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Annual Report 2016

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McMillan Shakespeare Limited Annual Report 2016 Collectively, the McMillan Shakespeare Group’s (MMS) business divisions provide expertise in novated leasing, salary packaging, associated Fringe Benefits Tax administration and management, operating leases and asset management for ‘tool of trade’ vehicles and other business assets, retail finance, insurance and warranty. No other provider offers this breadth of service or industry experience. Financial calendar 2016 A nnual R esults A nnounce m ent of 24 A u g ust 2016 29 S e pte m b er 2016 2016 Final Dividend Ex-D ate 30 S e pte m b er 2016 2016 Final Dividend R ecord D ate 2016 Final Dividend 14 O cto b er 2016 Pay m ent D ate 25 O cto b er 2016 G eneral M eeting 2016 A nnual Annual General Meeting The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held on 25 October 2016 at 10am at the State Library of Victoria, Ground Floor, 328 Swanston Street, Melbourne, Victoria in the Theatrette. www.mmsg.com.au MMS Annual Report 2016 1 Contents Chairman’s Report CEO’s Report The journey to who we are today Financial History Non-financial Highlights Directors’ Report – Directors – Directors meetings – Principal activities – Results – Dividends – Review of operations - Group – Key highlights and activities – Outlook – Strategy and prospects – State of affairs – Events subsequent to balance date – Likely developments – Results of major segments of the Group > Group Remuneration Services > Asset Management – Aust/NZ > Asset Management – UK > Retail Financial Services Indemnification and insurance – Directors’ experience and responsibilities – Company Secretary – Remuneration Report – Environmental regulations – – Non-audit services – Auditor’s independence declaration – Directors’ declaration – Corporate governance practices – Five year summary Financial Report Independent Audit Report Auditors’ Independence Declaration Shareholder Information Corporate Directory 2 4 6 8 10 12 12 12 12 13 13 14 15 15 15 15 15 15 16 18 19 20 22 23 24 42 42 42 43 43 43 44 45 96 98 99 101 Financial calendar 24 A u g ust 2016 A nnounce m ent of 2016 A nnual R esults 29 S e pte m b er 2016 2016 Final Dividend Ex-D ate 30 S e pte m b er 2016 2016 Final Dividend R ecord D ate 14 O cto b er 2016 2016 Final Dividend Pay m ent D ate 25 O cto b er 2016 2016 A nnual G eneral M eeting Annual General Meeting The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held on 25 October 2016 at 10am at the State Library of Victoria, Ground Floor, 328 Swanston Street, Melbourne, Victoria in the Theatrette. www.mmsg.com.au MMS Annual Report 2016 2 Chairman’s Report I am pleased to report that MMS delivered another record profit for the 2016 financial year (FY16), assisted by the execution of our diversification strategy. Board composition The last year marked the end of an era for your Board. As previously announced, Ronald Pitcher AM retired as Chairman and Director on 27 October 2015. Ron has a distinguished record of service to your Company in the role of Chairman since it listed on the ASX in March 2004, chairing the Board through both favourable and challenging market conditions. Since the company listed, Ron has presided over MMS’ continued profit growth, the evolution of our businesses, and expansion into new markets both at home and offshore. Returns to shareholders have remained strong and MMS’ market capitalisation has climbed from $33 million to more than $1.1 billion today. We thank Ron for 11 years of outstanding service to MMS and wish him the best for the future. Following Ron’s retirement, I was proud to be appointed as Chair of your Board, and thank Ron for his wise counsel during what was a seamless handover of duties. In January we were delighted to appoint Sue Dahn as an independent Director and Chair of your Board’s Audit, Risk and Compliance Committee. Sue brings to the Board her extensive experience in senior roles within the Victorian Government, and global and local accounting firms. As a partner leading Investment Advisory Services at Pitcher Partners, and Non-Executive Director of MTAA Super, she is well placed to provide counsel to MMS as it strives to serve diverse stakeholders including long-standing clients in Not-for-Profit (NFP) organisations and government agencies. After regaining our traditional momentum last year, in FY16 our entry into the consumer vehicle financing market helped increase our net profit after tax to $82.5 million, up 22%, while simultaneously reducing the regulatory risk associated with FBT legislation. Our performance also reflected higher net profit contributions from our three other operating divisions, stretching our excellent track record of profit growth to 12 years since MMS listed on the Australian Securities Exchange (ASX). The final dividend of 34 cents per share brings the total dividend for the year to 63 cents per share fully franked, an increase of 21% over the prior year. The dividend payout ratio is 60% which is consistent with the prior year. Diversification strategy During the past two years we have had a focus on diversifying our business into new markets and geographies. FY16 has been another year of achievement. In Australia, we completed the acquisition of three United Financial Services companies (collectively known as ‘UFS’) in July 2015 and progressed the integration of this business along with Presidian under the Retail Financial Services (RFS) segment. We also continued to put our customers at the forefront of everything we do by increasing our investment in customer service, and improving their service experience by leveraging the connectivity of digital channels. Our Australasian fleet financing and management unit returned to profit growth in FY16 notwithstanding the highly competitive market. In the UK, the newly-acquired Anglo Scottish Asset Finance business made a better than expected maiden profit contribution and our UK businesses increased assets under management to more than 16,100 units. Chairman’s Report MMS Annual Report 2016 3 $82.5m 63.0c FY16 Net Profit after Tax FY16 Dividend per Share Outlook Pursuing our diversification strategy has provided MMS the opportunity to deepen relationships with clients through an enhanced range of products and services. In the year ahead our focus will be on extracting more benefits from this strategy as the integration of our acquired businesses progress. Continued earnings growth in the medium term will be underpinned by increased organic growth across business segments, supported by increased cross- selling opportunities, the launch of new products, and investment in infrastructure and systems. Against a backdrop of political uncertainty in the UK, we anticipate clients and consumers will prefer to purchase used vehicles over new vehicles. We expect our acquisition of Anglo Scottish to be bedded down, and generate a greater contribution to earnings by year’s end. In Australasia, our business will be strengthened by new business wins for our GRS segment, and the commencement of Principal and Agency (P&A) agreements for our Asset Management segment. Your Company’s regulatory risk exposure has also been reduced from the pledge by both major political parties in Australia to retain the current FBT arrangement for novated leases. This, together with our diversification strategy, means MMS is well placed to deliver more value to our shareholders, customers and the community. We thank you for your loyalty as a shareholder and look forward to your continued support in 2017. Finally, on behalf of shareholders, I would like to thank all of our people located around the world for their tireless efforts in achieving another record result for MMS. Our team is highly talented, deeply committed to our customers, and very well led by our Managing Director and Chief Executive Officer Mike Salisbury. I thank Mike, and the rest of my fellow Board members, for the invaluable skills and expertise they bring to your Company. Yours sincerely, Tim Poole Chairman MMS Annual Report 2016 4 Chief Executive Officer’s Report MMS has delivered another record performance in 2016 through a consistent focus on delivering our diversification strategy by strengthening our existing businesses, expanding into new markets and driving growth across all business segments. Revenue grew by 30% as newly acquired UFS and Anglo Scottish Asset Finance made solid maiden contributions to the Group, and our customer base expanded to include both corporate partnerships and direct relationships with consumers. MMS took a market leading position in the independent used vehicle financing market in Australia, and enjoyed market share gains in the UK as we continued to invest in our strategy and future growth. Our traditional salary packaging and novated leasing business proved again to be a reliable engine of growth as new business wins, participation growth and productivity improvements supported overall profitability. Pleasingly, it was also a year when this business’s exposure to regulatory risk was reduced as both major political parties recognised the value of our industry to the wider community and confirmed no change would be made to the FBT treatment of novated leases. Segment performance In Australia our salary packaging and novated leasing business enjoyed another record profit, up 8%, due to the hard work of our talented employees across the country. Customer numbers rose again on the back of solid organic growth, we delivered good cost containment, and a raft of additional contract wins. Improving our customers’ access to workplace benefits has always been what makes our business tick, and we estimate that Maxxia and RemServ now deliver salary packaging services to 45% of Australia’s public health employees. Our clients’ confidence in our service was also demonstrated by several renewals of large contracts, including our exclusive contract with the Tasmanian Government’s Department of Health and Human Services, Peninsula Health, and our sole provider contract with the Government of South Australia. The latter ensures we continue to provide education and support to 104,000 government employees in South Australia, and supports our deeper investment in the state, including the creation of 25 new jobs and the opening of Maxxia’s third Customer Care Centre by the Premier of South Australia, Jay Weatherill. Another highlight was RemServ’s reappointment as a salary packaging provider to the Queensland Government for another five years until April 2021. This will extend our long-standing partnership to 20 years and underlines the success of RemServ’s focus on ‘Queenslanders serving Queenslanders’. New client wins have included coverage of two large health organisations in NSW. Chief Executive Officer’s Report In recent years we have articulated our diversification strategy to create value for our shareholders and customers by becoming a leader in adjacent and complementary sectors. In 2015 this manifested in the acquisition of Presidian and UFS and the creation of our Retail Financial Services (RFS) segment. The post-merger integration phase is unfolding and is proceeding to expectations; and I am delighted to report that profitability in RFS was solid in FY16. Cross sales of products into our GRS segment have also commenced with the soft launch of our Maxxia Plus service. Our Asset Management segment in Australasia delivered a 19% increase in profitability despite continued fleet inertia across the market. New business wins, including the appointment of Interleasing to the NSW Government’s panel of vehicle leasing providers, was a highlight during the year and will underpin growth in FY17. Importantly, our pursuit of greater flexibility and a more capital light funding model reached a milestone with the development of our first P&A funding arrangement that will lift your Company’s return on equity in the years ahead. In the UK, the integration of our newly-acquired Anglo Scottish Asset Finance business progressed ahead of plan and a maiden profit contribution has exceeded expectations and helped lift overall profitability for this segment. Solid organic growth helped consolidate our foothold in the UK, and was reinforced by originations from repeat business and the addition of new tied agents to the group. By year end we had P&A funding arrangements with six UK banks and finance companies in place. MMS Annual Report 2016 5 Prepared for new challenges As we embark on a new financial year, I am proud that the actions of all of our people around the world have made your Company more vibrant, nimble, and resilient. This achievement has, in part, been borne out of our relentless commitment to improve our customers’ experience at every touch point with an MMS business, thereby giving them greater value and enabling our businesses to compete in any market conditions. It is why during FY16 we offered a wider choice of digital channels to customers, including the launch of our Maxxia and RemServ Claims Apps which, by 30 June, had driven more than 60% of all claims being lodged via the online channel. Finally, it is also why we continue our investment in on-the-ground education events for our clients’ employees – a personalised approach to service for which we are renowned. In FY16 we received feedback from the market that these events increase program participation and help to set us apart from our competitors. Conducted at worksites across Australia, they include group information sessions and one- on-one consultations in which our dedicated Customer Education Managers ensure our customers fully understand the financial benefits of salary packaging and novated leases. We put our people into worksites spanning metropolitan, regional and remote locations every day; and over the last year conducted around 20,000 educational activities, including 5,552 consultations with individuals. This level of dedication from our people reflects our core values that our inaugural Chairman, Ron Pitcher, helped embed, and I thank Ron for his 11 years of leadership and service to MMS. It also instils confidence in our clients and customers, and will sustain our competitive position and earnings growth in the years to come. I thank our customers and our people for their support. I also thank you, our shareholders, for your trust and investment in MMS as it moves into the future from a position of strength. Yours sincerely Mike Salisbury Managing Director & Chief Executive Officer MMS Annual Report 2016 6 The journey to who we are today 1980s – 2000 MMS’ origins date back to the 1980s with the Australian federal government’s introduction of the Fringe Benefits Tax (FBT) in 1986. In 1988 Melbourne economics teacher, Anthony Podesta, joined a Geelong-based taxation and accounting firm established by accountants Neil McMillan and Edward Shakespeare. Following an ownership change and his elevation to Managing Director and Chief Executive Officer, Anthony revived the business as McMillan Shakespeare and Associates Ltd (MSA) and began offering remuneration advice and administration services. During the 1990s MSA grew as a range of organisations signed on as clients, including many schools across Australia who enjoyed the FBT concessions available at the time and remain clients today. MSA began growing a national footprint, and opened an office in Perth in 1998. This initial success cemented the position of MSA as the pioneer of Australia’s salary packaging industry as customers learned how best to ‘package’ their remuneration according to FBT concessions amid a decade of changes to taxation measures, including superannuation. By 1998 a lack of investment capital led Anthony to sell 80% of MSA to Zurich Australia for $20 million. A reinvigorated MSA launched Australia’s first novated lease product to the market that year – a ground-breaking financial product that gave more people access to new cars. 2000 –2016 MSA’s client numbers grew, with the profile of the client base broadening in 2001 after the federal government’s Inquiry into the Definition of Charities and Related Institutions led to FBT concessions being introduced for charities, Not-For-Profits (NFP), hospitals and Public Benevolent Institutions. Success with large NFP and public sector clients stimulated MSA’s growth in scale, and by early 2004 Anthony, Ross Chessari and John Bennetts seized the opportunity to buy the company back from Zurich for $32.5 million. On 15 March 2004 it was listed on the Australian Securities Exchange as McMillan Shakespeare Limited (ASX: MMS). Under Anthony’s leadership, MMS expanded into Queensland by acquiring Brisbane-based salary packager PKF Remuneration Services in October 2004. Greater expertise in vehicle leasing was gained by the acquisition of Easifleet Management in January 2006. Our national footprint continued expanding with the opening of our Adelaide office. In May 2008, Anthony stepped down as CEO following the appointment of former AAMI CEO Michael Kay to the role. Anthony was named Ernst & Young Australian Entrepreneur of the Year in 2012 and remained a MMS Board director until his retirement in February 2014. 