comparable with the current period. Except for the payment of an ex gratia bonus to CEO Mr Reid of $35,625 during FY 2017, the STI values reported in this table are the STIs awarded for the performance period, but are paid in the financial year following the year to which they relate (i.e. the value shown for 2017 is the value earned in FY 2017 and paid during FY 2018). 11. Employment terms for KMP and Senior Executives 11.1 Service agreements The remuneration and other terms of employment for executive KMP are covered in formal employment contracts. All service agreements are for unlimited duration. All KMP are entitled to receive pay in lieu of any accrued but untaken annual and long service leave on cessation of employment. The treatment of incentives in the case of termination is addressed in separate sections of this report that give details of incentive design. A summary of contract terms in relation to executive KMP is presented below: Name Position held Mr P Cumins Executive Deputy Chairman Mr M Reid Chief Executive Officer Mr M Jenkins Chief Financial Officer Mr S Prior Chief Operating Officer – Stores Mr N Carbone Chief Risk Officer Period of notice From Company From KMP 12 months 12 months 6 months 3 months 3 months 6 months 3 months 6 months 12 months 6 months 3 months 3 months 6 months 3 months Mr R Groom Chief Financial Officer and Company Secretary 12 months 12 months Mr G Fee Chief Information Officer Mr S Budiselik Chief Operating Officer – Personal Finance Ms M Cutten Chief Human Resources Officer 1 month 6 months 3 months 1 month 6 months 3 months On appointment to the Board, all NEDs enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation relevant to the office of the director and does not include a notice period. NEDs are not eligible to receive termination payments under the terms of the appointments. 12. Other remuneration-related matters The following outlines other remuneration related matters that may be of interest to stakeholders, in the interests of transparency and disclosure: • Mr Martyn Jenkins’ remuneration was reviewed and amended as part of being appointed Chief Financial Officer effective 3 July 2017 and increased to $331,066 FAR with a 50% STI target. • Mr Sam Budiselik was employed by the Company on a consultant basis for the duration of FY 2017 and the company paid $385,000 (plus GST) for these services. He was appointed Chief Operating Officer – Personal Finance effective 3 July 2017 with a remuneration package comprising $320,049 FAR and 50% STI Target. • Mr Nathan Carbone was employed by the Company on a consultant basis for the period 1 July 2016 to 31 December 2016 and the company paid $181,500 (plus GST) for those services. This amount has been included in the statutory table in Section 10 above. His remuneration has been reviewed since the close of FY 2017 considering external benchmarking input and internal relativities and the Board approved an amount of $320,049 FAR and 20% STI target. • Ms Myrrhine Cutten was employed by the Company on a contract basis from 17 April 2017 to 30 June 2017. She was appointed Chief Human Resources Officer effective 3 July 2017 with a remuneration package comprising $251,066 FAR and 30% STI Target. 19,046 – (1,731,868) (867,622) Ms A Manners Chief Manager Digital, Marketing and Product Mr B Edwards General Counsel and Company Secretary The LTI value reported in this table is the amortised accounting charge of all grants that have not lapsed or vested prior to the reporting period (but The following outlines other transactions with KMP of the Group: which may have lapsed or vested in whole or in part during the period). Where a market based measure of performance is used such as iTSR, no adjustments can be made to reflect actual LTI vesting. However, in relation to non-market conditions, such as EPS, adjustments have been made to ensure the accounting charge matches the vesting. • • There were no loans to Directors or other KMP at any time during the reporting period. During the year ended 30 June 2017, the Group paid $35,428 to HopgoodGanim, a law firm in which Mr K Dundo is a partner, for legal services. Legal services were provided to the Company on terms and conditions no more favourable than those that it is reasonable to expect the Company would have been charged if dealing at arm’s length with an unrelated party. Both Target and awarded values of STI and LTI remuneration are outlined in the relevant sections of the Remuneration Report to assist shareholders • There were no other relevant material transactions involving KMP other than compensation and transactions concerning shares, performance to obtain a more complete understanding of remuneration as it relates to senior executives. rights / options as discussed in this report. 56 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 57 Directors’ report For the year ended 30 June 2017 — Remuneration Report (audited) (continued) The following summarises the treatment of remuneration in respect of those KMP who are no longer employed by the Company during or since the reporting period: Mr Michael Cooke – Group Legal Counsel The remuneration disclosed in relation to Mr Michael Cooke, General Counsel of Cash Converters International Limited, represents consulting fees (a retainer) paid to his firm (Cooke & Co) under a consulting agreement (negotiated 24 September 2001). The fees cover the cost of Mr Cooke’s consulting and the work of his firm’s colleagues in relation to fulfilling the General Counsel function (solicitor) for Cash Converters International Limited. Mr Cooke retired from this role on 31 August 2016. Mr Cooke was not eligible for participation in the STI plan in FY 2017. The Company entered into a separate arrangement with Mr Cooke on 19 September 2016 for payment of a monthly retainer in regard to ongoing provision of legal services. Mr Ralph Groom – Chief Financial Officer and Company Secretary and Mr Glen Fee – Chief Information Officer In addition to contractual termination payments accounted for in FY 2017 and disclosed in Section 10, Mr Groom and Mr Fee continue to participate in the Company LTI Plan on a pro rata basis in Tranches 15, 16, 19 and 20. It is anticipated that this continued participation supports alignment with the interest of shareholders post the incumbents’ separation from the Company. 13. External remuneration consultant advice During the reporting period, the Board approved and engaged an external remuneration consultant (ERC) to provide KMP remuneration recommendations and advice. The consultants and the amount payable for the information and work that led to their recommendations are listed below: Godfrey Remuneration Review of and advice on role transitioning addressing role changes and unvested equity $10,000 Group Pty Limited Activities approved by the Board and not classified as remuneration advice / recommendation $9,500 including providing feedback on the FY 2016 Remuneration Report prior to it being published, and reviewing LTI vesting scenarios in relation to the FY 2016 LTI grant. Subsequent to the end of the reporting period, the ERC has continued to be engaged to support the Board with ongoing KMP remuneration considerations. Specifically, the ERC has been engaged to assist with re-drafting the remuneration report, to provide the 2017 GRG Remuneration guide and to proffer advisory input in regard to the LTI incentive plan. Fees charged in relation to this activity of $13,700 have been expensed in FY 2017. The Board is satisfied that the KMP remuneration recommendations received were free from undue influence from KMP to whom the recommendations related. The reasons the Board is so satisfied include that it is confident that the policy for engaging external remuneration consultants is being adhered to and is operating as intended, the Board has been closely involved in all dealings with the external remuneration consultants and each KMP remuneration recommendation received during the year was accompanied by a legal declaration from the consultant to the effect that their advice was provided free from undue influence from the KMP to whom the recommendations related. This directors’ report is signed in accordance with a resolution of directors made pursuant to s298(2) of the Corporations Act 2001. On behalf of the directors Stuart Grimshaw Director Perth, Western Australia 7 September 2017 58 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 59 Corporate governance For the year ended 30 June 2017 — The Company’s Corporate Governance Statement can be found on the Company’s website at http://www.cashconverters.com/Governance. The following governance-related documents can also be found in the Corporate Governance section of the Company’s website: • Board Charter • Code of Conduct • Continuous Disclosure Policy • Securities Trading Policy • Audit and Risk Committee Charter • Remuneration and Nomination Committee Charter • Gender Equality Report 2016-17 • Short Term Incentive Policy and Procedure • Long Term Incentive Policy and Procedure • • • Engaging External Remuneration Consultants Policy Non-Executive Director Remuneration Policy and Procedure Senior Executive Remuneration Policy and Procedure • Diversity and Inclusion Policy Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2017 — Continuing operations Franchise fee revenue Financial services interest revenue Sale of goods Other revenues Total revenue Financial services cost of sales Cost of goods sold Other cost of sales Total cost of sales Gross profit Employee expenses Administrative expenses Advertising expenses Occupancy expenses Other expenses Finance costs Share of net profit / (loss) of equity accounted investments Profit before income tax Income tax expense Profit for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Profit / (loss) for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign operations Other comprehensive income / (loss) for the year Total comprehensive profit / (loss) for the year Profit / (loss) attributable to: Owners of the Company Non-controlling interest Total comprehensive profit / (loss) attributable to: Owners of the Company Non-controlling interest Earnings / (loss) per share From continuing operations Basic (cents per share) Diluted (cents per share) From continuing and discontinued operations Basic (cents per share) Diluted (cents per share) Notes 2.1 2.1 2.1 2.2 2.2 2.2 2.2 2.2 2.2 5.2 2.3 5.1 2.4 2.4 2.4 2.4 2017 $’000 15,444 174,590 76,799 4,640 271,473 (49,841) (42,596) (5,366) (97,803) 173,670 (75,754) (8,302) (10,844) (14,443) (27,039) (9,404) 314 28,198 (7,580) 20,618 – 20,618 (1,208) (1,208) 19,410 20,618 – 20,618 19,410 – 19,410 4.21 4.11 4.21 4.11 2016 $’000 16,603 212,338 74,161 6,893 309,995 (63,876) (40,039) (5,169) (109,084) 200,911 (74,036) (8,853) (12,626) (15,023) (47,387) (9,659) (2,156) 31,171 (5,277) 25,894 (31,166) (5,272) (4,154) (4,154) (9,426) (5,272) – (5,272) (9,426) – (9,426) 5.37 5.24 (1.09) (1.09) 60 | Cash Converters International Limited – Annual Report 2017 60 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 61 The accompanying notes form an integral part of the consolidated statement of profit or loss and other comprehensive income. Consolidated statement of financial position As at 30 June 2017 — Current assets Cash and cash equivalents Trade receivables Loan receivables Inventories Prepayments Current tax receivable Assets associated with discontinued operations Total current assets Non-current assets Trade and other receivables Loan receivables Plant and equipment Deferred tax assets Goodwill Other intangible assets Investments in associates Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Provisions Total current liabilities Non-current liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Notes 2017 $’000 2016 $’000 4.1 3.1 3.2 3.3 5.1 3.1 3.2 3.4 2.3 3.5 3.6 5.2 3.7 4.2 3.8 4.2 3.8 4.4 80,571 7,571 87,933 20,991 5,512 35 202,613 – 202,613 23,480 14,037 10,233 9,879 107,009 26,987 4,607 196,232 398,845 21,288 46,303 7,064 74,655 60,934 2,417 63,351 138,006 260,839 210,203 7,206 43,430 260,839 73,609 13,651 102,419 17,612 9,767 9,851 226,909 7,448 234,357 25,766 2,102 13,853 13,075 107,009 24,034 4,295 190,134 424,491 19,821 70,023 22,427 112,271 63,961 5,974 69,935 182,206 242,285 207,540 (8,726) 43,471 242,285 The accompanying notes form an integral part of the consolidated statement of financial position. Consolidated statement of changes in equity For the year ended 30 June 2017 — Foreign currency Non- controlling interest Issued capital translation acquisition reserve reserve $’000 $’000 $’000 Balance at 1 July 2015 205,399 Loss for the year Exchange differences arising on translation of foreign operations Total comprehensive income for the year Dividend reinvestment plan Share-based payments Shares issued on exercise of performance rights Dividends paid – – – 1,572 – 569 – 10,697 – (4,154) (4,154) – – – – (15,809) – – – – – – – Balance at 30 June 2016 207,540 6,543 (15,809) Profit for the year Exchange differences arising on translation of foreign operations Total comprehensive income for the year – – – Dividend reinvestment plan 2,663 Share-based payments Dividends paid Transfer reserve balance to retained earnings – – – – (1,208) (1,208) – – – – Balance at 30 June 2017 210,203 5,335 – – – – – – 15,809 – The accompanying notes form an integral part of the consolidated statement of changes in equity. Share- based payment reserve $’000 3,032 – – – – (1,923) (569) – 540 – – – – 1,331 – – 1,871 Retained earnings $’000 58,379 (5,272) Total $’000 261,698 (5,272) – (4,154) (5,272) – – – (9,636) 43,471 (9,426) 1,572 (1,923) – (9,636) 242,285 20,618 20,618 – (1,208) 20,618 – – (4,850) (15,809) 43,430 19,410 2,663 1,331 (4,850) – 260,839 62 | Cash Converters International Limited – Annual Report 2017 62 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 63 Consolidated statement of cash flows For the year ended 30 June 2017 — Cash flows from operating activities Receipts from customers Payments to suppliers and employees Payment for settlement expense Interest received Interest received from personal loans Net decrease / (increase) in personal loans advanced Interest and costs of finance paid Income tax refunded / (paid) Net cash flows provided by operating activities Cash flows from investing activities Acquisition of intangible assets Purchase of plant and equipment Proceeds on disposal of non-current assets Instalment credit loans repaid by franchisees Net cash flows used in investing activities Cash flows from financing activities Dividends paid Proceeds from borrowings Repayment of borrowings Capital element of finance lease and hire purchase payment Net cash flows (used in) / provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the year 4.1 The accompanying notes form an integral part of the consolidated statement of cash flows. Notes 2017 $’000 2016 $’000 2.2 2.7 3.6 196,661 (193,578) (12,152) 1,797 50,463 4,487 (9,404) 5,260 43,534 (6,272) (1,149) – 1,020 (6,401) (2,186) 57,500 (85,098) (32) (29,816) 7,317 73,609 (355) 80,571 261,950 (253,761) (23,128) 1,622 94,743 (25,801) (10,841) (14,710) 30,074 (3,426) (5,283) 415 92 (8,202) (8,065) 77,816 (69,612) (104) 35 21,907 52,379 (677) 73,609 Notes to the financial statements For the year ended 30 June 2017 — These financial statements have been organised into the following six sections: 1. Basis of preparation 2. Financial performance 3. Assets and liabilities 4. Capital structure 5. Group structure 6. Other items Each section sets out the accounting policies applied in producing the relevant notes, along with details of any key judgements and estimates used or information required to undestand the note. The purpose of this format is to provide readers with a clearer understanding of what drives the financial performance and financial position of the Group. (1) Basis of preparation In this section This section sets out the basis upon which the Group’s financial statements are prepared as a whole. Specific accounting policies are described in the note to which they relate. Cash Converters International Limited is a for-profit company limited by shares, incorporated and domiciled in Australia. Its shares are publicly traded on the Australian Securities Exchange. The financial report of the Company for the year ended 30 June 2017 was authorised for issue in accordance with a resolution of directors dated 7 September 2017. (a) Statement of compliance The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has been prepared on a historical cost basis, except where noted. The financial report is presented in Australian dollars. The financial report comprises the consolidated financial report of Cash Converters International Limited and its subsidiaries (the Group, as outlined in note 5.3). Accounting Standards include Australian Accounting Standards. Compliance with the Australian Accounting Standards ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’). (b) Changes to accounting policies Adoption of new and revised Accounting Standards The Group has adopted all of the new and revised Standards and Interpretations, including amendments to the existing standards issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current reporting period. The adoption of these amendments has not resulted in any significant changes to the Group’s accounting policies nor any significant effect on the measurement or disclosure of the amounts reported for the current or prior periods. 64 | Cash Converters International Limited – Annual Report 2017 64 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 65 Notes to the financial statements For the year ended 30 June 2017 — (1) Basis of preparation (continued) Standards and interpretations in issue not yet adopted AASB 15 ‘Revenue from Contracts with Customers’ At the date of authorisation of the financial statements, the Standards and Interpretations that were issued but not yet effective are listed below: AASB 15 replaces AASB 118 ‘Revenue’ and will be applied from 1 July 2018. AASB 15 provides a single, principles-based Standard / Interpretation Effective for Expected to be annual reporting initially applied periods beginning in financial year on or after ending AASB 9 ‘Financial Instruments’, and the relevant amending standards 1 January 2018 30 June 2019 AASB 15 ‘Revenue from Contracts with Customers’, AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’, AASB 2015-8 ‘Amendments to Australian Accounting Standards – Effective date of AASB 15’ AASB 16 ‘Leases’ 1 January 2018 30 June 2019 1 January 2019 30 June 2020 AASB 2014-10 ‘Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’ and AASB 2015-10 ‘Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128’ AASB 2016-1 ‘Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses’ AASB 2016-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: 1 January 2018 30 June 2019 1 January 2017 30 June 2018 (c) Key judgements and estimates five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognised, accounting for variable consideration, costs of fulfilling and obtaining a contract and various related matters. New disclosures regarding revenue are also introduced. An initial impact assessment has been performed and, based on material revenue streams in FY 2017, no significant risk of an impact to revenue recognition has been identified. This analysis considered the Company’s current accounting policies for material revenue streams to which the new standard applies, including retail goods sold and franchise fees. The Company will formalise its impact assessment during FY 2018. AASB 16 ‘Leases’ AASB 16 replaces AASB 117 ‘Leases’ and will be applied from 1 July 2019. AASB 16 will significantly impact the accounting for operating leases as it requires the recognition of a lease liability being the present value of future lease payments and corresponding right-of-use asset, which will initially be recognised at the same value as the lease liability or lower amount depending on the transition approach adopted. The Company operates a corporate store network of 71 stores, each carrying a property lease and therefore the impact of the standard will most likely result in significant increases in assets and liabilities. It will also likely result in increased EBITDA, as the current operating lease expense will be recognised as a combination of interest and depreciation under the new standard, and result in earlier recognition of expenses over the life of the contract due to the front-loading of interest expense under the new standard. Amendments to AASB 107’ 1 January 2017 30 June 2018 AASB 2016-5 ‘Amendments to Australian Accounting Standards – Classification and In applying the Group’s accounting policies, management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgements, Measurement of Share-based Payment Transactions’ 1 January 2018 30 June 2019 estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial AASB 2017-2 ‘Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016’ 1 January 2017 30 June 2018 AASB 2017-4 Amendments to Australian Accounting Standards – Uncertainty over Tax Treatment 1 January 2017 30 June 2018 Impact of changes to Australian Accounting Standards and Interpretations A number of Australian Accounting Standards and Interpretations are in issue but are not effective for the current year end. The Company has considered the potential impact of these new standards as outlined below. AASB 9 ‘Financial Instruments’, and the relevant amending standards AASB 9 will be applied from 1 July 2018 and replaces AASB 139 ‘Financial instruments: Recognition and measurement’. AASB 9 significantly changes the recognition of impairment on customer receivables with the standard introducing an expected loss model. Under this approach impairment provisions are recognised at inception of the loan based on the life time expected loss on a loan. This differs from the current incurred loss model under AASB 139 whereby impairment provisions are only reflected when there is objective evidence of impairment. The standard also includes a single approach for the classification and measurement of financial assets based on cash flow characteristics and the business model used for the management of the financial instruments. Additionally, the standard amends the rules on hedge accounting to align the treatment with risk management practices. While the Company does not currently utilise hedge accounting this development could provide opportunities to implement hedge accounting in the future. The Company has been assessing the potential impact of AASB 9, which includes the establishment of a project plan and production of a timetable for implementation and an initial impact assessment. statements are outlined below: Significant accounting judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amount recognised in the financial statements: • • Recoverability of deferred tax assets – see note 2.3(g) Classification of contingent liabilities – see note 6.1 Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: • • • • Impairment of goodwill and other intangible assets – see note 3.5 and 3.6 Useful lives of other intangible assets – see note 3.6 Impairment of financial assets (including personal loan receivables) – see note 3.2 Impairment for inventory obsolescence – see note 3.3 (d) Basis of consolidation The consolidated financial statements comprise the financial statements of Cash Converters International Limited and entities controlled by the Company and its subsidiaries (the Group, as outlined in note 5.3). Control is achieved when the Company: Of the changes that AASB 9 introduces, the Company has identified the impact of the revised credit provisioning approach to have the most • has power over the investee: significant impact. The impact would be that impairment provisions under AASB 9 are recognised earlier in the income statement. This will result in a one-off adjustment to receivables and reserves on adoption and for those loan products experiencing growth, the growth in profitability will be slower. • • is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. Due to the recent enhancements to internal credit assessment processes and the relatively immature loan books for new products, any assessment on historic performance by the Company to quantify the impact of AASB 9 will be unlikely to reflect the impact when the standard is adopted. As the changes to the composition of the loan book stabilise in the period prior to application date, the Company will be able to quantify the impact with more relevance to the actual outcome. The Company will formalise its impact assessments and choice of transition approach before June 2018. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. 66 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 67 Notes to the financial statements For the year ended 30 June 2017 — (1) Basis of preparation (continued) (2) Financial performance Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. (e) Foreign currency Both the functional and presentation currency of Cash Converters International Limited and its Australian subsidiaries is Australian dollars ($). The functional and presentation currency of the non-Australian Group companies is the national currency of the country of operation. As at the reporting date, the assets and liabilities of foreign subsidiaries are translated into Australian dollars at the rate of exchange ruling at the reporting date and the statements of comprehensive income are translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity, the foreign currency translation reserve. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Foreign currency differences arising on translation are recognised in the income statement. (f) Other accounting policies Significant and other accounting policies that summarise the measurement basis used, and are relevant to, an understanding of the financial statements are provided throughout the notes to the financial statements. (g) Reclassification of comparative financial information Comparative information within the statement of financial position relating to current vehicle finance loans of $1.104 million and non-current vehicle finance loans of $2.102 million has been reclassified from current trade and other receivables to current loan receivables and from non-current trade and other receivables to non-current loan receivables respectively due to an increase in the vehicle loan business during the year, to be comparable to the current year presentation. Comparative information in the statement of profit or loss and other comprehensive income and segment note has been reclassified as follows to be comparable to the current year presentation: • advertising and training revenues and expenses have been grossed up by $6.740 million to reflect revenue and expenses that were netted off in the prior year • • • • other revenue of $367 thousand has been reclassified from financial services interest revenue to other revenues area agent fees / commission of $16.345 million and $5.710 million of other expenditure has been reclassified from other expenses to financial services cost of sales in the current period to better align with management’s consideration of these costs following operational changes in the current period a further $475 thousand of cost of sales expenditure has been reclassified from other expenses to other cost of sales several other changes to the line items included within administrative expenses and other expenses have been made to provide further detail on expenses. (h) Rounding The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. In this section This section explains the results and performance of the Group. This section provides additional information about those individual line items in the financial statements that the Directors consider most relevant in the context of the operations of the Group, including: a) Accounting policies that are relevant for understanding the items recognised in the financial statements; and b) Analysis of the Group’s result for the year by reference to key areas, including revenue, results by operating segment and income tax. 2.1 Revenue Financial services interest revenue Personal loan interest Loan establishment fees Pawn broking fees Cash advance fee income Vehicle loan interest Vehicle loan establishment fees Other financial services revenue Sale of goods Retail sales Vehicle trade sales Other revenue Bank interest Other vehicle revenue Other revenue 2017 $’000 2016 $’000 65,932 45,737 29,057 26,702 2,546 1,043 3,573 174,590 76,125 674 76,799 591 3,103 946 4,640 85,981 53,481 28,128 40,260 94 4 4,390 212,338 73,728 433 74,161 593 4,920 1,380 6,893 68 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 69 Notes to the financial statements For the year ended 30 June 2017 — 2.1 Revenue (continued) Accounting policies Franchise fees Franchise fees and levies in respect of particular services are recognised as income when they become due and receivable and the costs in relation to the income are recognised as expenses when incurred. Personal loan, cash advance, vehicle finance, vehicle lease and pawn broking interest Interest revenue in relation to personal loans, vehicle finance, vehicle leases and pawn broking is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Due to the short term nature of the Cash Advance product, Cash Advance fee income is recognised on a cash basis as repayments are successfully collected. Loan establishment fee revenue Establishment fees are deferred and recognised over the life of the loans at the effective interest rate applicable so as to recognise revenue at a constant rate to the underlying principal over the expected life of the loan. Other vehicle revenue Charges relating to the vehicle leases such as vehicle maintenance, warranty, registration and insurance are recognised over the life of the lease. Other categories of revenue Other categories of revenue, such as financial services commission and retail sales, are recognised when the Group has transferred the risks and rewards of the goods to the buyer or when the services are provided. Bank interest is recognised as earned on an accruals basis. 