1980 1985 1990 1995 2000 2005 2010 1988 Anthony Podesta joins Geelong-based accounting firm McMillan Shakespeare 1989 Firm renamed as McMillan Shakespeare and Associates Ltd and begins offering remuneration advice and administration services Origins Mid 80s Traditional taxation and accounting practice Net Profit After Tax (NPAT) Number of Staff 1986 Fringe Benefits Tax introduced 1992 Superannuation Guarantee introduced 1997 Purchase Access Fleet 1998 MSA sold to Zurich Australia 1998 MSA launches Australia’s first novated vehicle lease 1996 Perth office opens 2000 Goods and Services Tax introduced 2001 FBT concessions introduced for NFPs, charities, hospitals and Public Benevolent Institutions 2001 Federal Government Inquiry into the Definition of Charities and Related Institutions March 2004 Listing of McMillan Shakespeare Limited on ASX 2009 Expansion to New Zealand Michael Kay appointed May 2008 CEO October 2004 Acquisition of Brisbane-based PKF Remuneration Services 2004 Staff and management buyout of MSA from Zurich Australia January 2006 Acquisition of Easifleet Management 2006 Adelaide office opens 2010 February 2014 Acquisition of Anthony Podesta Interleasing (Australia) Ltd retires from the Board 2012 Maxxia UK 2013 Acquisition of CLM Fleet Management 2015 September 2014 Mike Salisbury appointed CEO February 2015 Acquisition of Presidian July 2015 Acquisition of UFS November 2015 Acquisition of Anglo Scottish MMS market capitalisation passes $1 billion and total employees (not FTE) passes 1,000 FY05 $5.2M FY08 FY09 FY10 $17.4M $20.5M $27.9M FY13 $62.2M FY16 $82.5M Net Profit After Tax (NPAT) 197 390 435 532 993 Number of Staff 2011 Queensland floods 2016 Major Australian political parties pledge no changes to the method for valuing FBT on vehicles MMS Annual Report 2016 7 At the start of the 2015 calendar year, MMS embarked on a strategic journey to create value for shareholders by diversifying our core business and entering the consumer vehicle financing market. MMS sought to apply our expertise as a novated lease leader and asset manager to this market to become a single source provider of all types of consumer vehicle finance. The acquisitions of privately-owned Presidian Holdings Pty Ltd and United Financial Services Pty Ltd followed, and 18 months later the integration of these businesses has significant momentum, with investors alert to the benefits of our long-term diversification strategy. The journey to who we are today In September 2009 our trading company, MSA, re-branded as Maxxia Pty Ltd and more acquisitions followed. Interleasing (Australia) Ltd was purchased from GMAC Australia LLC in March 2010 which gave MMS two more brands – Holden Leasing and Interleasing. This consolidated the company’s position as Australia’s leading single source provider of salary packaging, novated leases, insurance, and fleet financing and management services. In 2009 MMS established a fleet management business in New Zealand. In 2012 MMS established our UK joint venture. In 2013 we acquired CLM Fleet Management plc and commenced financing assets via Maxxia Finance (UK). This was followed by the acquisition of Anglo Scottish Asset Finance Ltd in November 2015. Meanwhile, in our home market over the years, developments in Australia’s taxation law have presented challenges. The uncertainty about the tax treatment of novated leasing during the election period reduced sales and dented MMS’s 2014 financial result. The company rebounded in 2015 under the leadership of new CEO Mike Salisbury, and by 4 May 2016 both major political parties in Australia had recognised the value of our industry to the wider community and pledged to retain the current FBT arrangement for novated leases. 1980 1985 1990 1995 2000 2005 2010 March 2004 Listing of McMillan Shakespeare Limited on ASX 2009 Expansion to New Zealand May 2008 Michael Kay appointed CEO 2012 Maxxia UK 2013 Acquisition of CLM Fleet Management 2015 September 2014 Mike Salisbury appointed CEO February 2015 Acquisition of Presidian July 2015 Acquisition of UFS October 2004 Acquisition of Brisbane-based PKF Remuneration Services 2004 Staff and management buyout of MSA from Zurich Australia FY05 $5.2M January 2006 Acquisition of Easifleet Management 2010 Acquisition of Interleasing (Australia) Ltd February 2014 Anthony Podesta retires from the Board November 2015 Acquisition of Anglo Scottish MMS market capitalisation passes $1 billion and total employees (not FTE) passes 1,000 2006 Adelaide office opens FY08 $17.4M FY09 $20.5M FY10 $27.9M FY13 $62.2M FY16 $82.5M Net Profit After Tax (NPAT) 197 390 435 532 993 Number of Staff 2011 Queensland floods 2016 Major Australian political parties pledge no changes to the method for valuing FBT on vehicles 1988 Anthony Podesta joins Geelong-based accounting firm McMillan Shakespeare 1989 Firm renamed as McMillan Shakespeare and Associates Ltd and begins offering remuneration advice and administration services 1997 Purchase Access Fleet 1998 MSA sold to Zurich Australia 1998 MSA launches Australia’s first novated vehicle lease 1996 Perth office opens Origins Mid 80s Traditional taxation and accounting practice Net Profit After Tax (NPAT) Number of Staff 1986 Fringe Benefits Tax introduced 1992 Superannuation Guarantee introduced 2000 Goods and Services Tax introduced FBT concessions introduced for NFPs, charities, hospitals and Public Benevolent Institutions 2001 2001 Federal Government Inquiry into the Definition of Charities and Related Institutions Financial History MMS Annual Report 2016 8 Segment revenue performance s n o i l l i m $ s n o i l l i m $ 110.0 204.8 23.1 188.1 188.1 172.0 163.3 158.9 38.9 35.6 48.2 54.1 65.8 76.0 92.1 111.6 137.3 155.9 157.2 176.1 188.3 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 GRS Asset Management RFS Normalised NPAT last 11 years CAGR of 29% 17.1 5.2 11.3 13.2 17.4 20.5 27.9 43.5 54.3 62.2 55.0 67.5 82.5 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 NPAT continuing operations Profit recognised on ILA business combination (acquisition gain) NPAT performance 1 100 80 60 40 20 0 UNPATA performance 2 11 years CAGR of 29.2% s n o i l l i m $ 5.2 11.3 13.2 17.4 20.5 27.9 43.5 54.3 62.2 55.9 69.6 87.2 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 1 NPAT and EPS CAGR are normalised to exclude the profit recognised on acquisition of Interleasing (Australia) Limited in FY10 ($17m profit after tax). 2 Underlying NPATA (UNPATA) excludes one-off payments in relation to transaction costs incurred in acquisitions and the amortisation of acquisition intangibles Financial History s t n e c 120 100 80 s t n e c 60 40 20 0 s t n e c Underlying earnings per share EPS 3 Dividends per share MMS Share price: March 2004 - June 2016 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 MMS Annual Report 2016 9 Underlying EPS 11-year CAGR - 26% 114.4 81.5 81.4 85.2 70.8 53.4 45.9 32.4 28.3 19.7 21.5 14.3 7.9 17.1 19.8 25.8 30.4 41.3 64.0 76.6 83.3 75.3 89.7 105.1 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Underlying EPS Cash EPS Linear (Underlying EPS) 3.9 9.5 12.5 16.5 19.0 24.0 38.0 47.0 42.0 52.0 52.0 63.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Dividends per share Dividend 11 year CAGR 29% Government proposal to change FBT treatment of motor vehicles 4 0 - r a M 4 0 - n u J 4 0 - p e S 4 0 - c e D 5 0 - r a M 5 0 - n u J 5 0 - p e S 5 0 - c e D 6 0 - r a M 6 0 - n u J 6 0 - p e S 6 0 - c e D 7 0 - r a M 7 0 - n u J 7 0 - p e S 7 0 - c e D 8 0 - r a M 8 0 - n u J 8 0 - p e S 8 0 - c e D 9 0 - r a M 9 0 - n u J 9 0 - p e S 9 0 - c e D 0 1 - r a M 0 1 - n u J 0 1 - p e S 0 1 - c e D 1 1 - r a M 1 1 - n u J 1 1 - p e S 1 1 - c e D 2 1 - r a M 2 1 - n u J 2 1 - p e S 2 1 - c e D 3 1 - r a M 3 1 - n u J 3 1 - p e S 3 1 - c e D 4 1 - r a M 4 1 - n u J 4 1 - p e S 4 1 - c e D 5 1 - r a M 5 1 - n u J 5 1 - p e S 5 1 - c e D 6 1 - r a M 6 1 - n u J 3 Underlying EPS excludes the profit recognised on acquisition of Interleasing (Australia) Limited, and the after tax acquisition costs and acquired intangibles amortisation. Cash EPS includes CAPEX but excludes the investment in Fleet growth. MMS Annual Report 2016 10 Our customers Non-financial Highlights 11.5 million pa Payments processed 888,556 pa Number of phone calls accepted 49 Industry leading Net Promoter Score (NPS) (Average monthly score during FY16) 19,898 Number of onsite educational activities delivered to clients located around Australia 34% Maxxia and RemServ website visits originating from smartphones and mobile devices 2.2 million Maxxia and RemServ website visits 61% Claims lodged online via private self-serve websites (as a % of total claims lodged) 100% Number of customer complaints resolved by MMS and our Customer Advocate without referral to an external arbitrator 53,000 Claims App downloads Non-financial Highlights MMS Annual Report 2016 11 Our people Our environment 1,157 9% (YOY reduction) Employees across MMS Group % reduction in greenhouse emissions from car fleet 81%* Carbon neutrality (printed material) Employee Engagement High performance work environment ranking * 2015 survey result (survey biennial) Carbon neutrality (net zero carbon footprint) achieved from the offset of 100% of CO2 emissions caused by the production of printed material 272 hrs 15% (YOY reduction) Company sponsored staff volunteering hours % reduction in greenhouse emissions from electricity MMS Annual Report 2016 12 Directors’ Report The Directors of McMillan Shakespeare Limited (Company or MMS) present this report on the consolidated entity, consisting of the Company and the entities that it controlled at the end of, and during, the financial year ended 30 June 2016 (Group or MMSG). Directors The Directors during the whole of the financial year and up to the date of this report (Directors) are as follows: Mr Tim Poole (Independent Non-Executive Director) Mr John Bennetts (Non-Executive Director) Mr Ross Chessari (Non-Executive Director) Mr Ian Elliot (Independent Non-Executive Director) Mr Mike Salisbury (Managing Director and CEO) Mr Ronald Pitcher AM retired as Independent Chairman on 27 October 2015. Mr Tim Poole was appointed to the position of Independent Chairman effective 28 October 2015. Ms Sue Dahn was appointed to the position of Independent Non-Executive Director and Chair of the Audit, Risk and Compliance Committee effective 1 January 2016. Mr Ian Elliot was appointed to the position of Chairman of the Remuneration and Nomination Committee on 26 April 2016. Details of the qualifications, experience and special responsibilities of the Directors at the date of this Annual Report are set out on pages 22 and 23. The Directors that are noted above as independent Directors, as determined in accordance with the Company’s definition of independence, have been independent at all times throughout the period that they held office during the financial year ended 30 June 2016. Directors’ meetings The number of meetings held by the board of Directors (Board) (including meetings of committees of the Board) and the number of meetings attended by each of the Directors during the financial year ended 30 June 2016 were as indicated in the table below. Ms Sue Dahn attended one meeting by invitation prior to her formal appointment. Principal activities The principal activities of the Company and its controlled entities during the course of the financial year ended 30 June 2016 was the provision of salary packaging, vehicle leasing administration, fleet management and retail financial services. In the opinion of the Directors, there were no significant changes in the nature of the activities of the Company and its controlled entities during the course of the financial year ended 30 June 2016 that are not otherwise disclosed in this Annual Report. Director Mr T. Poole (Chariman) Mr M. Salisbury (Managing Director and CEO) Mr J. Bennetts Mr R. Chessari Mr I. Elliot Ms S. Dahn Mr R. Pitcher, AM Board Meetings Audit, Risk & Compliance Committee Meetings 1 Remuneration & Nomination Committee Meetings 1 Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended 16 16 16 16 16 6 4 16 16 14 15 15 6 4 4 - 4 - - 3 1 4 - 4 - - 3 1 5 - 3 5 5 2 3 5 - 3 4 5 2 3 1 The Audit, Risk & Compliance Committee and Remuneration & Nomination Committee were reconstituted in May 2016. There have been two meetings of the reconstituted committees with the expanded responsibilities. See the Corporate Governance Statement for further details www.mmsg.com.au/about/governance Directors’ Report MMS Annual Report 2016 13 Results Details of the results for the financial year ended 30 June 2016 are as follows: Results 2016 2015 Net profit after income tax (NPAT) $82,469,341 $67,486,611 Basic earnings per share (EPS) Earnings per share on a diluted basis (DPS) 99.4 cents 99.0 cents 87.0 cents 86.8 cents Dividends