2.2 Expenses Financial services cost of sales Net bad and doubtful debt expense Commissions Other financial services cost of sales Refer below for details of finance costs. Employee expenses Employee benefits Share-based payments Superannuation expense Administrative expenses General administrative expenses Communications expenses IT expenses Travel costs Notes (i) 2017 $’000 29,759 14,357 5,725 49,841 69,416 1,331 5,007 75,754 2,784 2,119 2,523 876 8,302 2016 $’000 41,068 16,345 6,463 63,876 70,639 (1,923) 5,320 74,036 3,223 2,673 745 1,368 8,009 (i) During the year ended 30 June 2016 a number of performance rights issued to employees of the Company lapsed unvested, and share-based payments expense amounts that had been expensed in prior years in respect of these rights were reversed, resulting in a negative share-based payments expense for the year. Refer to note 6.5 for further information on share-based payments. Occupancy expenses Rent Outgoings Other Other expenses Legal fees Professional and registry costs Auditing and accounting services Bank charges ASIC compliance settlement provision Green Light Auto restructure costs Other expenses from ordinary activities Depreciation Amortisation Loss on write down of assets Finance costs Interest Finance lease charge ASIC compliance settlement Notes 3.8 2017 $’000 10,540 1,745 2,158 14,443 5,209 4,879 670 1,775 – – 6,383 3,580 3,717 826 2016 $’000 10,938 1,839 2,246 15,023 3,636 5,075 671 3,111 12,500 2,228 9,562 3,589 3,278 3,737 27,039 47,387 9,339 65 9,404 9,592 67 9,659 On 9 November 2016 the Company announced that it had entered into an enforceable undertaking with ASIC in relation to its compliance with certain provisions applicable to small amount credit contracts under the National Consumer Credit Protection Act 2009 (Cth). Prior to this announcement, the Company had recognised a provision of $12.500 million in respect of any potential compliance issues in its credit assessment processes, based on Cash Converters’ best estimate of the likely outcome of discussions with ASIC at the date of the 2016 financial report. As at 30 June 2017 $391 thousand for customer remediation remains outstanding and is classified within trade payables, the balance having been paid during the year. Settlement expense During the year ended 30 June 2016 a payment of $23.128 million was made in respect of the settlement of the NSW Class Action. This was recognised in profit and loss in the year ended 30 June 2015. Accounting policies Employee benefits expense The Group’s accounting policy for liabilities associated with employee benefits is set out in note 3.8. The policy relating to share-based payments is set out in note 6.5. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs (see note 4.2 below). 70 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 71 Notes to the financial statements For the year ended 30 June 2017 — 2.2 Expenses (continued) Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more (b) Deferred tax representative of the time pattern in which economic benefits from the leased asset are consumed. Deferred income tax in the statement of financial position relates to the following: Impairment Impairment expenses are recognised to the extent that the carrying amount of assets exceeds their recoverable amount. Refer to note 3.5 for further details on impairment. 2.3 Taxation Deferred tax assets Allowance for doubtful debts This note sets out the Group tax accounting policies and provides an analysis of the Group’s income tax expense / benefit and deferred tax balances, Accruals including a reconciliation of tax expense to accounting profit. Income tax is accounted for using the balance sheet method. Accounting income is not always the same as taxable income, creating timing differences. These differences usually reverse over time. Until they reverse, a deferred tax asset or liability must be recognised in the statement of financial position. (a) Consolidated income statement The major components of tax expense are: Current income tax expense Current year Adjustment for prior years Deferred income tax expense Temporary differences Adjustment for prior years Income tax expense reported in income statement Tax reconciliation Profit before tax from continuing operations Income tax at the statutory rate of 30% (2016: 30%) Research and development tax benefits recognised Adjustments relating to prior years Income tax rate differential Non-deductible items Tax effect of share-based payment expense Recognition of previously impaired tax losses Impairment of tax losses Other Income tax expense on profit before tax 2017 $’000 7,082 665 1,858 665 1,665 2,620 2016 $’000 7,892 573 1,986 691 2,943 2,792 14,555 16,877 (3,375) (1,301) (4,676) 9,879 13,075 (2,685) (340) (171) 9,879 (2,583) (1,219) (3,802) 13,075 10,875 2,635 (179) (256) 13,075 Provision for employee entitlements Other provisions Other Carry forward losses Deferred tax liabilities Fixed assets Intangible assets Net deferred tax assets Reconciliation of net deferred tax assets Opening balance at beginning of period Tax (expense) / benefit during period recognised in profit or loss Prior year adjustment Other Closing balance at end of period 2017 $’000 4,153 402 2,685 340 7,580 2016 $’000 7,868 (134) (2,635) 178 5,277 28,198 31,171 (c) Unrecognised deferred tax balances Deferred income tax relating to the UK in the balance sheet excludes the following: Tax losses – revenue 4,904 5,253 8,459 (958) (20) (170) 203 399 (341) – 8 7,580 9,351 – 44 (1,625) (2,677) (653) 837 – 5,277 72 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 73 Notes to the financial statements For the year ended 30 June 2017 — 2.3 Taxation (continued) (d) Carry forward tax losses (g) Key estimate: deferred tax assets Carry forward losses of $2.620 million (2016: $2.792 million) have been recognised in relation to the Group’s UK operations, which are profitable in A net deferred tax asset of $9.879 million (2016: $13.075 million) has been recognised in the consolidated statement of financial position. This the current year, however have had a recent history of losses. Refer to note 5.1 for more information on the UK operations and background to prior includes $2.620 million (2016: $2.792 million) of carried forward tax losses in relation to the Group’s UK operations, which although profitable in the period losses, and note 2.3(g) for further information supporting the recognition of these losses. (e) Tax consolidation Relevance of tax consolidation to the Group The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Cash Converters International Limited. The members of the tax-consolidated group are identified in note 5.3. Nature of tax funding arrangements and tax sharing agreements current year, have a recent history of losses. The UK tax losses have an indefinite availability period subject to satisfaction of the same ownership and continuity of business tests. A deferred tax asset for the UK operations has only been recognised to the extent tax losses are expected to be recoverable against future earnings. In making this assessment, a forward looking estimation of taxable profit was made, based on management’s best estimate of future UK performance from continuing operations as at 30 June 2017. Continuing operations in Australia were profitable during the current year and the Australian tax group is expected to continue to be profitable, therefore supporting the recognition of net deferred tax assets arising from temporary differences in Australia. Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the 2.4 Earnings per share terms of the tax funding arrangement, Cash Converters International Limited and each of the entities in the tax-consolidated group has agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable from or payable to other entities in the tax-consolidated group. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligation. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (f) Accounting policies Current taxes Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. Current tax assets and liabilities are measured at the amount expected to be recovered from, or paid to, taxation authorities. All are calculated at the tax rates and tax laws enacted or substantively enacted by the balance sheet date. Deferred taxes Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carried forward unused tax assets and unused tax losses, to the extent it is probable that taxable profit will be available to utilise them. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) that affect neither taxable income nor accounting profit. A deferred tax liability is not recognised in relation to the temporary differences arising from the initial recognition of goodwill. Earnings per share (EPS) is the amount of post-tax profit / (loss) attributable to each share. Basic EPS is calculated on the Company’s statutory profit for the year divided by the weighted average number of shares outstanding. Diluted EPS adjusts the basic EPS for the dilutive effect of any instruments, such as options, that could be converted into ordinary shares. The calculation of basic earnings per share has been based on the following profit / (loss) attributable to ordinary shareholders and weighted average number of ordinary shares outstanding. Reconciliation of earnings used in calculating earnings per share Basic and diluted earnings per share Profit / (loss) attributable to shareholders of the Company used in calculating earnings per share From continuing operations From discontinued operations Weighted average number of shares used as the denominator 2017 $’000 2016 $’000 20,618 – 20,618 25,894 (31,166) (5,272) Number Number 490,327,477 482,214,271 10,890,748 11,866,600 501,218,225 494,080,871 The carrying amount of deferred income tax assets is reviewed at balance sheet date and reduced to the extent that it is no longer probable that Weighted average number of shares – basic sufficient taxable profit will be available to utilise them. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Dilutive effect of performance rights Weighted average number of shares – diluted Deferred tax assets and liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the dilutive effect of 10,890,748 (2016: 11,866,600). deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. The number of potential ordinary shares not included in the above calculation is 12,755,380 (2016: 14,798,151), equating to a weighted average Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the statement of comprehensive income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess. 74 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 75 Cash Converters International Limited – Annual Report 2017 | 75 Notes to the financial statements For the year ended 30 June 2017 — 2.5 Segment information The Group’s operating segments are organised and managed separately according to the nature of their operations. Each segment represents a strategic business unit that provides different services to different categories of customer. The Chief Executive Officer (chief operating decision- maker) monitors the operating results of the business units separately for the purpose of making decisions about resource allocation and performance assessment. The Group’s reportable segments under AASB 8 Operating Segments are therefore as follows: Franchise operations This involves the sale of franchises for the retail sale of new and second hand goods and the sale of master licenses for the development of franchises in countries around the world. Store operations This segment involves the retail sale of new and second hand goods, cash advance and pawn broking operations at corporate owned stores in Australia. Personal finance This segment comprises the Cash Converters Personal Finance personal loans business and Mon-E, which is responsible for providing the internet platform and administration services for the Cash Converters network in Australia to offer small cash advance loans to customers. In prior years, this segment has been disclosed as two separate segments, financial services – personal loans and financial services – administration. Vehicle financing This segment comprises Green Light Auto Group Pty Ltd, which provides motor vehicle finance since March 2016, and fully maintained vehicles through a lease product to customers for a term of up to 4 years (a product that the Group ceased to offer during the 2016 financial year). The segmental profit analysis has been presented for both financial years for continuing operations only. Refer to note 5.1 for information related to the Group’s discontinued operations. The accounting policies of the reportable segments are the same as the Group’s accounting policies. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under review. Segment profit represents the profit earned by each segment without the allocation of central administration costs and directors’ fees and expenses, interest income and expense in relation to corporate facilities and tax expense. This is the measure reported to the chief executive officer (chief operating decision maker) for the purpose of resource allocation and assessment of segment performance. Year ended 30 June 2017 Interest revenue (i) Other revenue Gross revenue Less inter-company sales Segment revenue External interest revenue (ii) Total revenue EBITDA (iii) Less inter-company eliminations Segment EBITDA Depreciation and amortisation EBIT Interest expense Profit / (loss) before tax from continuing operations Year ended 30 June 2017 Interest revenue (i) Other revenue Gross revenue Less inter-company sales Segment revenue External interest revenue (ii) Total revenue EBITDA (iii) (iv) Less inter-company eliminations Segment EBITDA Depreciation and amortisation EBIT Interest expense Profit / (loss) before tax from continuing operations Franchise operations Store operations Personal finance Vehicle Corporate financing head office $’000 $’000 $’000 $’000 $’000 2,898 17,983 20,881 (682) 20,199 – 56,511 75,222 131,733 (7,524) 124,209 13 121,652 – 121,652 (4,558) 117,094 97 20,199 124,222 117,191 11,172 (682) 10,490 (149) 10,341 – 12,318 5,231 17,549 (3,859) 13,690 – 54,014 (4,542) 49,472 (1,116) 48,356 (4,154) 5,604 3,777 9,381 – 9,381 12 9,393 (401) (7) (408) (69) (477) (415) Total $’000 186,665 96,982 283,647 (12,764) 270,883 590 271,473 – – – – – 468 468 (31,378) 45,725 – (31,378) (2,930) (34,308) (4,835) – 45,725 (8,123) 37,602 (9,404) 10,341 13,690 44,202 (892) (39,143) 28,198 2,053 24,977 27,030 (6,441) 20,589 – 67,170 73,197 140,367 (11,132) 129,235 77 158,416 2 158,418 (6,995) 151,423 474 20,589 129,312 151,897 7,271 (346) 6,925 (235) 6,690 – 17,420 6,121 23,541 (3,936) 19,605 (1) 65,537 321 65,858 (302) 65,556 (4,116) 2,743 5,398 8,141 – 8,141 5 8,146 (4,599) – (4,599) (133) (4,732) (508) – 14 14 – 14 37 51 (37,932) (6,096) (44,028) (2,261) (46,289) (5,034) 230,382 103,588 333,970 (24,568) 309,402 593 309,995 47,697 – 47,697 (6,867) 40,830 (9,659) 6,690 19,604 61,440 (5,240) (51,323) 31,171 76 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 77 Cash Converters International Limited – Annual Report 2017 | 77 (i) Interest revenue comprises personal loan interest, cash advance fee income, pawn broking interest from customers and commercial loan interest from third parties (ii) External interest is interest received on bank deposits (iii) EBITDA is earnings before interest, tax, depreciation, amortisation and impairment (iv) Includes ASIC compliance settlement provision of $12.500 million in corporate head office Notes to the financial statements For the year ended 30 June 2017 — 2.5 Segment information (continued) Group assets by reportable segment Franchise operations Store operations Personal finance Vehicle financing Total of all segments Unallocated assets Total segment assets Assets relating to discontinued operations Unallocated Consolidated total assets 2017 $’000 2016 $’000 36,573 73,409 186,195 24,977 321,154 77,691 398,845 – 398,845 39,992 84,052 244,527 13,260 381,831 35,212 417,043 7,448 424,491 Geographical information The Group operates in two principal geographical areas – Australia (country of domicile) and the United Kingdom. The Group’s revenue from continuing operations from external customers and information about its non-current assets by geographical location are detailed below. Australia United Kingdom Rest of world Revenue from external customers Non-current assets 2017 $’000 259,345 11,389 739 271,473 2016 $’000 295,435 15,707 457 311,599 2017 $’000 142,516 1,713 – 2016 $’000 143,654 1,242 – 144,229 144,896 Non-current assets include property, plant and equipment, goodwill and other intangible assets, and exclude deferred tax assets, trade and other receivables and other financial assets. Unallocated assets include various corporate assets including cash held at a corporate level that has not been allocated to the underlying segments. 2.6 Dividends Group liabilities by reportable segment Franchise operations Store operations Personal finance Vehicle financing Total of all segments Unallocated liabilities Consolidated total liabilities Unallocated liabilities include Group borrowings not specifically allocated to the underlying segments. Other segment information Franchise operations Store operations Personal finance Vehicle financing Total of all segments Unallocated Total * Depreciation, amortisation and impairment from continuing operations Depreciation, amortisation and impairment * Additions to non-current assets 2017 $’000 104 3,855 1,081 72 5,112 2,185 7,297 2016 $’000 1,999 3,935 302 133 6,369 498 6,867 2016 $’000 570 1,555 4,291 364 6,780 224 7,004 2016 $’000 4,010 3,182 159 136 7,487 321 7,808 6,879 7,604 51,226 3,978 69,687 68,319 138,006 – 7,636 87,606 10,291 105,533 76,673 182,206 Recognised amounts Final dividend – prior year 100% franked at 30% Interim dividend – current year 100% franked at 30% Unrecognised amounts Final dividend – current year 100% franked at 30% Per share cents 1.00 – 1.00 – 2017 2016 Total $’000 4,850 – 4,850 – Per share cents – 2.00 2.00 1.00 Total $’000 – 9,637 9,637 4,850 On 28 October 2016 the Company paid a fully franked final dividend of 1.0 cent per share in respect of the financial year ended 30 June 2016. The total interim dividend paid was $4.850 million. On 22 August 2017 the Company announced that there would be no final dividend in respect of the financial year ended 30 June 2017. The Company has Australian franking credits available of $57.782 million on a tax paid basis (2016: $67.786 million). 78 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 79 Notes to the financial statements For the year ended 30 June 2017 — 2.7 Notes to cash flow statement Reconciliation of loss to net cash flow from operating activities: Profit / (loss) after tax Non-cash adjustment to reconcile profit after tax to net cash flows: Amortisation Depreciation Impairment of non-current assets Share-based payments Loss on disposal of non-current assets Share of net (profit) / loss of equity accounted investment Changes in assets and liabilities: Trade and loan receivables Inventories Other assets Trade and other payables Provisions Income tax payables Net cash provided by operating activities 2017 $’000 2016 $’000 20,618 (5,272) 3,717 3,580 – 1,331 826 (314) 14,786 (3,469) 3,879 (1,686) (12,574) 12,840 43,534 3,334 5,293 2,247 (1,923) 12,878 2,032 14,917 7,648 976 (6,692) 3,503 (8,867) 30,074 Cash flows are included in the cash flow statement on a net basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (3) Assets and liabilities In this section This section shows the assets used to generate Cash Converters’ trading performance and the liabilities incurred as a result. Information on other assets and liabilities are in the following sections: • Section 2 – Deferred tax assets and liabilities • Section 4 – Financing activities • Section 5 – Equity-accounted investments 3.1 Trade and other receivables Current Trade receivables Allowance for impairment losses Total trade receivables (net) Finance lease receivables Vendor finance loans Other receivables Total trade receivables Non-current Finance lease receivables Vendor finance loans Loan to associate Other receivables Total trade and other receivables Notes (i) (ii) (iii) (iv) (ii) (iii) (v) (iv) 2017 $’000 1,187 (58) 1,129 506 1,521 4,415 7,571 1,932 6,628 14,908 12 23,480 2016 $’000 5,940 (2,309) 3,631 4,091 1,049 4,880 13,651 2,677 8,164 14,841 84 25,766 (i) Trade receivables include weekly franchise fees, wholesale sales, pawn broking fees, cash advance fees, default fees and OTC fees. Where the collection of the debtor is doubtful, an allowance for impairment losses is recognised. The average credit period on sales is 30 days. No interest is charged for the first 30 days from the date of the invoice. Thereafter, interest is charged at 2% per month on the outstanding balance. (ii) The Group entered into finance lease arrangements with customers for leasing of vehicles. All leases are denominated in Australian dollars. The average term of finance leases entered into is 4 years. The Group ceased entering into such finance lease arrangements from March 2016. (iii) Vendor finance loans are loans made to purchasers of the Group’s UK corporate stores during the prior year as part of the purchase agreement. The loans have various terms of up to 6 years, and bear interest at rates between nil and 9%. The receivables are held at amortised cost. No receivables are past due or impaired at 30 June 2017 (2016: nil). (iv) Other receivables include GST receivable, development agent fees outstanding, sub-master license sales, Mon-E fees, financial commission and instalment credit loans. None of these receivables are past due or considered impaired. (v) Commercial loan advanced to Cash Converters Holdings LP (New Zealand master franchisee) with a maturity date of 15 September 2018. Interest is charged quarterly at a rate of 8% per annum. 80 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 81 Notes to the financial statements For the year ended 30 June 2017 — 3.1 Trade and other receivables (continued) As at 30 June the ageing analysis of trade receivables was as follows: 0 to 30 days 31 to 60 days past due not impaired 61 to 90 days past due not impaired 90 + days past due not impaired Considered impaired Balance at end of year Accounting policy Notes 2017 $’000 634 21 22 452 58 1,187 2016 $’000 3,623 1 7 – 2,309 5,940 Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as trade and other receivables and are measured at amortised costs using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases. Allowance for impairment losses As at 30 June 2017, trade receivables and instalment credit loans of $58 thousand (2016: $2.309 million) were impaired and fully provided for. Movements in the provision for impairment of trade receivables were as follows: Balance at beginning of year Impairment losses recognised on receivables Amounts written off as uncollectible Balance at end of year Amounts receivable under finance leases Not later than one year Later than one year and not later than five years Less unearned finance income Present value of minimum lease payments receivable Allowance for uncollectible lease payments 2,309 58 (2,309) 58 2,553 311 (555) 2,309 Minimum lease payments lease payments 2017 $’000 3,309 1,734 5,043 (1,343) 3,700 (1,262) 2,438 2016 $’000 7,030 7,614 14,644 (6,793) 7,851 (1,083) 6,768 2017 $’000 1,768 1,932 3,700 – 3,700 (1,262) 2,438 2016 $’000 5,174 2,677 7,851 – 7,851 (1,083) 6,768 Unguaranteed residual values of assets leased under finance leases at the end of the reporting period are estimated at $1.312 million (30 June 2016: $2.213 million). The residual amounts have been excluded from the above calculations in the present value amounts – the amounts only relate to the minimum repayments. The interest rate inherent in the leases is fixed at the contract date for the entire lease term. The average effective interest rate contracted is approximately 26.0% (30 June 2016: 26.6%) per annum. 3.2 Loan receivables Current Personal short term loans Allowance for impairment losses Deferred establishment fees Total personal short term loans (net) Vehicle finance loans Allowance for impairment losses Total vehicle finance loans (net) Total loan receivables Non-current Vehicle finance loans Notes 2017 $’000 2016 $’000 (i) (ii) (iii) (iii) 117,585 (25,286) (9,575) 82,724 5,586 (377) 5,209 139,526 (26,302) (11,909) 101,315 1,134 (30) 1,104 87,933 102,419 14,037 2,102 (i) The credit period provided in relation to personal short term unsecured loans varies from 30 days to 12 months. Interest is charged on these loans at a fixed rate which varies dependent on the state or country of origin. An allowance has been made for estimated unrecoverable amounts arising from loans already issued, which has been determined by reference to past default experience. Before accepting any new customers, the Group uses an external scoring system to assess the potential customer’s credit quality and define credit limits by customer. There is no concentration of credit risk within the personal loan book. (ii) Deferred establishment fees relate to establishment fees charged on personal loans. The full amount of the fee is deferred at the commencement of the loan and is then recognised through the income statement at an effective interest rate over the life of the loan. The balance shown above reflects the amount of the fees still to be recognised at the end of the reporting period. (iii) Vehicle finance loans are secured loans advanced for financing the purchase of vehicles. The average term of these loans is 4.6 years and the average interest rate is 25.0%. 31 to 60 days past due not impaired 61 to 90 days past due not impaired 90 + days past due not impaired Considered impaired Balance at end of year As at 30 June the ageing analysis of vehicle finance loan receivables was as follows: 0 to 30 days 31 to 60 days past due not impaired 61 to 90 days past due not impaired 90 + days past due not impaired Considered impaired Balance at end of year 91,277 698 173 151 25,286 117,585 110,461 1,434 401 161 27,069 139,526 18,442 3,206 590 111 103 377 19,623 – – – 30 3,236 Present value of minimum 0 to 30 days As at 30 June the ageing analysis of personal loan receivables was as follows: 82 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 83 Notes to the financial statements For the year ended 30 June 2017 — 3.2 Loan receivables (continued) Allowance for impairment losses As at 30 June 2017, personal loan receivables of $25.286 million (2016: $26.302 million) were impaired and fully provided for. Movements in the provision for impairment of personal loan receivables were as follows: Balance at beginning of year Impairment losses recognised on receivables Amounts written off as uncollectible Balance at end of year 2017 $’000 26,302 37,295 (38,311) 25,286 2016 $’000 29,104 39,303 (42,105) 26,302 In determining the recoverability of a personal loan, the Group considers any change in the credit quality of the receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. As at 30 June 2017 vehicle finance loan receivables of $377 thousand (2016: nil) were impaired and fully provided for. Movements in the provision for impairment of vehicle finance loan receivables were as follows: Balance at beginning of year Impairment losses recognised on receivables Amounts written off as uncollectible Balance at end of year 30 347 – 377 – 30 – 30 In determining the recoverability of a vehicle finance loan, the Group considers any change in the credit quality of the receivable from the date credit was initially granted up to the reporting date. As the current customer base is relatively small, the Group has made a provision based on known historical losses and reasonable estimation of expected future losses. As these loans are secured by the underlying vehicle financed, the total loss will be reduced by the recoverable amount. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. Accounting policy Loan receivables that have fixed or determinable payments that are not quoted in an active market are classified as loan receivables and are measured at amortised costs using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Key estimate – impairment of financial assets The impairment of personal loans requires the Group to assess impairment regularly. The credit provisions raised (specific and collective) represent management’s best estimate of the losses incurred in the loan portfolio at reporting date based on their experienced judgment. The collective provision is estimated on the basis of historical loss experience for assets with similar credit characteristics. The historical loss experience is adjusted based on current observable data and events. The use of such judgments and reasonable estimates is considered appropriate. 3.3 Inventories New and pre-owned goods at cost New and used motor vehicles at cost Accounting policies 20,651 340 20,991 16,927 685 17,612 Inventories are valued at the lower of cost and net realisable value. Costs, including purchase costs on a first in first out basis are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs necessary to make the sale. With a significant proportion of inventory being jewellery, which retains its value, acquired from customers across 71 corporate stores and by the diverse range of other products, the overall exposure to obsolescence is minimal. Inventory is appropriately discounted in stores as it ages in order to effect a sale. The Company has therefore determined no obsolescence provision is required. 3.4 Plant and equipment Cost Balance at 1 July 2015 Additions Transfers to intangible assets Disposals Foreign currency exchange differences Balance at 30 June 2016 Additions Transfers between asset categories Transfers to intangible assets Disposals Foreign currency exchange differences Balance at 30 June 2017 Depreciation and impairment Balance at 1 July 2015 Disposals Depreciation expense Impairment Foreign currency exchange differences Balance at 30 June 2016 Disposals Transfers between asset categories Depreciation expense Foreign currency exchange differences Balance at 30 June 2017 Net book value As at 30 June 2016 As at 30 June 2017 Leasehold Plant and under finance Leasehold improvements improvements equipment $’000 $’000 13,219 2,652 – (3,497) (29) 12,345 543 772 – – (4) 13,656 5,670 (2,106) 1,693 – (24) 5,233 – 181 1,688 (4) 7,098 7,112 6,558 36,351 1,346 (4,626) (19,765) (187) 13,119 666 276 (1,020) (1,298) (39) 11,704 18,760 (15,698) 3,478 116 (183) 6,473 (1,070) 772 1,892 (38) 8,029 6,646 3,675 lease $’000 1,049 – – (1) – 1,048 – (1,048) – – – – 831 – 122 – – 953 – (953) – – – 95 – Total $’000 50,619 3,998 (4,626) (23,263) (216) 26,512 1,209 – (1,020) (1,298) (43) 25,360 25,261 (17,804) 5,293 116 (207) 12,659 (1,070) – 3,580 (42) 15,127 13,853 10,233 Total depreciation expense for the year ended 30 June 2016 includes $1.704 million of depreciation relating to discontinued operations. Accounting policies Plant and equipment, leasehold improvements and equipment under finance lease are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. 