Details of dividends paid by the Company during the financial year ended 30 June 2016 are as follows: Dividends 2016 2015 Final dividend for the financial year ended 30 June 2015 of 27.0 cents (2014: 31.0 cents) per ordinary share paid on 16 October 2015 fully franked at the tax rate of 30% (2015: 30%). Interim dividend for the financial year ended 30 June 2016 of 29.0 cents (2015: 25.0 cents) per ordinary share paid on 15 April 2016 fully franked at the tax rate of 30% (2015: 30%). $22,462,500 $23,632,463 $24,126,389 $20,279,628 Total $46,588,889 $43,912,091 Subsequent to the financial year ended 30 June 2016, the Directors declared a final dividend of 34.0 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 14 October 2016, bringing the total dividend to be paid for the financial year ended 30 June 2016 to 63.0 cents per ordinary share. MMS Annual Report 2016 14 Directors’ Report Review of operations – Group This year marked another record profit for MMS with our entry into the consumer vehicle financing market contributing substantially to the result. Consolidated Group NPAT for FY16 was $82.5 million, up 22% on FY15. This increased our NPAT compound annual growth rate (CAGR) to 22% over the 10 years since MMS shares were listed on the ASX in 2004. After adjusting for one off costs associated with the acquisition of UFS and Anglo Scottish Asset Finance as well as non-operating amortisation, underlying NPATA was 25% higher at $87.2 million. Return on Equity for FY16 was 24%, however using underlying NPATA Return on Equity was 27%, a marginal decline on the previous year’s result. The Group Remuneration Services (GRS) business saw earnings before interest, tax, depreciation and amortisation (EBITDA) increase to $88.9 million. New business in the health sector provide a significant opportunity to improve program participation rates for both the salary packaging and novated leasing services. Asset Management (AM) operations in the UK enjoyed a second consecutive year of profitability, which included a strong maiden contribution from our newly-acquired Anglo Scottish. EBITDA more than doubled to $5.5 million, up from $2.4 million in FY15. The EBITDA of our Australian AM operations increased to $21.7 million, up from $18.1 million in FY15. The integration of Presidian and UFS proceeded under the newly-created Retail Financial Services (RFS) segment, EBITDA reached $21.2 million compared with $5.5 million a year earlier and included a 12 and 11 month contribution from Presidian and UFS, respectively. Digital channels widen customer’s choice With an enlarged customer base brought about by new business wins and recent acquisitions, MMS stepped up our commitment to provide superb customer experiences by offering a wider choice of convenient online communication channels. In FY16 we processed 11.5 million payments, a 5% increase on the previous year. Our Customer Care Centre remained the most used channel, followed by our websites. We also worked to ensure our existing online channels delivered flexible, adaptable processes that recognise the individuality of our customers and improve their experience with what is essentially intangible products focused on transactions. The overwhelming popularity of our Maxxia and RemServ online claims function embedded in our private self-service sites was evident in the swift adoption by our customers that saw the proportion of claims lodged online reach 72% for Maxxia customers and 49% for RemServ customers by 30 June 2016. The usage rate was accelerated by the launch of our free Maxxia and RemServ Claims Apps in August 2015. By year’s end, Claims App downloads reached 53,000. The rapid uptake of online claims by our customers also reduced our average cost to serve our growing customer base, producing both streamlined processes and operational efficiencies. As MMS continues to expand our retail platform and achieve higher levels of cross sales, this and other digital initiatives will help boost margins and deliver earnings growth. One such digital initiative is our refreshed RemServ private site launched in June 2016. Accessible from any mobile device, the site delivers full functionality and convenience to our RemServ customers wherever they are. Our people also benefited from MMS’ digital expertise, with the redesign of our staff intranet site. Improved navigability, streamlined information, and better design provided for greater ease of working for our expanding workforce. The inclusion of our new internal cultural framework (unveiled in July 2015) on the intranet also helped embed MMS’ revised purpose and values across our expanded number of businesses. In addition, a new App for our employees became our first interactive channel whereby our people from all businesses and locations worldwide can connect. Directors’ Report MMS Annual Report 2016 15 Key highlights and activities included: – Consolidated Group FY16 NPAT of $82.5 million, up 22% on FY15. – Free cash flow (pre increase in operating lease assets) of $93.5 million provided a sound footing for investing and financing activities. Cash at 30 June 2016 was $95.6 million. – Group vehicle assets under management including Novated totalled 92,900 units as at 30 June 2016. – Group funding facilities have been renegotiated with extended maturity dates. State of affairs In FY16 the Group cemented its foothold in the finance sector and with the Anglo Scottish acquisition in November 2015 established a broker aggregation platform in the UK. There were no other significant changes in the state of affairs of the Company and its controlled entities that occurred during the financial year ended 30 June 2016 that are not otherwise disclosed in this Annual Report. Outlook The Group was successful in winning a number of new business contracts during the first weeks of FY17. Initiating principal and agency (P&A) agreements with a number of funding providers to convert a portion of the loan back to a capital lighter business model. At 30 June 2016 a funding provider has been secured with funding to commence in August 2016. Following the successful launch of Maxxia Plus the company expects to grow its customer base with employees of clients who do not novate or salary package. As planned, our largest novated leasing client is currently evaluating tender proposals to provide novated leasing services. If reappointed, MMS expects UNPATA may reduce by approximately $450,000 to $650,000 per month. The overall commercial impact of ‘Brexit’ to our UK operations is unclear. Despite the political uncertainty and long-term economic changes that are still to play out, we believe our UK businesses remain well positioned. Whilst the pound sterling has reduced in value the impact is negated by having sterling denominated debt. We anticipate some foreign-domiciled banks to scale back. As a precautionary measure against potential heightened credit risks, Maxxia Finance will move to confine our funding panel to UK-based lenders. On 10 August 2016 the HM Revenue & Customs (HMRC) (UK) published a report titled “Consultation on salary sacrifice for the provision of benefits in kind”. Uncertainty that now surrounds salary sacrifice schemes will mean that potential adopters are likely to place the introduction of a non-exempt scheme on hold until the outcome of the consultation is known. This could adversely impact our ability to further develop the lifestyle lease product. Reviews of the practices of credit insurance providers by ASIC are in progress and has identified areas for review across the industry, including point-of-sale products, flex commissions within asset origination pricing structures, and commission payments to brokers. MMS has been working with regulators and industry bodies to ensure safeguards for consumers are embedded across all our businesses, our sales practices comply with all disclosure requirements and all other regulatory standards and our pricing structures remain viable for our broker network. Strategy and prospects The Group’s medium term strategic direction is to continue to look selectively to diversify, enhance and refine our core business for the benefit of our shareholders, clients and customers. The rollout of Maxxia Plus will provide our salary packaging customers with an unrivalled product offering. We will retain our market leading position in Australia’s independent used vehicle financing market and continue to develop our integrated range of asset finance and management services in the UK. We will also enhance our client and customer experiences through continued investment in leading edge administration platforms and customer facing technology. In addition, the Board will consider making more value-adding acquisitions in complementary and adjacent market sectors, depending on market conditions and the value proposition to MMS. Events subsequent to balance date Other than matters disclosed in the Annual Report, there were no material events subsequent to reporting date. Likely developments Other than information disclosed in this Annual Report, there are no other material likely developments affecting the operations of the Group. MMS Annual Report 2016 16 Group Remuneration Services Group Remuneration Services Profitability for GRS remained strong during FY16. Solid organic growth, new business wins and firm cost control generated a 8% increase in NPAT to $58.7 million. Revenue rose 7% to $188.3 million as our total salary packages under management topped 293,000, and our novated lease volumes climbed to reach 55,800 – a record level. Our pipeline of new business contracts strengthened throughout the year; and client participation rates have improved. As well, the composition of our client base by industry sector is richer than it has even been. It extends beyond our core government, health and NFP organisations, to include global mining companies, major entertainment companies, and national performing arts organisations. A major highlight of the year was the reappointment of RemServ as salary packaging provider to the Government of Queensland. This flagship contract was extended for another three years to 2019, with the potential for a further extension to 2021. This will stretch our long-standing partnership to 20 years and underlines our commitment to this state. Maxxia was also reappointed as the sole provider of salary packaging and novated leasing services to the Government of South Australia in February 2016 – a sole contract we first secured in 2012 after spending 13 years as a panel member. This significant contract has been extended to 30 June 2023, a decision the Government of South Australia made following an independent biennial review of Maxxia’s performance by PricewaterhouseCoopers. It covers approximately 104,000 employees and ensures we retain access to this large customer base for our new offerings such as Maxxia Plus. It also supports our deepening investment in the state, which includes the opening of our third Customer Care Centre in August 2016. Directors’ Report Key highlights and activities included: – GRS FY16 NPAT was 8% higher than the – previous corresponding period. – Operational efficiencies and new digital channels lowered our customer ‘cost to serve’ ratio, suppressing segment cost growth and increased the EBITDA margin to 47%. In turn, this drove the segment’s NPAT margin higher to 31%. – As at 30 June 2016 GRS increased its salary packaging units to 293,000 and had a book of 55,800 novated leases. – Our exclusive contract with Tasmania’s Department of Health and Human Services was extended for another five years. – Major contract wins included Mid North Coast Local Health District and South Western Sydney Local Health District, which together allowed Maxxia to access 13,000 new employees for five years from 1 April 2016. New starters for Mid North Coast Local Health District were able to commence packaging from 1 March 2016. – The soft launch of the Maxxia Plus service in early 2016 which combines our Maxxia Rewards retail discount program with the array of competitive vehicle finance solutions offered under our RFS brands. This enables more cross-sell opportunities by allowing MMS to better target the 29% of people who approach Maxxia to discuss a novated lease, only to change course and purchase a vehicle by other means. It also enables us to reach out to all employees and offer them a consumer finance product. Initial feedback from customers has been very favourable and steady sales growth is expected in FY17. MMS Annual Report 2016 17 In FY16 RemServ moved to develop innovative products to lift organic sales growth of salary packaging benefits. RemServ laid the ground- work for the release of a new exempt bus travel benefit to a portion of South-East Queensland commuters in the first quarter of FY17. The new benefit will allow customers to package their bus travel to and from work. Capping of Meal Entertainment and Venue Hire Benefits The 2015 Federal Budget introduced an annual cap limit of $5,000 applying to Meal Entertainment and Venue Hire salary packaging benefits. The change took effect from 1 April 2016 and applies as a combined cap across both benefits each FBT year. For our customers, the 10-month lag between the Budget announcement and the date the change took effect, meant in early 2016 a bottleneck developed in their requests for package amendments ahead of the end of the FBT year. Maxxia and RemServ saw a year-end surge of calls, claims and other forms of customer contact that stretched our operational capacity both in our Customer Care Centres and other teams. Our year- end call volume tripled compared to previous years. MMS Annual Report 2016 18 Asset Management Key highlights and activities included: – New business wins included Interleasing (Australia) Ltd’s appointment to the Government of NSW’s panel of vehicle leasing providers. As one of six fleet funding providers on the panel, Interleasing gained exposure to the NSW Government’s owned fleet of 22,000 vehicles. Funding of these vehicles under the new arrangements commenced on 1 July 2016. – The development of P&A funding arrangements that will enable MMS to improve the Group’s return on equity by funding the credit risk of assets in Australia off balance sheet, and to offer this facility to clients with appropriate credit profiles. – Good cost containment which reduced annual employee and non-vehicle related costs by 5% for the year and drove margin improvement. – Assets under management totalled approximately 21,000. Asset Management – Aust/NZ Diversified revenue streams enabled a significant jump in profitability for this segment despite relatively flat sales volumes amid competitive market conditions as the business moves to a capital lighter funding model. This model will drive MMS’ Return on Equity higher in the years ahead by funding a proportion of the credit risk of assets in Australia off balance sheet. Principal and interest income remained the biggest contributor to revenue which reversed its decline in the first half of FY16 to lift 2% to $179.5 million compared to a year earlier. The EBITDA margin improved to reach 12% by year’s end and maintained strong end of contract yields. NPAT was $12.8 million, or 19% higher than the previous year, and the NPAT margin improved by 100 basis points to 7%. Growth in our portfolio was flat during the year, mainly as a result of above average levels of fleet ‘inertia’ as customers veered away from replacing assets in favour of lease extensions. The downsizing of some industrial customers, and the impact of market consolidation activity on others, produced headwinds for our portfolio. This was partially offset by new business wins; and, pleasingly there were no material asset impairments. These influences caused minimal movement in the written down value of fixed assets which totalled $307.0 million at year end. Directors’ Report MMS Annual Report 2016 19 Asset Management – UK After posting its maiden profit in FY15, additional investment and solid momentum in our UK businesses generated an increase in profit for this segment as we continue to replicate the MMS business model in this market. New business wins, strong organic growth, and a better than expected maiden profit contribution from our newly-acquired Anglo Scottish unit pushed NPAT to $1.8 million (£0.9 million) in the year to 30 June. The segment enjoyed a strong jump in revenue to $25.3 million (£12.6 million) on the back of $8.9 million derived from brokerage commission income, a $6.4 million increase in principal and interest income and a $9.4 million lift in revenue from other vehicle related services. Together Maxxia Ltd and Anglo Scottish originated $327.5 million of asset finance business, and Maxxia grew the number of assets managed to 16,100. Demonstrating the continued maturity of Maxxia in the UK, 30% of originations are now from repeat customers. Key highlights and activities included: – Completion of the integration of Anglo Scottish smoothly into our wider UK business. This proceeded ahead of plan, and was pivotal in elevating the unit’s maiden contribution to the segment’s profitability during the year. – An increase in the Group EBITDA margin to 22% (FY15: 19%) and NPAT margin to 7% (FY15: 4%). – Asset written down value grew by 13.8% to finish the year at $128.9 million. – $27.4 million of our UK fleet had been moved off balance sheet by 30 June as part of our P&A funding arrangements with six UK banks and asset finance companies. – Strong sales of our unique IT leasing product targeting schools was launched in late FY15. By the end of FY16 the number of schools using this product totalled 39. The Group will continue to execute its long- term strategic plan in the UK, including pursuing synergistic acquisitions if they present sound value for shareholders and market conditions are favourable. MMS Annual Report 2016 20 Retail Financial Services Retail Financial Services Calendar year 2015 was a watershed year for MMS, with our acquisitions of UFS (July 2015) building on the acquisition of Presidian (February 2015) to secure a market leading position for our company in the independent used vehicle financing market and a large B2C customer base. With the integration of the acquisitions well advanced, in FY16 the spotlight fell on the need to reposition these businesses and unify them as one RFS division to ensure all identified revenue and cost synergies are captured. Profitability within the newly-formed RFS segment increased four-fold on a year earlier with NPAT reaching $11.8 million as a result of a full 12 months of trading for Presidian, and 11 months for UFS. Organic growth and cross sell of warranty products into our GRS segment pushed revenue to $110.0 million. Key highlights and activities included: Increased net amount financed to $937m – an increase of 10%. – 76,000 warranty products were written, an increase of 7%. – EBITDA grew by 22%. Post-merger integration The acquisitions of Presidian and UFS aimed to enable MMS to expand into a new market and channel, thereby diversifying our core business while extracting new sources of revenue via cross-selling and other paths to revenue growth. Following the acquisitions, the post-merger integration phase unfolded, with more than 200 Presidian and UFS employees being relocated to MMS premises; and eight key integration processes being structured around the key sources of value to be extracted from the combined entities. Finance terms were quickly renegotiated so that new pricing arrangements for Presidian products took effect from July 2015. Throughout FY16 resources were allocated to priority processes that would accelerate the integration of information platforms and reporting systems. These included the integration of the Presidian and UFS IT development teams, and the broader consolidation of all back office functions and property. By year’s end these processes were nearing completion, allowing more resources to be applied to the remaining processes (see table opposite). In addition, during FY16 the Group completed a review of MMS’ brand portfolio to reposition and simplify our house of brands architecture following the acquisitions of Presidian and UFS. The acquisitions resulted in MMS offering multiple products (such as insurances and warranties) under different customer-facing brands. In the post-merger integration phase we will grow our brand equity by harmonising existing brands with our post-merger strategic direction to achieve a consistent public face for our customers and other stakeholders, as well as a source of sustainable competitive advantage. To achieve this, in FY17 we will reduce the number of customer-facing brands and reposition those remaining to focus resources and to concentrate marketing efforts. MMS’ corporate brand will remain unchanged. Directors’ Report MMS Annual Report 2016 21 MMS Annual Report 2016 22 Directors’ experience and special responsibilities Tim Poole CA, B Com Appointed: 17 December 2013 (Non-Executive Director), 28 October 2015 (Chairman) Positions: Chairman of the Board Member of the Audit, Risk and Compliance Committee Member of the Remuneration and Nomination Committee Mr Poole is currently Chairman of Aurizon Holdings Limited and Lifestyle Communities Limited and a Non-Executive Director of Reece Limited. Previously, Mr Poole was an executive of Hastings Funds Management (1995 to 2007), and he was appointed the Managing Director in 2005. He was formerly the Chairman of Asciano Limited and a Non-Executive Director of Newcrest Mining Limited and Japara Healthcare Limited. Mr Poole is considered an independent director under the Company’s definition of independence. Mike Salisbury MBA Appointed: 1 October 2014 (as Chief Executive Officer), 5 February 2015 (as Managing Director) Positions: Managing Director and Chief Executive Officer Mr Salisbury joined MMS as Managing Director of RemServ in April 2008 and was appointed to the position of Chief Executive Officer in October 2014. Before joining the company in April 2008, Mr Salisbury was a member of the senior management team at AAMI. Mr Salisbury held a variety of management positions within the organisation, including a number of state management roles and the position of Product Manager for Compulsory Third Party Insurance. Mr Salisbury is a member of the Australian Institute of Company Directors, and is a Director of the National Automotive Leasing & Salary Packaging Association. Mr Salisbury is a graduate of the Advanced Management Program at Harvard Business School. John Bennetts B Ec, LLB Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit, Risk and Compliance Committee Mr Bennetts is an experienced investor and has been the founder and director of many successful Australian companies with businesses in technology, finance and manufacturing. He is a founder of Cellestis Limited and private equity investment firm, Mooroolbark Investments Pty Limited (M-Group). He has also previously provided advisory services to a range of companies in Australia and Asia. Prior to the establishment of the M-Group, he was Group Legal Counsel and Company Secretary of Datacraft Limited. Ross Chessari LLB, M Tax Appointed 1 December 2003 Positions: Non-Executive Director Member of the Remuneration and Nomination Committee Mr Chessari is a founder and director of the investment manager, SciVentures Investments Pty Limited (SciVentures). Prior to founding SciVentures, Mr Chessari was the Managing Director of ANZ Asset Management and the General Manager of ANZ Trustees. Directors’ Report MMS Annual Report 2016 23 Ian Elliot Appointed: 27 May 2014 Positions: Non-Executive Director Chairman of the Remuneration and Nomination Committee Mr Elliot is currently a Non-Executive Director of Salmat Limited and a Non-Executive Director of Hills Industries Limited. Mr Elliot was formerly Chairman and CEO at Australia’s largest advertising agency George Patterson Bates. He is a Fellow of the Australian Institute of Company Directors and a graduate of the Advanced Management Program at Harvard Business School. Mr Elliot is considered an independent director under the Company’s definition of independence. Sue Dahn BCom, MBA, FCPA, FAICD Appointed: 1 January 2016 Positions: Non-Executive Director, Chair of the Audit, Risk and Compliance Committee Ms Dahn is a partner in Investment Advisory Services at Pitcher Partners and Chair of the firm’s Investment Committee. She is also a Non-Executive Director of MTAA Super and serves on the Victorian Council of the Australian Institute of Company Directors. Prior to joining Pitcher Partners Ms Dahn spent 14 years in senior positions within the Victorian Government including the Departments of Premier and Cabinet and Treasury and Finance. Before this she was an accountant with big 4 chartered accounting firms. Ms Dahn is considered an independent director under the Company’s definition of independence. Mark Blackburn Dip Bus (Acct), CPA, GAICD Positions: Chief Financial Officer and Company Secretary Mark Blackburn, joined McMillan Shakespeare Group as Chief Financial Officer in October 2011. Mr Blackburn commenced as Company Secretary on 26 October 2011. Mr Blackburn has over 30 years experience in finance, working across a broad range of industries for companies such as WMC, Ausdoc, Laminex Industries, Westpac, AAMI/Promina and Olex Cables. In particular, he has public company experience in financial management and advice, management of financial risks, management of key strategic projects, acquisitions and establishing joint ventures. Prior to his employment with MMS, Mr Blackburn was Chief Financial Officer of IOOF Holdings Ltd and iSelect Pty Ltd. MMS Annual Report 2016 24 Remuneration Report Executive Remuneration Guide This short guide is intended to provide shareholders with an overview of executive remuneration outcomes for FY16 having regard to the Company’s performance, as well as a brief update on the actions the Board and Remuneration and Nomination Committee have taken to improve the structure and reporting of the Company’s remuneration practices. This guide is audited and is in addition to the audited information set out in the formal Remuneration Report. Company performance The Board undertakes an annual strategic review and sets the strategy agenda for the Company. Three year financial plans, annual budgets, forecasts and financial and operational targets are prepared by executive management. These are reviewed and approved by the Board. In the approval process the Board considers Company financial returns and targets, strategic issues such as markets and competition for its products and businesses, regulatory and operating risks, operating capability and importantly, how these plans measure against stakeholder expectations. Current performance is reviewed by the Board through periodic reporting against approved targets. This framework of strategic management and the rollout of plans enable the Board to set Long Term Incentive (LTI) plan targets and its annual expectations that, together with operational performance, determine any annual cash bonuses for the executive management team. The NPAT and EPS four year CAGR (FY12–FY16) is 11% and 7% respectively as summarised in the key metrics table below. The Company has historically used Net Profit After Tax (NPAT) and Earnings Per Share (EPS) as key metrics for assessing LTI awarded to executive management to align more closely with Company performance. The Company has chosen to solely apply an EPS hurdle to the FY15 LTI options grant. The EPS growth hurdle requires that the Company’s EPS growth over the performance period is greater than the target set by the Board (see page 25). Indices FY16 FY15 FY14 1 FY13 FY12 4 year CAGR Net profit attributable to Company members $82,469,341 $67,486,611 $54,969,799 $62,163,519 $54,305,163 NPAT growth 22.2% 22.8% (11.6%) 14.5% 25.0% Basic earnings per share 99.4 cents 87.0 cents 73.8 cents 83.4 cents 76.6 cents Dividend per share 63.0 cents 52.0 cents 52.0 cents 42.0 cents 47.0 cents 11% - 7% - 1 Impacted by the former Government’s announcement on 16 July 2013 of proposed changes to the treatment of FBT on vehicles. Directors’ Report FY16 Remuneration outcomes Company performance was reflected in executive remuneration outcomes for FY16. No options vested during the year. The current tranche of options granted in FY15 and on 28 August 2015 will vest on 31 August 2017 subject to the achievement of performance hurdles over the vesting period and continuity of employment with the Company on 31 August 2017. FY16 bonuses were determined taking into consideration a number of company and individual performance metrics that included sales growth, cost to income ratio, customer satisfaction, productivity index, staff engagement, capital management, execution of selective acquisitions and group strategy. Annual bonuses are capped at 25% of fixed remuneration. The achievement of individual performance metrics for FY16 is discussed further on page 29. The vesting of current Performance Options are measured against target EPS. The target for FY15 was based on the MMS budget with annual increases in EPS over the FY15 year of 15% for FY16 and a further 15% for FY17. The performance hurdles are discussed in detail on pages 32 and 33. The actual EPS performance achieved 89% of the FY16 target and 69% of the FY15 target. The actual EPS performance achieved for FY16 and FY15 and target EPS for the remaining year in the current programme is shown in the chart below. FY15 - FY17 LTI Programme Achievement against performance hurdles MMS Annual Report 2016 25 Directors have assessed FY16 EPS for the purpose of the LTI using underlying NPATA of $87.2m which is based on reported NPAT of $82.5m and adding back $1.9m for the after- tax one-off acquisition costs for UFS and Anglo Scottish and after-tax amortisation of intangibles acquired through acquisitions of $2.8m. On this basis and using the formula as disclosed on page 32, the vesting entitlement for FY16 is 89% (FY15 is 69%). This results in cumulative vesting of the first two tranches of 53%. Details of Key Management Personnel (KMP) remuneration for FY16 and FY15, prepared in accordance with statutory obligations and accounting standards, are contained in section 3 of this Report. In addition to this Guide the report includes: – more detailed disclosure of the Company’s approach to annual bonuses; – clearer disclosure in relation to LTI opportunities and the terms and conditions that apply to the current grant; – additional discussion of the Company’s remuneration governance structures and the link between the company’s performance and remuneration outcomes; and – more information about Non-Executive Directors’ fees. Other relevant remuneration initiatives that apply to the current tranche of options implemented during FY15 are set out below: – earnings per share (EPS) performance hurdle is used for long term incentive option grant; – scaled reward system for LTI rather than a cliff vesting structure that could apply using a NPAT hurdle; and – a twelve month holding lock applies to options $ S P E $1.267 $1.217 $1.167 $1.117 $1.067 $1.017 $0.967 $0.917 $0.867 $1.226 issued to the four KMPs. Culmulative actual EPS 52.6% vesting $1.066 $1.051 $0.927 $0.890 FY15 FY16 FY17 Target EPS Actual EPS achievment Remuneration Report MMS Annual Report 2016 26 Contents Key section 1. Who does this Report cover? 