84 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 85 Notes to the financial statements For the year ended 30 June 2017 — 3.4 Plant and equipment (continued) Depreciation is provided on plant and equipment. Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued Allocation of goodwill to CGUs amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period. The following estimated useful lives are used in the calculation of depreciation: Goodwill has been allocated for impairment testing purposes to the following CGUs or groups of CGUs: Personal finance Store operations Notes 2017 $’000 2016 $’000 Impairment losses recognised No impairment losses have been recognised in the year ended 30 June 2017. Year ended 30 June 2016 2017 $’000 90,561 16,448 107,009 2016 $’000 90,561 16,448 107,009 Leasehold improvements Plant and equipment Equipment under finance lease Fixtures and fittings 3.5 Goodwill 8 years 5 years 5 years 8 years Gross carrying amount Balance at beginning of year Derecognised on disposal of discontinued operations Foreign currency exchange differences Balance at end of year Accumulated impairment losses Balance at beginning of year Impairment losses for year Derecognised on disposal of discontinued operations Foreign currency exchange differences Balance at end of year Net carrying amount At beginning of year At end of year Accounting policies 5.1 5.1 107,009 – – 107,009 – – – – – 118,565 (11,459) (97) 107,009 7,157 1,354 (8,515) 4 – 107,009 107,009 111,408 107,009 Goodwill arising on an acquisition of a business is carried at cost at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) that are expected to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the unit pro rata based on the carrying amount of each asset in the CGU. An impairment loss recognised for goodwill is recognised directly in profit or loss and is not reversed in subsequent periods. Impairment testing of non-current assets, including those with indefinite useful lives, using value in use calculations, at 31 December 2015 identified goodwill balances of $1.354 million, other intangible asset balances of $777 thousand and plant and equipment balances of $116 thousand that were not considered recoverable. These balances related to specific stores within the UK corporate stores network. Subsequent to the impairment testing, all of the UK corporate stores were sold, resulting in the derecognition of any related goodwill as part of the loss on disposal. Refer to note 5.1 for further information. Impairment testing and key assumptions Impairment testing approach applicable to all CGUs Impairment modelling for each CGU has been prepared separately based on a value in use model which uses cash flow projections based on budgets approved by management covering a five-year period. Cash flows beyond the five-year period are estimated using a terminal value calculated based on a terminal growth rate under standard valuation principles. Key assumptions are based on a combination of past experience for mature products and external sources (market data) for less mature products and economic metrics such as interest rates. In FY 2018 revenue and expenses are forecast to reduce due to decreasing loan volumes as a result of the changes to the Company’s credit assessment process before recovering to grow at levels below those historically observed. Growth in lending volumes is expected to be driven primarily by the recently launched MACC product. Working capital requirements are factored into the modelling based on historic requirements for each CGU, and vary in line with earnings growth. Capital investment, required to run the business (i.e. replacement and non-expansionary capital expenditure) has been included based on budgeted amounts for the next financial year and incremental growth in subsequent years consistent with increasing revenues. The recoverable value of all non-current assets, including goodwill, property, plant and equipment (note 3.4) and other intangible assets (note 3.6) is assessed using the impairment testing as outlined in this note. Impact of regulations The Personal Finance business operates in a regulated industry. The impairment testing for this business segment is based on management’s expectation of performance, taking into account applicable legislative requirements at the date of the impairment testing, being 30 June 2017. Any On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. material change to legislation impacting this business in future periods may have a significant positive or negative impact on future performance and may result in an impairment. 86 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 87 Notes to the financial statements For the year ended 30 June 2017 — 3.5 Goodwill (continued) The following key assumptions were used in the impairment testing: Assumption Personal finance Store operations 2018 budget revenue growth / (reduction) 2018 budget expense growth / (reduction) Revenue growth rate > 1 year Expense growth rate > 1 year Terminal growth rate > 5 years Pre-tax discount rate applied to cash flows (7%) (5%) 1% – 5% (2%) – 2% 2.5% 14.9% (3%) (5%) 1% – 3% 2% – 3% 2.5% 16.0% Bad debt rates have been forecast based on current average rates and are adjusted in future periods to move towards industry and historical averages for individual products experienced by the Group. This projection reflects the benefits of the enhanced credit assessment processes which were implemented in the current year, and consequent anticipated lower bad debt rates. For the year ended 30 June 2016 the key assumptions used included: • 2017 growth rates for revenue and expenses in Personal finance of -22% and -17% respectively, in the following years growth rates ranged from -9% to +11% for revenue and -2% to +6% for expenses; • 2017 growth rates for revenue and expenses in Store operations of -8% and -3% respectively, in the following years growth rates ranged from +2% to +3% for revenue and +2% for expenses; • Pre-tax discount rates ranging from 12.5% to 14.5% and terminal growth rates of 2.5%. Impairment sensitivity disclosures Based on the impairment testing completed for all CGUs, management believe that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed the recoverable amount of each CGU as at 30 June 2017. Reasonably possible changes are considered in the context of regulatory requirements that have been enacted or substantively enacted at the date of the impairment testing, or where the outcome of future changes can reasonably be modelled at the date of impairment testing. With this in mind, potential future legislative changes not yet enacted or substantively enacted may significantly impact the Group’s operations, should they be introduced in future periods. On 3 March 2016, the Small Amount Credit Contracts Review Final Report (the Final Report) was delivered by the Review Panel (the Panel) to the Minister for Small Business and Assistant Treasurer. The report outlines proposed regulatory requirements relating to the Protected Earnings Amount (PEA) cap that have the potential to significantly impact Small Amount Credit Contract (SACC) lending volumes, which would impact the Group’s Personal Loan and Cash Advance products. On 28 November 2016, the Minister announced the Government’s response to the report which supported the recommendation to extend the SACC PEA amount requirement to all consumers, and lowering it to 10 per cent of the consumer’s net income. Subsequent to this announcement there has been no further public consultation in relation to the proposed scope and form of any potential legislative changes, and no timetable has been released around when any such proposed draft legislation would be submitted to Parliament for consideration. Additionally, the industry continues to work with the Government on this important legislative matter. Consequently, there is significant uncertainty with respect to the timing of enacting any legislative change, as well as the final scope and form of any eventual change, if any. The recoverable value of both the Personal finance and Store operations businesses may be impacted by potential future legislative changes given the impact on both the Group’s personal loan and cash advance operations. Refer to note 2.5 for further information on the Group’s operations. Whilst ultimately the Group’s business operations could potentially be adjusted to mitigate the impact of these changes, the likely impact of the legislation if enacted in its current proposed form from 1 July 2018, based on the current profile of the loan book and with reasonably possible changes to other key assumptions being taken into account, may result in an impairment within a range of $35 million to $48 million. As outlined above, this estimate is subject to significant variability due to both the ultimate form and enactment date of the legislation, both of which are uncertain, as well as the profile of the loan book when any applicable legislative changes were to come into effect. Additionally, at both the date of impairment testing and the date of this report there is no certainty that any change to applicable legislation will be made. 3.6 Other intangible assets Allocation of other intangible assets to CGUs Other intangible assets are allocated to their respective CGU and tested for impairment when impairment indicators are identified. Refer to note 3.5 for details of impairment testing. The recoverable value of other intangible assets is assessed using the same assumptions and methods as the goodwill for the related CGUs. No impairment has been recognised in the year ended 30 June 2017 (2016: $777 thousand). The allocation of other intangible assets to CGUs is as follows: Franchise operations (excluding UK) Franchise operations (UK) Personal finance Store operations Vehicle financing 2017 $’000 9,771 2,805 8,491 4,673 1,247 26,987 2016 $’000 8,318 1,222 11,576 2,908 10 24,034 88 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 89 Notes to the financial statements For the year ended 30 June 2017 — 3.6 Other intangible assets (continued) Categories of other intangible assets Cost Balance at 1 July 2015 Additions Transfers from plant & equipment Disposals Foreign currency exchange differences Balance at 30 June 2016 Additions Transfers from plant & equipment Disposals Foreign currency exchange differences Balance at 30 June 2017 Amortisation and impairment Balance at 1 July 2015 Disposals Amortisation expense Impairment Foreign currency exchange differences Balance at 30 June 2016 Disposals Amortisation expense Foreign currency exchange differences Balance at 30 June 2017 As at 30 June 2016 As at 30 June 2017 Trade names Reacquired & customer rights relationships Software $’000 $’000 $’000 11,360 16,936 172 – (3,698) (135) 7,699 – – – (61) 7,638 4,597 (1,838) 480 777 (30) 3,986 – 542 (12) 4,516 3,712 3,122 – – (68) – 16,868 – – – – 16,868 6,506 (163) 1,044 – – 7,387 – 964 – 8,351 9,481 8,517 12,356 3,638 4,626 (6,100) – 14,520 6,305 1,020 (2,719) 4 19,130 4,842 (2,972) 1,810 – – 3,680 (2,109) 2,211 – 3,782 10,840 15,348 Total $’000 40,652 3,810 4,626 (9,866) (135) 39,087 6,305 1,020 (2,719) (57) 43,636 15,945 (4,973) 3,334 777 (30) 15,053 (2,109) 3,717 (12) 16,649 24,034 26,987 Total amortisation expense for the year ended 30 June 2016 includes $56 thousand relating to discontinued operations. Accounting policies Reacquired rights and Customer relationships acquired through business combinations are recognised at fair value at acquisition date less accumulated amortisation and impairment. Trade names relating to repurchased sub-master licenses both overseas and in Australia are recognised at cost less accumulated amortisation. Intangible assets are amortised as follows: Asset Reacquired rights Customer relationships Trade names Software Amortisation period The remaining life of each franchise agreement as at the acquisition date Useful life of 5 years based on historic average customer relationships Useful life which is not more than 100 years Useful life of between 5 and 8 years based on historic experience Key estimate – useful lives of other intangible assets The Company reviews the estimated useful lives of other intangible assets at the end of each annual reporting period. The estimation of the remaining useful lives of other intangible assets requires the entity to make significant estimates based on both past performance and expectations of future performance. 3.7 Trade and other payables Current Trade payables Accruals Notes 2017 $’000 2,495 18,793 21,288 2016 $’000 2,415 17,406 19,821 The Group has financial risk management policies in place to ensure that all payables are paid within the allowed credit period in order to avoid the payment of interest on outstanding accounts. 3.8 Provisions Current Employee benefits Fringe benefits tax ASIC compliance Onerous lease contracts Other Non-current Employee benefits Onerous lease contracts (i) (ii) (ii) 5,834 168 – 1,055 7 7,064 790 1,627 2,417 6,321 49 12,500 2,205 1,352 22,427 298 5,676 5,974 (i) On 9 November 2016, the Company announced that it had entered into an enforceable undertaking with ASIC in relation to its compliance with certain provisions applicable to small amount credit contracts under the National Consumer Credit Protection Act 2009 (Cth). Prior to this announcement, the Company had recognised a provision of $12.500 million in respect of any potential compliance issues in its credit assessment processes, based on Cash Converters’ best estimate of the likely outcome of discussions with ASIC at the date of the 2016 financial report. As at Software development expenditure is recognised as an asset when it is possible that future economic benefits attributable to the asset will flow. 30 June 2017 $391 thousand for customer remediation remains outstanding and is classified within trade payables, the balance having been paid Software assets are recognised at cost less accumulated amortisation. during the year. (ii) The provision for onerous lease contracts relates to the Group’s discontinued UK operations. 