2. Remuneration policy and guiding principles 3. Executive remuneration in detail 4. Non-Executive Director remuneration in detail 5. Statutory remuneration disclosures Page 26 27 28 36 37 1. Who does this Report cover? This Report sets out the remuneration arrange- ments for the Group’s KMP (who are listed in the table below) during FY16. Throughout this Remuneration Report, the KMP are referred to as either Executive KMP or Non-Executive Directors. All individuals held their positions for all of FY16 unless otherwise indicated. Non-Executive Directors Name Position Mr T. Poole Non-Executive Chairman 2 Mr J. Bennetts Non-Executive Director Mr R. Chessari Non-Executive Director Mr I. Elliot Ms S. Dahn Non-Executive Director Non-Executive Director 3 Mr R. Pitcher, AM Non-Executive Chairman 1 Executive KMP 4 Name Position Mr M. Salisbury CEO and Managing Director Mr G. Kruyt Chief Operating Officer Mr M. Blackburn Mr A. Tomas Group CFO and Company Secretary Managing Director, Fleet and Financial Products 1 Mr R Pitcher, MA retired as Non-Executive Chairman effective 27 October 2015. 2 Mr T Poole was appointed Non-Executive Chairman effective 28 October 2015. 3 Ms S Dahn was appointed Non-Executive Director effective 1 January 2016. 4 There were no changes to Key Management Personnel after the reporting date and before the Annual Report was authorised for issue. MMS Annual Report 2016 27 Executive KMP remuneration The components of remuneration for Executive KMP consist of fixed remuneration (including superannuation and benefits) and long-term incentives (in the form of options). In addition Executive KMP may also receive an annual bonus based on key performance indicators (KPIs). The Board believes that this is an appropriate mix as it ensures that executives are primarily focused on generating value for shareholders over the long term (based on targeted financial metrics), while also being modestly rewarded in the short term for exceeding KPIs that contribute to company performance. Executive KMP are not incentivised to focus on short term goals at the expense of long term goals and business priorities. See key section 3. Executive remuneration in detail section for further information. Remuneration governance Role of the Remuneration and Nomination Committee The Board has established a Remuneration and Nomination Committee whose objectives are to oversee the formulation and implementation of remuneration policy and make recommendations to the Board on remuneration policies and packages applicable to the Directors and executives. For further details of the composition and responsibilities of the Remuneration and Nomination Committee, please refer to the Corporate Governance Statement www.mmsg.com.au/about/governance Remuneration consultants and other advisors The Remuneration and Nomination Committee obtains external independent advice when required, and will use it to guide and inform their decision-making. During FY16, no remuneration recommendations (as defined in the Corporations Act) were received. Directors’ Report 2. Remuneration policy and guiding principles Overview The Group’s remuneration policies and practices are designed to align the interests of staff and shareholders while attracting and retaining staff members who are critical to its growth and success. The Group’s remuneration structure consists of cash and non-cash components. The table below shows which KMP are eligible for the various components. Fixed Remuneration LTI’s – Performance Options Non-Executive Directors Executive KMP   x  LTI’s-Voluntary Options Annual Cash Bonus Non-Executive Directors Executive KMP x  x  Non-Executive Director remuneration The Board’s policy is to remunerate the Chairman and the Non-Executive Directors at market rates for comparable companies for the time and commitment involved in meeting their obligations. The Non-Executive Directors are remunerated for their services from the maximum annual aggregate amount approved by the shareholders of the Company on 29 October 2014 (currently $900,000 per annum). The Board sets the fees for the Chairman and the other Non-Executive Directors. Neither the Chairman nor the other Non-Executive Directors are entitled to any performance related remuneration. There is no direct link between the remuneration of the Chairman or any other Non-Executive Director and the short term results of the Group because the primary focus of the Board is on the long term strategic direction and performance of the Group. There are no termination payments payable to the Chairman or the other Non-Executive Directors on their retirement from office other than payments relating to the accrued superannuation entitlements included in their remuneration. See key section 4. Non-Executive Director remuneration in detail section for further information. MMS Annual Report 2016 28 Remuneration Report 3. Executive remuneration in detail As outlined above, the key components of Executive KMP remuneration are fixed remuneration and long term incentive grants. However, the Remuneration and Nomination Committee also has the authority to make annual bonus awards. Fixed Remuneration Components – Fixed remuneration comprises base salary, superannuation and, in some cases, non-cash benefits, such as motor vehicle lease payments and car parking benefits It is determined on an individual basis, reflecting the duties, responsibilities and performance levels of the relevant executive, general market conditions and comparable remuneration offered in related industry sectors It does not vary over the course of a year based on performance – – – Neither the Chief Executive Officer nor the Chief Financial Officer are remunerated separately for acting as an officer of the Company or any entities in the Group Review – Fixed remuneration is reviewed by the Remuneration and Nomination Committee annually (or on promotion) to ensure fixed remuneration remains competitive in the market place and reflects the individual’s skills, knowledge, accountability and general performance – The Company conducts market based reviews – The Company generally positions itself at the median – There is no guarantee that fixed remuneration will be increased as a result of the annual review The Remuneration and Nomination Committee has reviewed remuneration based on analysis from multiple data sources and taken into consideration factors such as annual revenue, employee numbers, market capitalisation and comparable companies. The Company generally positions itself at the market median. In certain circumstances, for exceptional candidates or high responsibility positions, the Company may position itself up to the seventy-fifth percentile of the market. The Company has sourced additional data through external remuneration consultancies to inform Remuneration and Nomination Committee decision making. Directors’ Report Annual Bonus Program During the year, a total of $230,000 was awarded to Executive KMP under the annual bonus program. No Key Management Personnel has a contractual right to a bonus. However, the Remuneration and Nomination Committee has the authority to award bonuses based on contribution to operational, individual and financial performance. The Remuneration and Nomination Committee has opted for implementing bonuses rather than adopting the standard STI concept to ensure that the Company/KMP can remain nimble and switch priorities to quickly adapt to dynamic or evolving circumstances. One such instance occurred in FY14, to adapt to the disruption to the business caused by the former Government’s announcement on 16 July 2013 of proposed changes to the treatment of FBT on motor vehicles. The assessment criteria that applied to the annual cash bonus program in FY16 is set out below. Annual bonuses were paid to Executive KMPs during the year for their contribution to key strategic, operational and financial focus areas. The following were outperformance above expectations by Executive KMPs in FY16. MMS Annual Report 2016 29 Mr M. Salisbury (CEO and Managing Director) – Stakeholder management, including bipartisan political support for existing taxation arrangements concerning salary packaging and novated leasing – Recontracting of major GRS clients – Business development including new products (bus travel benefit) – Acquisitions (UFS and Anglo Scottish) Mr M. Blackburn (Group CFO and Company Secretary) – Stakeholder management, including investor relations – Treasury and credit management – Acquisitions (UFS and Anglo Scottish) – Retail financial services integration – Productivity improvements delivering financial results and analysis for the MMS Group Mr G. Kruyt (Chief Operating Officer) – Business development including new products (Maxxia Plus) and acquisitions (UFS and Anglo Scottish) – Retail Financial Services integration – Supply chain management – People development focus for senior and future leaders Mr A. Tomas (Managing Director, Fleet and Financial Products) – Business development including new products (white label services) – Acquisitions (Anglo Scottish) – Development of principal and agency funding capability Sales Growth Cost to Income Ratio Customer Satisfaction Productivity Index Staff Engagement Capital Manage- ment Mergers / Acquisitions Group Strategy   x                     x x        x CEO and Managing Director CFO and Company Secretary Chief Operating Officer Managing Director, Fleet and Financial Products MMS Annual Report 2016 30 Remuneration Report What is the annual bonus program? A bonus may be awarded by the Remuneration and Nomination Committee if the employee’s contribution to the Company’s financial performance, operating capability and growth initiatives together with the other metrics mentioned in the FY16 outcomes above, has exceeded expectations. Who is eligible? Executives What is the performance period 1 July – 30 June How and when are bonuses determined? Shortly after the end of the financial year, the CEO considers the issue of performance related annual bonuses. Any award of performance related bonuses is based on an assessment of a number of Company and individual performance metrics including sales growth, cost to income ratio, customer satisfaction, productivity index, staff engagement, capital management, corporate acquisitions and group strategy. The CEO makes a recommendation about bonuses (excluding his own) to the Chairman of the Remuneration and Nomination Committee. The CEO’s bonus is determined by the Remuneration and Nomination Committee. Performance related annual cash bonuses are capped at 25% of fixed remuneration per employee and have historically not exceeded 8% of total remuneration. In FY16 the highest bonus paid was 9% of that Executive’s total remuneration. The Remuneration and Nomination Committee makes the final determination about payment of all executive bonuses. How is it delivered? In cash. The Executive must be employed at the time the bonus is paid. Why does the Board consider the bonus program appropriate? Is there a performance threshold that must be met before bonuses can be paid? Were bonuses paid in FY16? Recognition of Executive contributions over and above role responsibility and the value created for the business. Company results must meet Board expectations. Individuals must exceed performance KPIs and meet organisational behavioural standards. Measures for Executives for FY16 included contribution to: – Acquisitions and the integration of acquired companies while minimising disruption to business as usual; – Record levels of novated lease sales; – Successful contract tenders and extensions resulting in maintaining clients/new business/increased market share; and – Record low cost to income ratio. Executive KMP bonuses paid in FY16 totalled $230,000 and the highest bonus paid to an Executive represented 9% of their total remuneration. All FY16 bonuses were paid in August 2016. Total bonuses paid to Executive KMP in relation to FY15 totalled $205,000. Annual bonuses paid to Executive KMPs relative to total remuneration for the last six years have not exceeded 8% per annum and is presented in the chart at right. s n o i l l i m $ 6 5 4 3 2 1 0 7% 7% 7% 6% 5% 8% 8% FY10 FY11 FY12 FY13 FY14 FY15 FY16 Annual cash bonuses included in remuneration Total remuneration % % of annual cash bonuses to total remuneration NOTE 1 Total remuneration is based on the amount as disclosed in the “total remuneration” column of the statutory table on page 38. 2 The annual bonuses paid in FY12 do not include $300,000 that was paid to Mr A Tomas under a contractual arrangement as disclosed in the Remuneration Report for that financial year. 3 The annual bonuses in respect of FY13 were declared and paid in FY14 and consequently, included in the FY14 results but for the purpose of this graph, have been attributed to FY13 to show the relative proportion to total remuneration. Directors’ Report Long-term Incentives The Company issues options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan (Plan) every three years. Two types of options may be granted under this Plan: 1. Performance options Options that will only vest subject to performance hurdles and continuity of employment; and 2. Voluntary options Options that are not subject to performance hurdles, but which: – Executives must purchase; – will only vest if the Executive continue in employment (and thereby contribute to the performance of the Company); and – Executives will only realise value from if the Company’s share price increases above a set ‘strike price’ Voluntary Options were granted in FY11 and again in FY15 to provide Executives with an additional opportunity to purchase up to a maximum of $50,000 per executive. The terms and conditions relevant to these Options were disclosed in prior years Remuneration Reports. No Executive can enter into a transaction that is designed or intended to hedge the Executive’s exposure to any unvested option. Executives are required to provide declarations to the Board on compliance with this policy from time to time. Further details are set out below. MMS Annual Report 2016 31 Performance Options No Performance Options were granted during the year to Executives as their LTI. The value of options included in the remuneration of Executive KMP were granted in FY15. The number of Performance Options awarded is determined by multiplying the relevant Executive’s fixed remuneration by a pre-determined percentage, which varies depending on the position, duties and responsibilities of the relevant executive (between 10% and 40%). This figure is then multiplied by three, recognising that grants are made on a three yearly basis rather than annually. The EPS performance hurdle is subject to the measurement of the Company’s average annual growth in EPS for a three year period. The performance hurdle was derived from the EPS targets put in place in respect of the Company’s FY15 – FY17 Three Year Financial Plan. The Remuneration and Nomination Committee considers this to be a key indicator of the financial success of the business. The EPS performance hurdle was designed so that Executives are incentivised to ensure that the Three Year Financial Plan is met or exceeded. The EPS performance hurdle provides the KMP with a sole and unambiguous target which they collectively need to achieve, thereby encouraging a collaborative approach across the business. The Remuneration and Nomination Committee considers that achieving the EPS target will have a positive impact on total shareholder return. All options issued have an exercise price (or strike price) and only become valuable to the extent that the share price rises above the exercise price. Given that options are issued at or above the prevailing market price at the date that the Board approved the grant, it is implied that increased shareholder wealth is required before the senior executive will receive any value from the options. Details of the key terms and conditions of the current Performance Options are outlined on pages 32 and 33. MMS Annual Report 2016 32 Remuneration Report What are Performance Options? An option to acquire a fully paid ordinary share in the Company (subject to payment of an exercise price), that will only vest and become exercisable if performance hurdles and service conditions are satisfied. Do Executives pay for Performance Options? Performance Options are granted as part of remuneration and therefore there is no payment required for a grant. However, Executives are required to pay an exercise price to exercise them and receive shares. What is the performance period? Three years What is the performance hurdle and why was it chosen? An earnings per share (EPS) hurdle applies to the FY15 grant. An EPS hurdle has been chosen as it provides evidence of the Company’s growth in earnings. The EPS growth hurdle requires that the Company’s EPS growth over the performance period is greater than the target set by the Board. How does the EPS performance hurdle work? Performance conditions (EPS targets) Achievement of FY15 EPS target of not less than $0.927 Weighting 33.3% Achievement of FY16 EPS target of not less than $1.066 (15% growth from FY15 target) 33.3% Achievement of FY17 EPS target of not less than $1.226 (15% growth from FY16 target) 33.3% Maximum Entitlement 100% The EPS performance hurdle is subject to the measurement of the Company’s average annual growth in EPS for a three year period. Basic EPS is determined by dividing the Company’s NPAT before significant items and acquisition related items by the weighted average number of ordinary shares on issue during the financial year. Growth in EPS will be measured by comparing the EPS at the start of the year of issue and the measurement year. The EPS hurdle is a ‘line of sight’ hurdle, as the achievement of the hurdle directly correlates to improved shareholder value. The Remuneration and Nomination Committee considers it a key indicator of the financial success of the business. Achieving the EPS target will have a positive impact on total shareholder return. The EPS target in FY15 is based on the Budgeted EPS for FY15: the Base Year. In the event that the EPS target in any one year is not achieved, at the end of the three year period ending 30 June 2017 the total EPS for the three year period will be calculated, and if the total EPS for the three year period exceeds the sum of EPS targets for each of the three years, the participant will be entitled to exercise all un-forfeited options. The vesting scale is as follows: Financial years 0% vesting 50-100% vesting 100% vesting FY15 FY16 FY17 EPS less than $0.867 EPS between $0.867 & $0.927 EPS at least $0.927 EPS less than $0.997 EPS between $0.997 & $1.066 EPS at least $1.066 EPS less than $1.146 EPS between $1.146 & $1.266 EPS at least $1.226 Process for assessing performance conditions To determine the extent to which the EPS performance hurdle is satisfied, the Remuneration and Nomination Committee relies on audited financial results and vesting is determined in accordance with the Plan Rules. The Remuneration and Nomination Committee believes this method of assessment provides an appropriate and objective assessment of performance. The Remuneration and Nomination Committee will take account of capital raisings and acquisitions where necessary or appropriate to do so. Directors’ Report MMS Annual Report 2016 33 What are the rights attaching to the Performance Options? No voting rights or entitlements to dividends are attached to Performance Options. What is the exercise price and how was it determined? There are multiple prices depending on when the executive joined. The exercise price is normally equal to or higher than the spot price at the date of grant and is based on 5 Day Volume Weighted Average Price of Shares traded in the period immediately prior to grant date of the options. When do the Performance Options expire? On 30 September 2018 for options without a “holding lock”. In relation to the Performance Options granted to the four Executive KMPs a mandatory 12 month 'holding lock' will apply to those Options such that any shares acquired by exercising vested Options cannot be sold until 12 months after the Options vest (the Options vest on 31 August 2017, so the 'holding lock' will apply until 31 August 2018 with the options expiring 30 September 2019). What happens on cessation of employment? What happens on a change of control? What Performance Options were granted in FY16? If the employee leaves employment with the Group before 31 August 2017 regardless of the circumstances, the options lapse without any payment to the employee. On a change of control, the Board has discretion to bring forward the exercise date of all performance options and to waive or vary the exercise conditions or performance conditions attached to the performance options. No Performance Options were granted to Executive KMPs in FY16. MMS Annual Report 2016 34 Remuneration Report Voluntary Options – FY15 LTI grant No Voluntary Options were offered to Executives in FY16. Details of the key terms and conditions of the FY15 Voluntary Options granted in FY15 are as follows. What are Voluntary Options? An option to acquire a fully paid ordinary share in the Company (subject to payment of an exercise price) that may be purchased by Executives. Voluntary Options provide executives with an additional opportunity to invest in the Company as a LTI. A Voluntary Option may be purchased by the Executive when offered by the Company. The Voluntary Option will only vest if the senior executive remains employed at vesting date. Do Executives pay for Voluntary Options? Yes. The maximum amount that can be applied towards the purchase of Voluntary Options is $50,000 and the number of options to be granted is determined by dividing the amount invested by the fair value of the option at grant date. The consideration payable per option is based on the fair value of the option at grant date less a 25% discount. In addition, an exercise price is payable when the options are exercised for shares. What is the vesting period? Three years. What is the performance hurdle and why was it chosen? No performance hurdles. The Executive buys the option at grant date. What are the rights attaching to the Voluntary Options? What is the exercise price and how was it determined? No voting rights or entitlements to dividends are attached to Voluntary Options. The exercise price is normally equal to or higher than the spot price at the date of grant and is based on 5 Day Volume Weighted Average Price of Shares traded in the period immediately prior to grant date When do the Voluntary Options expire? 30 September 2018. What happens on cessation of employment? If the Executive leaves employment with the Group before 31 August 2017, the executive will forfeit 25% (representing the discount) of their entitlement for consideration, paid by the Company, in the amount of $1. What happens on a change of control? On a change of control, the Board has discretion to bring forward the exercise date of all performance options and to waive or vary the exercise conditions or performance conditions attached to the performance options. What Voluntary Options were granted in FY16? None. Directors’ Report MMS Annual Report 2016 35 Fixed vs performance based remuneration The relevant proportions of fixed versus performance based remuneration received in FY16 are set out in the table below. The proportion of performance based remuneration received increased from FY15 to FY16, and the Remuneration and Nomination Committee will keep the remuneration ‘mix’ under review to ensure that it remains appropriate in the Company’s circumstances. Mr M. Salisbury Mr G. Kruyt Mr M. Blackburn Mr A. Tomas Fixed remuneration At risk – Annual Bonus At risk – LTI FY16 71% 68% 68% 73% FY15 74% 70% 72% 76% FY16 6% 9% 6% 4% FY15 5% 10% 5% 4% FY16 23% 23% 26% 23% FY15 21% 20% 23% 20% Consequences of performance on shareholders’ wealth The table below sets out the Company’s performance over the past five years in respect of key financial and non-financial indicators. In addition to the links between remuneration and shareholder value discussed above, when reviewing the Group’s performance and benefits for shareholder wealth, and the link to the remuneration policy, these indicators are generally considered: Indices Net profit attributable to Company members NPAT growth Dividends paid Dividend payout ratio 1 Share price as at 30 June 2 Earnings per share FY16 FY15 FY14 3 FY13 FY12 $82,469,341 $67,486,611 $54,969,799 $62,163,519 $54,305,163 22% 23% (12%) 15% 25% $46,588,889 $43,912,091 $29,064,347 $36,516,743 $31,422,422 60% $13.68 61% $12.09 70% $9.17 50% $16.18 65% $11.82 99.4 cents 87.0 cents 73.8 cents 83.4 cents 76.6 cents 1 Dividend payout ratio is calculated as total dividend for the financial year divided by UNPATA for the financial year. 2 Share price at the start of FY12 was $9.58. 3 Impacted by an announcement on 16 July 2013 of possible changes to the treatment of FBT on vehicles. MMS Annual Report 2016 36 Remuneration Report Key terms of Executive KMP service agreements All Executive KMP are party to a written executive service agreement. The key terms are set out below. Key terms of Executive Service Agreement for CEO Duration Ongoing. Periods of notice required to terminate 9 months written notice by the Company or CEO. The agreement may, however, be terminated by the Company for cause without notice or any payment. Termination payments The Company has discretion to make a payment in lieu of notice. No contracted retirement benefits are in place with any of the Company’s executives. Restraint of trade The Company can elect to invoke a restraint period not exceeding 6 months. Key terms of Executive Service Agreements for other Executive KMP Duration Ongoing. Periods of notice required to terminate Generally, 6 months written notice, by the Company or the Executive KMP. The agreement may, however, be terminated by the Company for cause without notice or any payment. Termination payments The Company has discretion to make a payment in lieu of notice. No contracted retirement benefits are in place with any of the Company’s Executive KMP. Restraint of trade The Company can elect to invoke a restraint period not exceeding 6 months. 4. Non-Executive Director remuneration in detail The remuneration of Non-Executive Directors comprises Directors’ fees and superannuation contributions, and takes into account the size and complexity of the Company’s operations, their responsibility for the stewardship of the Company and their workloads. As stated in the Executive Remuneration Guide section, total fees are not to exceed the annual limit of $900,000 approved by shareholders in October 2014. Details of the fees paid to the Non-Executive Directors are set out in the table below. Directors’ Fees The annual Directors’ fees (including superannuation contributions) payable to Non-executive Directors for FY16 were as follows: Position Chairman Fee ($) 205,000 (from 1 January 2016) Audit, Risk and Compliance Committee Chair 130,000 (from 1 January 2016) Remuneration and Nomination Committee Chairman 130,000 (from 1 January 2016) Director (base fee) 115,000 (from 1 January 2016) No fees are payable in respect of membership of Board Committees. Superannuation contributions Contributions required under legislation are made by the Company on behalf of Non-Executive Directors. Retirement Benefits There is no scheme for the payment of retirement benefits. Directors’ Report MMS Annual Report 2016 37 5. Statutory remuneration disclosures Non-Executive Director remuneration – statutory disclosures The tables below set out the out the statutory disclosures required under the Corporations Act 2001 (Cth) and in accordance with the Accounting Standards. Short-term benefits Post-employment benefits Cash salary/fees 1 Other Benefits 2 Superannuation Total Remuneration Non-Executive Directors Mr T. Poole (Non-Executive Chairman) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr I. Elliot (Non-Executive Director) Ms S. Dahn (Non-Executive Director Mr R. Pitcher, AM (Non-Executive Chairman) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 $ 164,852 107,182 101,536 85,322 93,278 85,322 104,037 98,050 39,574 - 61,800 182,907 $ - - - - 8,259 - - - 19,787 - - - $ 14,799 10,182 9,646 8,106 9,646 8,106 9,884 9,315 5,639 - 5,871 17,376 $ 179,651 117,364 111,182 93,428 111,183 93,428 113,921 107,365 65,000 - 67,671 200,283 1 The amounts shown for the Non-Executive Directors reflect directors’ fees only. 2 Other benefits comprise salary packaging. MMS Annual Report 2016 38 Remuneration Report Executive KMP remuneration – statutory disclosures The following table sets out the statutory disclosures required under the Corporations Act 2001 (Cth) and in accordance with the Accounting Standards. Short-term benefits Post- employment benefits Long- term benefits Share based payments Cash salary/ fees Current year Cash Bonus Other Benefits 1 Super- annuation Long Service Leave Options 2 Total remuneration Percentage of remuneration as options Total value of remuneration received 4 Non-Executive Directors $ $ $ $ $ $ $ Mr M. Salisbury (CEO and Managing Director) 3 Mr G. Kruyt (Chief Operating Officer) Mr M. Blackburn (Group CFO and Company Secretary) Mr A. Tomas (Managing Director, Fleet and Financial Products) 2016 714,022 75,000 77,150 37,635 28,226 270,760 1,202,793 2015 554,237 50,000 98,023 29,987 47,369 208,035 987,651 2016 497,292 75,000 23,467 19,308 20,886 193,400 829,353 2015 438,973 75,000 76,950 18,783 15,400 159,026 784,132 2016 557,231 50,000 (11,717) 38,642 10,686 229,621 874,463 2015 543,165 50,000 37,888 35,000 35,087 208,280 909,420 2016 379,622 30,000 158,287 35,628 9,117 182,967 795,621 2015 379,709 30,000 138,124 35,000 37,648 155,547 776,028 23% 21% 23% 20% 26% 23% 23% 20% $ 874,039 964,393 624,615 1,155,618 657,889 1,502,047 574,966 5,220,340 In the case of redundancy, the Company redundancy policy will apply to the extent that the payment is greater than the payment made to an Executive KMP on termination. No payments were made to any Executive KMP in respect of termination of services in FY16. 