90 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 91 Notes to the financial statements For the year ended 30 June 2017 — 3.8 Provisions (continued) Accounting policies Provisions are recognised when the Group has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably. A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave and personal leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short-term employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long-term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. (4) Capital structure and financing costs In this section This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet liquidity and access to capital markets. The Board determines the appropriate capital structure of the Group, specifically how much is raised from shareholders (equity) and how much is borrowed from financial institutions and capital markets (debt), in order to finance the Group’s activities both now and in the future. The Board considers the Group’s capital structure and its dividend policy at least twice a year ahead of announcing results, in the context of its ability to continue as a going concern, to execute the strategy and to deliver its business plan. 4.1 Cash and cash equivalents Cash on hand Cash at bank 2017 $’000 2,991 77,580 80,571 2016 $’000 2,831 70,778 73,609 4.2 Borrowings Current Securitisation facility Loans – vehicle finance Hire purchase and lease liabilities Non-current Loans – vehicle finance Bonds Hire purchase and lease liabilities Notes (i) (ii) (ii) (iii) 2017 $’000 44,426 1,799 78 46,303 1,229 59,705 – 60,934 2016 $’000 67,047 2,945 31 70,023 4,432 59,452 77 63,961 (i) The securitisation facility represents a liability owed by CCPF Receivables Trust No 1, a consolidated subsidiary established as part of the borrowing arrangement with the Fortress Investment Group. This liability is secured against eligible personal loan receivables originated by CCPF, which have been assigned to the Trust and generally have a maturity of less than twelve months. Collections from Trust receivables are used to pay interest of the securitisation facility, with the remainder remitted to CCPF on a monthly basis. The facility has been presented as a current liability because the Trust does not have the unconditional right to defer settlement of the liability for at least twelve months after the reporting period. In the ordinary course of business, the Group currently expects to utilise this facility until at least 15 March 2019. (ii) Loans – Vehicle Finance represents a vehicle leasing facility with FleetPartners for the provision of high quality fully maintained vehicles for the use of Green Light Auto’s customers. The underlying financing from FleetPartners is repayable in line with the contractual repayments from the customer and is therefore repayable over the underlying vehicle lease term. (iii) Represents a September 2013 issue of $60 million of senior unsecured 7.95% notes which mature in September 2018 with FIIG Securities Limited. Direct borrowing costs have been capitalised and offset against the liability. Accounting policies Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Assets held under finance leases are initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease Cash at bank includes restricted cash of $15.101 million (2016: $21.060 million) that is held in accounts controlled by the CCPF Receivables Trust obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of No 1 that was established to operate the Company’s securitisation facility with Fortress Finance. The facility prescribes that cash deposited in this interest on the remaining balance of the liability. Finance charges are charged directly against income. account can only be used to fund new principal advances. Surplus funds at the end of the period are redistributed in keeping with the terms of the securitisation facility. Cash at bank includes a further $5.482 million (2016: $5.871 million) on deposit as security for banking facilities. 92 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 93 Notes to the financial statements For the year ended 30 June 2017 — 4.2 Borrowings (continued) Financing arrangements Unrestricted access was available at balance date to the following lines of credit: Total facilities Bank overdrafts Securitisation facilities Bond Used at balance date Bank overdrafts Securitisation facilities Bond Unused at balance date Bank overdrafts Securitisation facilities Refer to note 4.3 for further information in relation to financial instruments. Loan covenants and review events 2017 $’000 2016 $’000 – 100,000 60,000 160,000 – 45,500 60,000 105,500 – 54,500 54,500 300 100,000 60,000 160,300 – 68,750 60,000 128,750 300 31,250 31,550 (a) Categories of financial instruments Financial assets Cash and cash equivalents Trade and other receivables Personal loan receivables Financial liabilities Trade and other payables Borrowings 2017 $’000 2016 $’000 80,571 31,051 101,970 213,592 21,288 107,237 128,525 73,609 39,417 104,521 217,547 19,821 133,984 153,805 The Group has no material financial assets or liabilities that are held at fair value. (b) Financial risk management objectives The Group’s treasury function provides services to the business, co-ordinates access to domestic and international financial markets, and manages the financial risks relating to the operations of the Group. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. (c) Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk from the previous period. The Group has borrowing facilities which are subject to various covenants and review events. The securitisation has various eligibility criteria which the (d) Foreign currency risk management receivables of the Group must meet to be funded under the facility. Under the bond facility, amongst other covenants, the Group must maintain sufficient The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate interest cover in the event of new financial indebtedness being incurred and requires dividends only be paid out of available profits. During the reporting exposures are relatively small and spot rates are normally used to translate transactions into the reporting currency. There are no foreign currency period there have been no events that would cause these covenants to be breached. denominated monetary assets or monetary liabilities in the Group at the reporting date (2016: nil) other than in the functional currency of the 4.3 Financial risk factors operating entity. (e) Interest rate risk management The Group’s activities expose the Group to a variety of financial risks: market risks (including currency risk and interest rate risk), credit risk and The Company and the Group are exposed to interest rate risk as entities in the consolidated Group borrow funds at variable rates and place funds liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential on deposit at variable rates. Personal loans issued by the Group are at fixed rates. The risk is managed by the Group by monitoring interest rates. adverse effects on financial performance. The Company and the Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management Financial risk and capital management is carried out in accordance with policies approved by the Board. The Board reviews and approves written section of this note. principles of overall risk management, as well as written policies covering specific areas such as managing capital, mitigating interest rates, liquidity, foreign exchange and credit risk. The Audit and Risk Committee assists the Board in monitoring the implementation of risk management policies. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. A 50-basis point increase or decrease is used because this represents management’s assessment of the possible change in interest rates. At reporting date, if interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net profit would increase / decrease by approximately $61 thousand (2016: increase / decrease by approximately $1 thousand). 94 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 95 Notes to the financial statements For the year ended 30 June 2017 — 4.3 Financial risk factors (continued) (f) Credit risk management Financial assets Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group. The Group measures The following table details the Group’s expected maturity for its financial assets. The table below has been drawn up based on the undiscounted credit risk on a fair value basis. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties contractual maturities of the financial assets including interest that will be earned on those assets except where the Company / Group anticipates that having similar characteristics, other than its franchisees. The Group has a policy of obtaining sufficient collateral or other securities from these the cash flow will occur in a different period. franchisees. The majority of loans within the financing division relate to loans made by Cash Converters Personal Finance which may be both secured and unsecured personal loans. Credit risk is present in relation to all unsecured loans made which is managed within an agreed corporate policy on customer acceptance and ongoing review of recoverability. (g) Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of directors, who have built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate cash reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. Included in note 4.2 is a listing of additional undrawn facilities that the Company / Group has at its disposal to further reduce liquidity risk. Liquidity and interest risk tables Financial liabilities The following table details the Group’s remaining contractual maturity for its financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are at floating rates, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Group may be required to pay. Weighted average effective interest rate % 0.00 7.59 7.93 7.67 0.00 7.59 7.95 7.90 1 year or less $’000 21,288 83 1,936 44,426 67,733 19,821 3,202 – 74,182 97,205 1 to 5 years $’000 More than 5 years $’000 – – 66,565 – 66,565 – 5,365 70,732 – 76,097 – – – – – – – – – – Total $’000 21,288 83 68,501 44,426 134,298 19,821 8,567 70,732 74,181 173,302 2017 Non-interest bearing Finance lease liability – fixed rate Fixed interest rate instruments Variable interest rate instruments 2016 Non-interest bearing Finance lease liability – fixed rate Fixed interest rate instruments Variable interest rate instruments Weighted average effective interest rate % 0.00 105.39 2.10 0.00 112.94 1.07 1 year or less $’000 35,032 179,223 33,224 247,479 6,105 175,673 69,715 251,493 1 to 5 years $’000 More than 5 years $’000 – 46,452 – 46,452 – 17,600 – 17,600 – – – – – – – – Total $’000 35,032 225,675 33,224 293,931 6,105 193,273 69,715 269,093 2017 Non-interest bearing Fixed interest rate instruments Variable interest rate instruments 2016 Non-interest bearing Fixed interest rate instruments Variable interest rate instruments The amounts included above for variable interest rate instruments for both assets and liabilities are subject to change if actual rates differ from those applied in the above average calculations. (h) Fair value of financial instruments The fair value of the Group’s financial assets and liabilities are determined on the following basis: Financial assets and financial liabilities that are measured at fair value on a recurring basis Subsequent to initial recognition, at fair value financial instruments are grouped into Levels 1 to 3 based on the degree to which the fair value is observable. Levels are defined as follows: • • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). At 30 June 2017 and 30 June 2016, the Group has no material financial assets and liabilities that are measured on a recurring basis at fair value. Financial assets and financial liabilities that are not measured at fair value on a recurring basis (but where fair value disclosures are required) At 30 June 2017 and 30 June 2016, the carrying amount of financial assets and financial liabilities for the Group is considered to approximate their fair values. The fair value of the monetary financial assets and financial liabilities is based upon market prices where a market price exists or by discounting the expected future cash flows by the current interest rates for assets and liabilities with similar risk profiles. 96 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 97 Notes to the financial statements For the year ended 30 June 2017 — 4.4 Issued capital Balance at beginning of year Issued during the year Dividend reinvestment plan Shares issued on exercise of performance rights Placement Share issue costs Balance at end of year 2017 Number 2016 Number 2017 $’000 2016 $’000 484,976,037 481,248,259 207,540 205,399 8,071,387 – – – 3,144,278 583,500 – – 2,663 – – – 1,572 569 – – 493,047,424 484,976,037 210,203 207,540 Fully paid ordinary shares carry one vote per share and carry the right to dividends. (5) Group structure In this section This section provides information to assist users understand how the Group structure affects the financial position and performance of the Group as a whole. The Group includes entities that are classified as associates, which are accounted for using the equity method. In this section of the notes there is information about: 1. Changes to the structure that occurred during the prior year as a result of business combinations or the disposal of a discontinued operation; 2. Investments in associates; 3. Composition of the Group; and 4. Parent entity financial information. 5.1 Discontinued operations (a) Description Changes to the Corporations Act abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the disposed of all the assets and liabilities of the majority of its corporate owned stores to franchisees, with the remainder closed, and ceased lending Company does not have a limited amount of authorised capital and issued shares do not have a par value. through its UK personal loan book. Assets disposed included plant and equipment, intangible assets (reacquired rights, trade names and customer On 29 February 2016, the Company announced that its UK operation would return to its original role as a master franchisor and subsequently relationships) and store inventory. (b) Financial performance and cash flow information The results of the discontinued operations (UK retail and personal loan business) included in the loss for the year ended 30 June 2016 are set out below. Revenue Expenses Impairment of non-current assets Loss on disposal of assets Loss before income tax Income tax expense Loss after income tax of discontinued operations Net cash flows from discontinued operations Net cash outflows from operating activities Net cash inflows from investing activities Net cash outflows from financing activities Net cash (outflows) / inflows from discontinued operations Accounting policies 2016 $’000 74,467 (93,302) (2,248) (10,083) (31,166) – (31,166) (6,050) 415 (13) (5,648) A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the statement of profit or loss. 98 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 99 Notes to the financial statements For the year ended 30 June 2017 — 5.1 Discontinued operations (continued) (c) Loss on disposal of assets Consideration received Cash Deferred sales proceeds Total consideration received Assets disposed Current assets Plant and equipment Goodwill Other intangible assets Total assets disposed Loss on disposal of assets (d) Assets associated with discontinued operations The following assets were reclassified as associated with discontinued operations as at 30 June 2016: Assets associated with discontinued operations Personal loan receivables 5.2 Investment in associates Balances of the investments in associates and joint ventures are as follows: Balance at beginning of year Net profit / (loss) for year Write off of investment in associate Foreign exchange adjustment in value of investment Balance at end of year 2016 $’000 252 9,900 10,152 9,780 4,938 2,808 2,709 20,235 10,083 7,448 2016 $’000 6,288 (1,392) (764) 163 4,295 2017 $’000 4,295 314 – (2) 4,607 Associates are those entities over which the Company has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but not control or joint control over those policies. The financial statements include the Company’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. If the Company’s share of losses exceeds its interest in an associate, their carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent the Company has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. During the year, the Company held an investment in the Cash Converters Holdings Limited Partnership, the master franchisor in New Zealand. The Company holds a 25% equity interest (ownership and voting interest) in all aspects of the New Zealand enterprise, including corporate stores, franchise contracts and financial services. In the prior year, the Company was involved in a joint venture with EZCORP Inc in South America and Mexico. During the year ended 30 June 2016, EZCORP Inc made a decision to close this operation and accordingly the Company’s 20% equity interest in the joint venture of $764 thousand was written off. 5.3 Controlled entities (a) Composition of the Group Controlled entities of Cash Converters International Limited: Name of entity Country of incorporation Ownership interest BAK Property Pty Ltd (1) Cash Converters (Cash Advance) Pty Ltd (1) (2) Cash Converters Finance Corporation Limited (3) Cash Converters (NZ) Pty Ltd Cash Converters Personal Finance Pty Ltd (1) (2) Cash Converters Pty Ltd (1) (2) Cash Converters (Stores) Pty Ltd (1) (2) Cash Converters UK Holdings PLC Cash Converters USA, Inc (3) Cash Converters USA Limited (3) Finance Administrators of Australia Pty Ltd (1) (2) Green Light Auto Group Pty Limited (1) (2) Mon-E Pty Ltd (1) (2) Safrock Finance Corporation (QLD) Pty Ltd (1) (2) Safrock Finance Corporation WA Pty Ltd (1) (2) CCPF Receivables Trust No 1 Australia Australia Australia Australia Australia Australia Australia UK USA Australia Australia Australia Australia Australia Australia Australia 2017 2016 100% 100% 100% 100% 64.33% 64.33% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99.285% 99.285% 99.285% 99.285% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (1) These companies are parties to the Deed of Cross Guarantee and members of the Closed Group as at 30 June 2017. (2) These companies are members of the tax consolidated group. (3) Non-controlling interest is not considered material in these subsidiaries. 