1 Other benefits reflect annual leave entitlements, motor vehicle packaging payments, travel benefits and car parking benefits. 2 The equity value comprises the value of options issued. No shares were issued to any Non-executive Director (and no options were granted to any Non-executive Director) during the financial years ended 30 June 2016 and 30 June 2015. The value of options issued to Executive KMP (as disclosed above) are the assessed fair values (less any payments for the options) at the date that the options were granted to the executives, allocated equally over the period from when the services are provided to vesting date. Fair values at grant date are determined using a binomial option pricing model that takes into account the exercise price, the expected term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. No options were granted to Executive KMPs during the year ended 30 June 2016. 3 Mr Salisbury was appointed CEO from 1 October 2014 and Managing Director on 5 February 2015 and was formerly Managing Director, Remuneration Services. 4 Value of remuneration received comprises salary, benefits and superannuation salary packaged, annual and long service leave used and bonuses paid in the year. Cash remuneration paid in FY15 includes the intrinsic value of options that vested in the year as disclosed on page 36 of the 2015 Annual Report. Directors’ Report MMS Annual Report 2016 39 Option Details No options were granted to, exercised by or lapsed with respect to Non-Executive Directors during FY16 or FY15. The terms and conditions of each grant of options to executives affecting their remuneration in FY16 or FY15 and each relevant future financial year are as follows: Grant Date Expiry Date Share price at valuation date Exercise Price Value per option at grant date 1 Date Exercisable 19 August 2014 30 September 2018 $10.18 $10.18 $2.78 100% after 31 August 2017 19 August 2014 2 30 September 2019 $10.18 $10.18 $3.01 100% after 31 August 2017 23 September 2014 30 September 2018 $10.83 $10.83 $2.91 100% after 31 August 2017 28 October 2014 30 September 2018 $10.17 $10.17 $2.68 100% after 31 August 2017 24 March 2015 30 September 2018 $11.87 $11.87 $2.94 100% after 31 August 2017 26 May 2015 30 September 2018 $12.88 $12.88 $3.18 100% after 31 August 2017 25 August 2015 30 September 2018 $13.82 $13.82 $3.23 100% after 31 August 2017 1 Reflects the fair value at grant date for options granted as part of remuneration calculated in accordance with AASB 2: Share-based Payment. 2 This tranche of options is subject to a holding lock where any shares acquired by exercising these options cannot be sold until twelve months after the options vest. Details of the options over ordinary shares in the Company provided as remuneration to each Executive KMP are set out below. When exercised each option is convertible into one ordinary share of McMillan Shakespeare Limited. Name Date of grant Type of option Number of options granted Value of options granted during the year Number of options vested during year Vested % Number of options forfeited/ lapsed during the year Forfeited or lapsed % Year in which options may vest Maximum value of options yet to vest 1 Mr M. Salisbury Mr G. Kruyt Mr M. Blackburn Mr A. Tomas 19 August 2014 19 August 2014 19 August 2014 19 August 2014 Performance 302,158 Performance 215,827 Performance 256,248 Performance 204,184 - - - - - - - - - - - - - - - - - - - - FY 2018 $709,860 FY 2018 $506,914 FY 2018 $601,850 FY 2018 $479,568 1 There is no minimum or maximum value attached to the options at the vesting date. MMS Annual Report 2016 40 Remuneration Report Movement of options granted to Executive KMP The table below reconciles the options held by each Executive KMP from the beginning to the end of FY16. Name Options Balance at start of year Granted as compen- sation Vested during the year Exercised during the year Forfeited Other changes during the year Vested and exercisable at the end of the year Unvested at the end of the year Mr M. Salisbury Performance 302,158 Mr G. Kruyt Performance 215,827 Mr M. Blackburn Performance 256,248 Mr A. Tomas Performance 204,184 - - - - - - - - - - - - - - - - - - - - - - - - 302,158 215,827 256,248 204,184 Shares issued on exercise of performance options Details of fully paid ordinary shares in the Company that were issued following the exercise of performance options by KMPs during the year are set out below. Equity instrument details relating to key management personnel The tables below show the number of shares in the Company held during the financial year by each Director and each of the Executive Key Management Personnel, including their personally related parties There were no shares granted during the year as compensation. Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance at the end of the year Non-Executive Directors Mr T. Poole Mr J. Bennetts Mr R. Chessari Mr I. Elliot Ms S Dahn Key Management Personnel Mr M. Salisbury Mr G. Kruyt Mr M. Blackburn Mr A. Tomas 8,000 3,543,025 6,050,941 - - 10,276 7,953 1,250 464,449 - - - - - - - - - 11,000 - - - - - - 8,750 - 19,000 3,543,025 6,050,941 - - 10,276 7,953 10,000 464,449 End of the audited Remuneration Report Directors’ Report Directors’ Report MMS Annual Report 2016 41 Unissued shares At the date of this Annual Report, unissued ordinary shares of the Company under option are: Option class Performance Options Performance Options Performance Options Performance Options Performance Options Performance Options No. of unissued ordinary shares Exercise price Expiry date 978,417 469,081 107,877 150,831 85,692 33,436 $10.18 $10.18 $10.83 $11.87 $12.88 $13.82 30 September 2019 30 September 2018 30 September 2018 30 September 2018 30 September 2018 30 September 2018 No options were granted to the Directors or any of the five highest remunerated officers of the Company since the end of the financial year. Directors’ interests At the date of this Annual Report, the relevant interest of each Director in the securities issued by the Company and its controlled entities, as notified by the Directors to the Australian Stock Exchange Limited (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth), is as follows: Director Mr. T Poole (Chairman) Mr M. Salisbury (Managing Director) Mr J. Bennetts Mr R. Chessari Mr I Elliot Ms S Dahn Options - 302,158 - - - - Ordinary shares 19,000 10,276 3,543,025 6,050,941 - - No Director, during FY16, became entitled to receive any benefit (other than a benefit included in the aggregate amount of remuneration received or due and receivable by the Directors shown in the Remuneration Report or the fixed salary of a full time employee of the Company) by reason of a contract made by the Company or a controlled entity with the Director or an entity in which the Director has a substantial financial interest or a firm in which the Director is a member. MMS Annual Report 2016 42 Directors’ Report Non-audit services Details of the amounts paid or payable to the auditor of the Company, Grant Thornton Audit Pty Ltd and its related practices, for non-audit services provided, during FY16, are disclosed in Note 4 to the Financial Statements. The Company’s policy is that the external auditor is not to provide non-audit services unless the Audit, Risk and Compliance Committee has approved that work in advance, as appropriate. The Audit, Risk and Compliance Committee has reviewed a summary of non-audit services provided during the financial year ended 30 June 2016 by Grant Thornton Audit Pty Ltd. Given that the only non-audit services related to client contract audits and review of banking covenant and trust account compliance, the Audit, Risk and Compliance Committee has confirmed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). This has been formally advised to the Board. Consequently, the Directors are satisfied that the provision of non- audit services during the year by the auditor and its related practices did not compromise the auditor independence requirements of the Corporations Act 2001 (Cth). Environmental regulations The Directors believe that the Company and its controlled entities have adequate systems in place for the management of relevant environmental requirements and are not aware of any breach of those environmental requirements as they apply to the Company and its controlled entities. Indemnification and insurance Under the Company’s Constitution, the Company indemnifies the Directors and officers of the Company and its wholly-owned subsidiaries to the full extent permitted by law against any liability and all legal costs in connection with proceedings incurred by them in their respective capacities. The Company has also entered into a Deed of Access, Indemnity and Insurance with each Director, each Company Secretary, and each responsible manager under the licenses which the Company holds (Deed), which protects individuals acting as officeholders during their term of office and after their resignation. Under the Deed, the Company also indemnifies each officeholder to the full extent permitted by law. The Company has a Directors & Officers Liability Insurance policy in place for all current and former officers of the Company and its controlled entities. The policy affords cover for loss in respect of liabilities incurred by Directors and officers where the Company is unable to indemnify them and covers the Company for indemnities provided to its Directors and officers. This does not include liabilities that arise from conduct involving dishonesty. The Directors have not included the details of the premium paid with respect to this policy as this information is confidential under the terms of the policy. Directors’ Report MMS Annual Report 2016 43 Auditor’s independence declaration A copy of the auditor’s independence declaration, as required under section 307C of the Corporations Act 2001 (Cth), is set out on page 98 of this Annual Report. Corporate governance practices Our full corporate governance statement is available on our website at www.mmsg.com.au/about/governance Directors’ declaration The Directors have received and considered written representations from the Chief Executive Officer and the Chief Financial Officer in accordance with the ASX Principles. The written representations confirmed that: – the financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operating results of the Company and its controlled entities and are in accordance with all relevant accounting standards; and – the above statement is founded on a sound system of risk management and internal compliance and control that implements the policies adopted by the Board and that compliance and control is operating efficiently and effectively in all material respects. Signed in accordance with a resolution of the Directors. Tim Poole Chairman 24 August 2016 Melbourne, Australia Michael Salisbury Managing Director MMS Annual Report 2016 44 Five year summary 2012–2016 FINANCIAL PERFORMANCE Group Revenue ($m) NPAT ($m) UNPATA ($m) Group Remuneration Services segment Segment revenue ($m) Segment NPAT ($m) Asset Management segment Segment revenue ($m) Segment NPAT ($m) Retail Financial Services segment Segment revenue ($m) Segment NPAT ($m) SHAREHOLDER VALUE Dividends per share (cps) Dividend payout ratio (%) 2 Basic earnings per share (cps) Return on Equity (%) 3 OTHER Employees Employee engagement score (%) 4 2016 2015 2014 2013 2012 504.7 82.5 87.2 188.3 58.7 204.8 14.6 110.0 11.8 63.0 60 99.4 24 389.6 67.5 69.6 176.1 54.3 188.1 11.3 23.1 3.0 52.0 61 87.0 25 1,157 No survey 1,035 81 347.5 55.0 56.1 157.2 42.0 188.1 13.6 - - 52.0 70 73.8 26 873 No survey 330.1 62.2 62.2 155.9 46.8 172.0 14.6 - - 42.0 50 83.4 34 700 84 302.0 54.3 54.3 137.3 40.3 163.3 14.3 - - 47.0 65 76.6 38 730 No survey 1 Underlying NPATA (UNPATA) is reported NPAT normalised for items considered to be capital in nature or not directly relating to operational performance. UNPATA is likely to better reflect maintainable earnings and presents a better comparable measure of performance year on year. UNPATA items included in FY16 comprise after-tax adjustments for acquisition expenses from business combination relating to UFS and Anglo Scottish of $1.9m in FY16 (Presidian of $1.5m in FY15, CLM of $0.8m in FY14), and after-tax amortisation of intangibles acquired from business combination of $2.8m in FY16 (FY15: $0.6m). 