100 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 101 Notes to the financial statements For the year ended 30 June 2017 — 5.3 Controlled entities (continued) (b) Deed of cross guarantee Cash Converters International Limited and certain wholly-owned companies (the Closed Group), identified in (a) above, are parties to a Deed of Cross Guarantee (the Deed). The effect of the Deed is that members of the Closed Group guarantee to each creditor payment in full of any debt in the event of winding up of any of the members under certain provisions of the Corporations Act 2001. ASIC Corporations Instrument 2016/785, issued on 28 September 2016, provides relief to parties to the Deed from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and directors’ reports, subject to certain conditions as set out therein. Pursuant to the requirements of this Corporations Instrument, a summarised consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2017 and consolidated Statement of Financial Position as at 30 June 2017, comprising the members of the Closed Group after eliminating all transactions between members are set out on the following pages. Summarised statement of profit or loss and comprehensive income Profit / (loss) before income tax Income tax benefit / (expense) Total comprehensive income Summary of movements in Closed Group’s retained earnings Retained earnings at beginning of year Transfer reserve balance Net profit / (loss) Dividends paid or provided for Retained earnings at end of year Statement of financial position Current assets Cash and cash equivalents Trade receivables Loan receivables Inventories Other assets Current tax receivable Total current assets 2017 $’000 26,513 (7,580) 18,933 84,748 (15,809) 18,933 (4,850) 83,022 74,645 5,243 87,933 20,899 5,305 – 2016 $’000 14,501 (7,418) 7,083 87,302 – 7,083 (9,637) 84,748 68,697 10,934 102,419 17,445 9,102 9,850 194,025 218,447 Non-current assets Trade and other receivables Loan receivables Plant and equipment Deferred tax assets Goodwill Other intangible assets Investments in associates Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Provisions Current tax payable Total current liabilities Non-current liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 2017 $’000 33,364 14,037 10,230 10,927 2016 $’000 40,462 2,102 13,833 10,283 107,009 107,009 25,276 4,607 30,250 235,700 429,725 17,091 46,303 6,009 3,633 73,036 60,934 790 61,724 134,760 294,965 210,203 1,740 83,022 294,965 22,813 4,295 30,250 231,047 449,494 18,100 70,023 20,222 – 108,345 63,961 298 64,259 172,604 276,890 207,540 (15,398) 84,748 276,890 102 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 103 Notes to the financial statements For the year ended 30 June 2017 — 5.4 Parent entity disclosures The financial information of the parent entity, Cash Converters International Limited has been prepared on the same basis as the consolidated financial report. (a) Statement of financial position (6) Other items In this section This section includes additional information not disclosed elsewhere in the report but required to be disclosed to comply with the Accounting Standards, the Corporations Act 2001 or the Corporations Regulations. 2017 $’000 2016 $’000 6.1 Contingent liabilities Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity (b) Comprehensive income Profit for the year Other comprehensive income Total comprehensive income 35 276,315 276,350 – 60,000 60,000 216,350 5,072 267,284 272,356 – 60,000 60,000 212,356 210,203 207,540 1,871 4,276 540 4,276 216,350 212,356 – – – – – – In the course of its normal business the Group occasionally receives claims and writs for damages and other matters arising from its operations. Where, in the opinion of the directors it is deemed appropriate, a specific provision is made, otherwise the directors deem such matters are either without merit or of such kind or involve such amounts that would not have a material adverse effect on the operating results or financial position of the economic entity if disposed of unfavourably. On 31 July 2015, the Company was served with a statement of claim lodged with the New South Wales Registry of the Federal Court of Australia commencing a class action claim on behalf of borrowers resident in Queensland who took out personal loans from the Company’s subsidiaries during the period from 30 July 2009 to 30 June 2013. On 27 April 2016, the Company was served with a statement of claim lodged with the New South Wales Registry of the Federal Court of Australia commencing a class action claim on behalf of borrowers resident in Queensland who took out cash advance loans during the period from 28 April 2010 to 30 June 2013. Both these proceedings relate to the brokerage fee charged to customers. The brokerage fee system has not been used since 30 June 2013. These proceedings are being vigorously defended. The potential financial impact of either class action noted above cannot be reliably estimated at this time. The directors are not aware of any other material contingent liabilities in existence as at 30 June 2017 requiring disclosure in the financial statements. 6.2 Commitments Operating leases Operating leases relate to office accommodation and retail premises with lease terms of between 5 to 10 years, with an option to extend for a further 5 years. All operating lease contracts contain market review clauses in the event that the Group exercises its option to renew. The Group does not have an option to purchase the leased assets at the expiry of the lease period. Non-cancellable operating lease commitments payable: (c) Guarantees entered into by parent entity in relation to the debts of its subsidiaries Cross guarantees have been provided by the parent entity and its controlled entities as listed in note 5.3. Guarantee provided under the deed of cross guarantee (1) 2,199 2,141 (1) Cash Converters International Limited has provided a cross guarantee to HSBC for a BACS facility provided to CCUK. Within one year One to five years Later than five years Capital expenditure As at 30 June 2017, capital expenditure commitments were nil (2016: $391 thousand). Other contractual commitments Within one year One to five years 2017 $’000 10,164 24,664 5,133 39,961 2017 $’000 535 502 1,037 2016 $’000 12,440 30,006 7,562 50,008 2016 $’000 – – – 104 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 105 Notes to the financial statements For the year ended 30 June 2017 — 6.3 Related party disclosures The immediate parent and ultimate controlling party of the Group is Cash Converters International Limited. Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. During the year, the Group paid $35,428 to HopgoodGanim, a law firm in which Mr Kevin Dundo is a partner, for legal services. Legal services were provided to the Group on terms and conditions no more favourable than those that it is reasonable to expect the Company would have been charged if dealing at arm’s length with an unrelated party. EZCORP Inc (EZCORP) is a related party of the Company because the Company is an associate due to the substantial holding of the Company’s listed shares by EZCORP. The balances and transactions between the Company and EZCORP in the year ended 30 June 2016 relate to the South American and Mexican joint venture (refer note 5.2). 6.5 Share-based payments Cash Converters rights plan The Cash Converters rights plan, which was approved by shareholders on 18 November 2015, allows the directors of the Company to issue performance rights which will vest into ordinary shares in the Company upon the achievement of certain vesting conditions. As at 30 June 2017, the shareholders had approved the issue of 15,920,500 performance rights under the Company’s previous rights plan, approved by shareholders on 30 November 2010 and 14,232,846 performance rights under the new rights plan, to the then managing director (now Executive Deputy Chairman) and the Company’s senior management team in various tranches with each tranche containing vesting conditions. Each right entitles the holder to subscribe for one fully paid ordinary share in the Company at the exercise price of nil. During the reporting period, a total of 7,598,694 performance rights were granted in Tranches 17, 18, 19 and 20 to senior executives of the Company. The following arrangements were in existence during the current reporting period: Other than share based payments (as disclosed in note 6.5) and shareholdings of Key Management Personnel (KMP) (as disclosed in the remuneration report), the parent, its subsidiaries, associates and KMP made no related party transactions during the reporting period. Tranche Grant date Number of rights Grant date fair value Exercise price Expiry date 6.4 Key management personnel disclosures Details of directors and other members of KMP of Cash Converters International Limited during the year are: • Mr Stuart Grimshaw (Non-Executive Chairman) • Mr Lachlan Given (Non-Executive Director) • Mr Kevin Dundo (Non-Executive Director) • • • • • • • • • • • Ms Andrea Waters (Non-Executive Director, appointed 9 February 2017) Ms Ellen Comerford (Non-Executive Director, appointed 9 February 2017) Mr Reginald Webb (Non-Executive Director, retired 14 February 2017) Mr Peter Cumins (Managing Director to 23 January 2017, Executive Deputy Chairman from 23 January 2017) Mr Mark Reid (Chief Executive Officer – Australia to 23 January 2017, Chief Executive Officer from 23 January 2017) Mr Martyn Jenkins (Chief Operating Officer – Financial Services Australia from 1 July 2016) Mr Shane Prior (Chief Operating Officer – Stores) Mr Nathan Carbone (Chief Risk Officer, appointed 1 January 2017) Ms Alice Manners (Chief Manager Digital and Marketing, appointed 24 February 2017) Mr Brad Edwards (Corporate Counsel, appointed 6 June 2017) Mr Ralph Groom (Company Secretary, Chief Financial Officer) • Mr Glen Fee (Chief Information Officer) • Mr Michael Cooke (Legal Counsel, retired 31 August 2016) The aggregate compensation of the KMP of the Group is set out below: Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments Termination benefits 2017 $ 4,584,113 208,644 165,520 2016 $ 3,770,918 122,960 – 1,315,143 (1,945,164) 600,150 6,873,570 270,332 2,219,046 12 13 14 15 16 17 18 19 20 25 Sep 2014 18 Nov 2015 18 Nov 2015 28 Jan 2016 28 Jan 2016 23 Nov 2016 23 Nov 2016 12 Dec 2016 12 Dec 2016 124,166 1,865,000 1,865,000 1,232,224 1,232,224 2,286,460 2,286,460 973,843 973,843 $0.96 $0.23 $0.41 $0.26 $0.45 $0.20 $0.31 $0.17 $0.29 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 1 Jul 2017 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2019 30 Jun 2019 30 Jun 2019 30 Jun 2019 Fair value of performance rights granted during the year The weighted average fair value of the performance rights granted during the financial year is $0.25 (2016: $0.34). Where relevant, the expected life used in the model is based on the earliest vesting date possible for each tranche, based on the vesting conditions. Grant date Option pricing model Grant date share price Exercise price Expected volatility Option life Dividend yield Risk-free interest rate Tranche 17 Tranche 18 Tranche 19 Tranche 20 23 Nov 2016 23 Nov 2016 12 Dec 2016 12 Dec 2016 Monte Carlo Binomial Monte Carlo Binomial $0.36 $0.00 40% $0.36 $0.00 40% $0.34 $0.00 40% $0.34 $0.00 40% 2.60 years 2.60 years 2.55 years 2.55 years 5.33% 1.88% 5.56% 1.88% 5.80% 1.95% 5.88% 1.95% 106 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 107 Notes to the financial statements For the year ended 30 June 2017 — 6.5 Share-based payments (continued) Movement in performance rights during the year The following table illustrates the number of, and movements in, performance rights during the year. The performance rights were issued at no charge, and the weighted average exercise price is nil. No rights were exercisable at the end of the current year. Outstanding at beginning of year Granted during year Forfeited / lapsed during year Exercised during year Outstanding at end of year Share options exercised during the year Tranche Year ended 30 June 2017 Year ended 30 June 2016 6 8 10 Share options forfeited / lapsed during the year Tranche Year ended 30 June 2017 12 15 16 19 20 Year ended 30 June 2016 2 3 9 11 12 2017 Number 6,758,319 7,598,693 2016 Number 8,997,497 6,634,152 (1,601,632) (8,289,831) – (583,499) 12,755,380 6,758,319 Grant date Number Exercise date Share price at exercised exercise date 16 Sep 2015 16 Sep 2015 16 Sep 2015 $0.505 $0.505 $0.505 25 Sep 2012 24 Sep 2013 25 Sep 2014 – 176,997 199,001 207,501 583,499 Grant date Number lapsed 25 Sep 2014 28 Jan 2016 28 Jan 2016 12 Dec 2016 12 Dec 2016 30 Nov 2014 19 Sep 2011 24 Sep 2013 25 Sep 2014 25 Sep 2014 22,000 219,852 219,852 569,964 569,964 1,601,632 6,000,000 1,800,000 198,998 207,501 83,332 8,289,831 Share options outstanding at year end The total number of options outstanding at 30 June 2017 was 12,755,380 (2016: 6,758,318). Tranche Grant date Number of rights Grant date fair value Exercise price Expiry date 12 13 14 15 16 17 18 19 20 25 Sep 2014 18 Nov 2015 18 Nov 2015 28 Jan 2016 28 Jan 2016 23 Nov 2016 23 Nov 2016 12 Dec 2016 12 Dec 2016 102,166 1,865,000 1,865,000 1,232,224 1,232,224 2,286,460 2,286,460 942,923 942,923 12,755,380 $0.96 $0.23 $0.41 $0.26 $0.45 $0.20 $0.31 $0.17 $0.29 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 1 Jul 2017 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2018 30 Jun 2019 30 Jun 2019 30 Jun 2019 30 Jun 2019 The weighted average remaining contractual life for the performance rights outstanding at 30 June 2017 was 1.5 years (2016: 2.0 years). Accounting policies The Group provides benefits to executives of the Group in the form of share-based payment transactions, whereby KMP render services in exchange for options (equity-based transactions). The current plan to provide these benefits is the Executive Performance Rights Plan. The cost of the equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using an appropriate valuation methodology. The cost of equity-based transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and / or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (vesting date). At each subsequent reporting date until vesting, the cumulative charge to the profit or loss is the product of: • The grant date fair value of the award. • The current best estimate of the number of the awards that will vest, taking into account such factors as the likelihood of non-market performance conditions being met. • The expired portion of the vesting period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share. 108 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 109 Notes to the financial statements For the year ended 30 June 2017 — Directors’ declaration — 6.6 Auditor’s remuneration The directors declare that: Auditor of the parent entity Audit / review of the financial report Taxation services Independent expert in relation to Enforceable Undertaking Other non-audit services Related practice of the parent entity auditor Audit Taxation services 2017 $ 2016 $ 402,000 23,680 276,100 85,950 49,553 14,110 851,393 545,900 12,500 – – 111,880 85,740 756,020 The auditor of Cash Converters International Limited is Deloitte Touche Tohmatsu. 6.7 Events subsequent to the end of the year There has not been any matter or circumstance other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected or may significantly affect the operations of the Group. a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; b) in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 1 to the financial statements; c) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the Group; and d) the directors have been given the declarations required by s295A of the Corporations Act 2001. At the date of this declaration the Company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the Company and the companies to which the ASIC Class Order applies, as detailed in note 5.3 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s295(5) of the Corporations Act 2001. On behalf of the directors Stuart Grimshaw Director Perth, Western Australia 7 September 2017 110 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 111 Deloitte Touche Tohmatsu ABN 74 490 121 060 Deloitte Touche Tohmatsu Tower 2, Brookfield Place ABN 74 490 121 060 123 St Georges Terrace Perth WA 6000 Tower 2, Brookfield Place GPO Box A46 123 St Georges Terrace Perth WA 6837 Australia Perth WA 6000 GPO Box A46 Tel: +61 8 9365 7000 Perth WA 6837 Australia Fax: +61 8 9365 7001 www.deloitte.com.au Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au The Board of Directors Cash Converters International Limited Level 18 The Board of Directors 37 St Georges Terrace Cash Converters International Limited Perth WA 6000 Level 18 37 St Georges Terrace Perth WA 6000 7 September 2017 7 September 2017 Dear Directors Dear Directors Cash Converters International Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following Cash Converters International Limited declaration of independence to the directors of Cash Converters International Limited. In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following As lead audit partner for the audit of the financial statements of Cash Converters International declaration of independence to the directors of Cash Converters International Limited. Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: As lead audit partner for the audit of the financial statements of Cash Converters International Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and (i) the auditor independence requirements of the Corporations Act 2001 in relation to the belief, there have been no contraventions of: audit; and (ii) any applicable code of professional conduct in relation to the audit. (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and Yours sincerely (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU DELOITTE TOUCHE TOHMATSU David Newman Partner Chartered Accountants David Newman Partner Chartered Accountants Deloitte Touche Tohmatsu ABN 74 490 121 060 Deloitte Touche Tohmatsu Tower 2, Brookfield Place ABN 74 490 121 060 123 St Georges Terrace Perth WA 6000 Tower 2, Brookfield Place GPO Box A46 123 St Georges Terrace Perth WA 6837 Australia Perth WA 6000 GPO Box A46 Tel: +61 8 9365 7000 Perth WA 6837 Australia Fax: +61 8 9365 7001 www.deloitte.com.au Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Report to the members of Cash Converters International Limited Independent Auditor’s Report to the members of Cash Converters International Limited Report on the Audit of the Financial Report Opinion Report on the Audit of the Financial Report We have audited the financial report of Cash Converters International Limited (the “Company”) and Opinion its subsidiaries (the “Group”), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the We have audited the financial report of Cash Converters International Limited (the “Company”) and consolidated statement of changes in equity and the consolidated statement of cash flows for the its subsidiaries (the “Group”), which comprises the consolidated statement of financial position as year then ended, and notes to the financial statements, including a summary of significant at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the accounting policies, and the directors’ declaration. consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant In our opinion, the accompanying financial report of the Group is in accordance with the Corporations accounting policies, and the directors’ declaration. Act 2001, including: In our opinion, the accompanying financial report of the Group is in accordance with the Corporations giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its (i) Act 2001, including: financial performance for the year then ended; and (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its complying with Australian Accounting Standards and the Corporations Regulations 2001. financial performance for the year then ended; and Basis for Opinion (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under Basis for Opinion those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under independence requirements of the Corporations Act 2001 and the ethical requirements of the those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Report section of our report. We are independent of the Group in accordance with the auditor Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have independence requirements of the Corporations Act 2001 and the ethical requirements of the also fulfilled our other ethical responsibilities in accordance with the Code. Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have We confirm that the independence declaration required by the Corporations Act 2001, which has also fulfilled our other ethical responsibilities in accordance with the Code. been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis at the time of this auditor’s report. for our opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis Key Audit Matters for our opinion. Key audit matters are those matters that, in our professional judgement, were of most significance Key Audit Matters in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we Key audit matters are those matters that, in our professional judgement, were of most significance do not provide a separate opinion on these matters. in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. Liability limited by a scheme approved under Professional Standards Legislation. 112 | Cash Converters International Limited – Annual Report 2017 Member of Deloitte Touche Tohmatsu Limited. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited Cash Converters International Limited – Annual Report 2017 | 113 Key audit matter How the scope of our audit responded to the Key Audit Matter Carrying value of non-current assets As disclosed in notes 3.5 and 3.6, the carrying value of goodwill and other intangible assets as at 30 June 2017 relating to the personal finance and store operations was $99.0 million and $21.1 million respectively. The assessment of the recoverable value of these assets requires significant judgement in respect of assumptions such as discount rates, forecast loan volumes and forecast bad debt levels. Our procedures included, but were not limited to: obtaining an understanding of the key controls management has in place in relation to the estimate of the recoverable amount of the personal finance and store operations; comparing the forecasts used in calculating the recoverable amount to the Board approved business plan; evaluating the forecasts used in calculating the recoverable amount by reference to recent performance of the business and assessing historical forecasting accuracy; in conjunction with our valuation experts we assessed and challenged the assumptions and methodologies used, in particular: the discount rate against that of comparable companies; forecast loan volumes for personal loans against recent actual levels and related trending; forecast bad debt levels for personal loans; in relation to the assumptions applied above, where possible we corroborated market related assumptions by reference to external data; management’s consideration of the impact of potential legislative changes on future personal loan volumes; sample testing management’s models for mathematical accuracy; applying sensitivities to the forecast cash flows including growth in the number of loans and evolution of bad debt rates to reflect uncertainty with respect to the impact of: recent changes in lending criteria; and the early stage of growth of the Medium Amount Credit Contracts loan book. evaluating the adequacy of the disclosures in the financial report. Key audit matter Allowance for impairment losses – personal loan receivables As disclosed in note 3.2, the carrying value of personal loan receivables as at 30 June 2017 was $82.7 million, net of allowances for impairment losses of $25.3 million. The assessment of the recoverable value of personal loans requires significant judgement in respect of assumptions such as default rates in making an estimate of the recoverability of loans, on either a specific or collective basis. Contingent liabilities As disclosed in note 6.1, the Company is subject to two class actions in relation to historic lending practices in Queensland associated with personal loans and cash advance loans. We focused on this area as a key audit matter due to the potential significance of the class actions to the Group. How the scope of our audit responded to the Key Audit Matter Our procedures included, but were not limited to: evaluating the key controls management have in place in relation to the estimate of the recoverable value of personal loans; challenging the assumptions and methodology used to determine both the specific and collective allowances; evaluating forecast default rates against historically observed levels; performing a look back test of the loans that were written off in the current financial year by aging category, to build an expectation of the allowance as at 30 June 2017 by comparable aging category; developing an independent expectation of the allowance for doubtful debts based on independent statistical modelling using historic repayment data and comparing this with managements estimates; and evaluating the adequacy of the disclosures included in the financial report. We assessed the appropriateness of management’s conclusion that the class actions gave rise to contingent liabilities as at 30 June 2017. Our procedures included, but were not limited to: holding discussions with Group Internal Legal Counsel, Management and the Directors; reviewing minutes of meetings of the board of directors; obtaining copies of pleadings; holding discussions with external legal counsel to gain an understanding of the current status of the class actions; and assessing the adequacy of the disclosures. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. 114 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 115 In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Directors’ Responsibilities for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting intentional omissions, involve collusion, fraud may from error, as misrepresentations, or the override of internal control. forgery, Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 25 to 58 of the directors’ report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Cash Converters International Limited, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU David Newman Partner Chartered Accountants Perth, 7 September 2017 116 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 117 Additional securityholder information As at 18 September 2017 — 1. Number of holders of equity securities (a) Distribution of holders of equity securities 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over (b) Voting rights Holders Number Fully paid ordinary shares Number 806 1,799 1,098 1,795 221 5,719 405,259 5,104,369 8,630,126 56,385,926 422,521,744 493,047,424 Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. (c) Less than marketable parcel of shares The number of shareholders holding less than a marketable parcel is 1,299, given a share price of $0.385 per share. (d) Substantial shareholders Ordinary shareholder EZCORP Inc HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited 2. Twenty largest equity security holders Ordinary shareholder 1. EZCORP Inc 2. HSBC Custody Nominees (Australia) Limited 3. Citicorp Nominees Pty Limited 4. JP Morgan Nominees Australia Limited 5. BNP Paribas Nominees Pty Ltd6. BNP Paribas Noms Pty Ltd 7. National Nominees Limited 8. Riolane Holdings Pty Ltd 9. RBC Investor Services Australia Nominees Pty Limited 10. RBC Investor Services Australia Nominees Pty Ltd 11. Mr Noel D’Souza + Mrs Christine D’Souza 12. MICPIP Nominees Pty Ltd 13. National Nominees Limited 14. Narlack Pty Ltd 15. Mr Craig Graeme Chapman 16. Dorran Pty Ltd 17. Investment Custodial Services Limited <990048401 A/C> 18. Ms Choi Chu Lee 19. Mr Frederick Benjamin Warmbrand 20. Sporran Lean Pty Ltd Number of shares % of issued shares 156,552,484 88,826,167 30,268,324 31.75 18.02 6.14 Number of shares % of issued shares 156,552,484 88,826,167 30,268,324 21,881,596 12,523,642 12,173,630 7,749,676 6,895,226 5,051,641 4,987,873 3,949,898 2,775,206 2,500,014 2,361,809 2,000,000 1,500,000 1,400,000 1,250,000 1,240,000 1,199,999 31.75 18.03 6.14 4.44 2.54 2.47 1.57 1.40 1.02 1.01 0.80 0.56 0.51 0.48 0.41 0.30 0.28 0.25 0.25 0.24 367,087,185 74.45 118 | Cash Converters International Limited – Annual Report 2017 Cash Converters International Limited – Annual Report 2017 | 119 cashconverters.com