2 Dividend payout ratio is calculated as total dividend for the financial year divided by UNPATA for the financial year. 3 Return on equity has been adjusted to reflect 12 months trading for acquisitions made in each financial year. 4 Employee engagement survey conducted biennially. Financial Report 2016 MMS Financial Report 2016 Statements of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2016 Consolidated Group Parent Entity MMS Financial Report 2016 47 2015 $’000 68,363 (677) - - - - (213) - (358) - - 2016 $’000 46,715 (726) - - - - (356) - (400) - - (1,973) (507) - - 43,260 734 43,994 - - - - - - 66,608 517 67,125 - - - - 69,746 43,994 67,125 87.0 86.8 Revenue and other income Employee benefits expense Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Brokerage commissions and incentives Net claims incurred Consulting expenses Marketing expenses Property and corporate expenses Technology and communication expenses Other expenses Finance costs Share of equity accounted joint venture loss Acquisition expenses Profit before income tax Income tax (expense) / benefit Profit attributable to members of the parent entity Other comprehensive income Items that may be re-classified subsequently to profit or loss: Changes in fair value of cash flow hedges Exchange differences on translating foreign operations Income tax on other comprehensive income Total other comprehensive (loss) / income for the year Total comprehensive income for the year Basic earnings per share (cents) Diluted earnings per share (cents) Note 3 4(a) 11(b) 5(a) 6 6 2016 $’000 504,666 (120,206) (91,380) (60,063) (46,960) (7,823) (3,003) (3,380) (11,230) (11,206) (13,327) (12,841) (1,495) (2,289) 119,463 (36,994) 82,469 (73) (8,145) (16) (8,234) 74,235 99.4 99.0 2015 $’000 389,590 (96,856) (92,825) (50,717) (5,535) (2,160) (2,119) (3,477) (10,059) (8,673) (9,350) (10,865) (816) (2,196) 93,942 (26,455) 67,487 (107) 2,338 28 2,259 The above statements of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. MMS Financial Report 2016 48 Statements of Financial Position As at 30 June 2016 Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Inventory Prepayments Deferred acquisition costs Total current assets Non current assets Property, plant and equipment Finance lease receivables Intangible assets Other financial assets Deferred tax assets Deferred acquisition costs Total non current assets TOTAL ASSETS Current liabilities Trade and other payables Unearned premium liability Other liabilities Provisions Current tax liability Borrowings Derivative financial instruments Total current liabilities Non current liabilities Borrowings Unearned premium liability Other financial liabilities Provisions Deferred tax liabilities Total non current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY Note 8 9 10 13 10 15 11 14 16 17 18 19 19 20 18 14 21(a) Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 95,583 37,396 46,280 7,282 7,827 2,084 196,452 302,132 89,279 254,632 1,732 194 964 648,933 845,385 70,561 5,966 16,384 13,023 10,116 12,944 819 129,813 332,626 2,755 6,740 1,705 1,251 345,077 474,890 370,495 144,380 4,086 222,029 370,495 85,729 46,941 35,253 7,165 6,361 2,137 183,586 305,128 89,911 194,671 1,871 1,183 973 593,737 777,323 63,862 6,105 16,187 10,591 3,789 5,658 699 106,891 346,046 2,781 - 2,228 934 351,989 458,880 318,443 121,617 10,677 186,149 318,443 5,716 6,477 - - 14 - 12,207 - - - 2,598 2,413 - - 18 - 5,029 - - - 337,900 261,646 - - 337,900 350,107 105,617 - - - 9,439 11,500 - 126,556 41,528 - - - 540 42,068 168,624 181,483 144,380 10,092 27,011 181,483 105 - 261,751 266,780 47,908 - - - 2,182 4,016 - 54,106 53,002 - - - - 53,002 107,108 159,672 121,617 8,449 29,606 159,672 The above statements of financial position should be read in conjunction with the accompanying notes. Statements of Changes in Equity For the year ended 30 June 2016 MMS Financial Report 2016 49 2016 Consolidated Group Issued capital $’000 Retained Earnings $’000 Option Reserve $’000 Note Cash flow Hedge Reserve $’000 Foreign Currency Translation Reserve $’000 Total $’000 Equity as at beginning of year 21, 22 121,617 186,149 8,449 (526) 2,754 318,443 Profit attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: - - - Contributions of equity, net of transaction costs 21(b) 22,763 82,469 - 82,469 - - (46,589) - - - - 1,643 - - (89) (89) - - - - (8,145) (8,145) 82,469 (8,234) 74,235 - - - 22,763 1,643 (46,589) 28 7 - - Employee share schemes - value of employee services Dividends paid Equity as at 30 June 2016 2015 144,380 222,029 10,092 (615) (5,391) 370,495 Consolidated Group Issued capital $’000 Retained Earnings $’000 Option Reserve $’000 Note Cash flow Hedge Reserve $’000 Foreign Currency Translation Reserve $’000 Total $’000 Equity as at beginning of year 21 56,456 162,574 4,848 (447) 416 223,847 Profit attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Employee share schemes - value of employee services Income tax associated with share based payments recognised in equity Dividends paid Equity as at 30 June 2015 - - - 67,487 - 67,487 21(b) 28 7 65,161 - - - - - - (43,912) - - - - 1,326 2,275 - - (79) (79) - - - - - 2,338 2,338 - - - - 67,487 2,259 69,746 65,161 1,326 2,275 (43,912) 121,617 186,149 8,449 (526) 2,754 318,443 The above statements of changes in equity should be read in conjunction with the accompanying notes. MMS Financial Report 2016 50 2016 Statements of Changes in Equity For the year ended 30 June 2016 Issued capital $’000 121,617 Note 21 - - - Equity as at beginning of year Profit attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs 21(b) 22,763 Employee share schemes - value of employee services Dividends paid Equity as at 30 June 2016 28 7 - - 144,380 2015 Equity as at beginning of year Profit attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Employee share schemes - value of employee services Income tax associated with share based payments recognised in equity Dividends paid Equity as at 30 June 2015 Issued capital $’000 56,456 Note 21 - - - 65,161 - - - 121,617 21(b) 28 7 The above statements of changes in equity should be read in conjunction with the accompanying notes. Parent Entity Retained Earnings $’000 29,606 43,994 - 43,994 - - (46,589) 27,011 Parent Entity Retained Earnings $’000 6,393 67,125 - 67,125 - - - (43,912) 29,606 Option Reserve $’000 8,449 - - - - 1,643 - 10,092 Option Reserve $’000 4,848 - - - 1,326 2,275 - 8,449 Total $’000 159,672 43,994 - 43,994 22,763 1,643 (46,589) 181,483 Total $’000 67,697 67,125 - 67,125 65,161 1,326 2,275 (43,912) 159,672 Statements of Cash Flows For the year ended 30 June 2016 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from sale of assets under lease Proceeds from sale of lease portfolio Payments for assets under lease Interest received Interest paid Dividends received Income taxes paid Subsidiaries acquisition expense MMS Financial Report 2016 Consolidated Group Parent Entity Note 2016 $’000 2015 $’000 23(b) 516,531 (226,279) 52,188 32,805 372,471 (153,766) 47,688 - (234,601) (243,441) 1,855 (11,329) - (33,586) (2,612) 2,681 (9,832) - (29,042) (2,416) 2016 $’000 - (1,834) - - - 123 (1,947) 46,592 - - 51 2015 $’000 - (1,485) - - - 39 - 68,324 - - Net cash from / (used in) operating activities 23(a) 94,972 (15,657) 42,934 66,878 Cash flows from investing activities Payments for capitalised software Payments for plant and equipment Proceeds from sale of plant and equipment Payments for contract rights 15(b) (3,396) (4,468) - - (4,777) (7,698) 1,921 (512) - - - - - - - - Payments for subsidiary investments (net of cash acquired) 29(c) (39,000) (63,620) Subsidiaries’ acquisition expenses Payments for joint venture subordinated loans - (1,356) - (961) (55,982) (1,225) - (64,450) (2,416) - Net cash used in investing activities (48,220) (75,647) (57,207) (66,866) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Proceeds from share issues Payment of borrowing costs Dividends paid by parent entity Proceeds from / (repayments to) controlled entities 23(c) 23(c) 116,360 (111,343) 5,358 (184) 7 (46,589) - 146,298 (11,872) 15,112 (542) (43,912) - - (4,016) 5,358 - (46,589) 62,638 Net cash (used in) / provided by financing activities (36,398) 105,084 17,391 Effect of exchange changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 8 (500) 9,854 85,729 95,583 752 14,532 71,197 85,729 - 3,118 2,598 5,716 57,500 (359) 15,112 (130) (43,912) (26,630) 1,581 - 1,593 1,005 2,598 The above statements of cash flows should be read in conjunction with the accompanying notes. 52 1 Summary of Significant Accounting Policies (a) General information The financial report of McMillan Shakespeare Limited and its subsidiaries for the year ended 30 June 2016 was authorised for issue in accordance with a resolution of the directors on 24 August 2016 and covers McMillan Shakespeare Limited (‘the Company” or the “parent entity”) as an individual entity as well as “the Group”, consisting of McMillan Shakespeare Limited and its subsidiaries (‘the Group”) as required by the Corporations Act 2001. The financial report is presented in Australian dollars, which is the Group’s functional and presentation currency. McMillan Shakespeare Limited is a company limited by shares and domiciled in Australia, whose shares are publicly traded on the Australian Stock Exchange. (b) Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board (AASB), and Corporations Act 2001. McMillan Shakespeare Limited is a for-profit entity for the purpose of preparing the financial statements. Material accounting policies adopted in the preparation of these financial statements are presented below and have been applied consistently unless stated otherwise. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Compliance with IFRS Australian Accounting Standards incorporate International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with IFRSs. (c) Principles of consolidation (i) Subsidiaries The consolidated financial statements comprise the financial statements of the Company and its subsidiaries which are all entities (including structured entities) controlled by the Company as at 30 June each year. Control is achieved when the Group is exposed to, or has rights to, variable returns from its involvement in the entity and has the ability to affect those returns through its power to direct the activities of the entity. In assessing control, the Group considers all relevant facts and circumstances to determine if the Group’s voting rights in an investee are sufficient to give it power, including the following: – the size of the Group’s voting rights holding relative to the size and dispersion of holdings of the other vote holders; – potential voting rights held by the Group and other holders; – rights arising from other contractual arrangements; and – facts and circumstances that indicate whether the Group has the ability to direct relevant activities at the time decision need to be made. The Group reassess whether the Group has control over an entity when facts and circumstances indicate changes that may affect any of these elements. Subsidiaries are consolidated from the date control is transferred to the Group and deconsolidated from the Group from the date that control ceases. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from intra-group transactions are eliminated. Unrealised losses are also eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost in the individual financial statements of the parent entity, including the value of options issued by the Company on behalf of its subsidiaries in relation to employee remuneration. (ii) Joint ventures The Group has an interest in a joint venture, where by contractual agreement, the joint venture partners jointly control the economic activities and key decisions of the joint venture entity. The arrangement requires unanimous consent of the parties for key strategic, financial and operating policies that govern the joint venture. The Group’s interest in the joint venture entity is accounted for using the equity method after initially recognising the investment at cost. Under the equity method, the post-acquisition share of profits and losses of the joint venture entity is recognised in profit and loss, and the share of post- acquisition movements in other comprehensive income is recognised in other comprehensive income. When the Group’s share of losses exceeds its interest in the joint venture entity, the carrying amount of that interest, including any long-term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the joint venture entity. The Group’s share of intra-group balances, transactions and unrealised gains or losses on such transactions between the Group and the joint venture are eliminated. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 53 (d) Business combinations (e) Employee Share Trust The acquisition method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition related costs are expensed as incurred. Where equity instruments are issued, the value of the equity instruments is their published market price over the period representative of the achievement of control the transfer of the benefits from the achievement of control unless, in rare circumstances, it can be demonstrated that the published price on that day is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in business combinations are initially measured at their fair values at acquisition date. The excess of the cost of acquisition over the fair value of the Consolidated Group’s share of the identifiable net assets acquired is recorded as goodwill (refer Note 1(j)(i)). If the cost of acquisition is less than the Consolidated Group’s share of the fair value of the net assets acquired, the gain is recognised in profit or loss. If the initial accounting for a business combination is incomplete by the time of reporting the period in which the business combination occurred, provisional estimates are used for items for which accounting is incomplete. These provisional estimates are adjusted in a measurement period that is not to exceed one year from the date of acquisition to reflect the information it was seeking about facts and circumstances that existed at the date of acquisition that had they been known would have affected the amounts recognised at that date. Any contingent consideration to be transferred by the Group will be recognised at fair value at acquisition date. Contingent consideration that includes an asset or liability is classified as an asset or liability and is re- measured for fair value changes. Subsequent changes to the fair value of contingent consideration that qualify as measurement period adjustments are retrospectively adjusted against goodwill. For changes to the fair value of contingent consideration that occur beyond the measurement period are recognised in profit or loss. Contingent consideration that is classified as an equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to the present value at the date of the exchange using the entity’s incremental borrowing rate as the discount rate. The Group maintains the McMillan Shakespeare Limited Employee Share Plan Trust (EST) to facilitate the distribution of McMillan Shakespeare Limited shares under the Group’s executive option plan. The EST is controlled by McMillan Shakespeare Limited and forms part of the Consolidated Group. Shares held by the EST are disclosed as treasury shares and are deducted from issued shares. (f) Current versus non-current classification The Group presents assets and liabilities in the statements of financial position based on current/ non- current classification. An asset is current when it is: – Expected to be realised or intended to be sold or consumed in the Group’s normal operating cycle, – Held primarily for the purpose of trading, – Expected to be realised within twelve months after reporting date, or – Cash or a cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after reporting date. The Group classifies all other assets as non-current. A liability is current when: – It is expected to be settled in the Group’s normal operating cycle, – It is held primarily for the purpose of trading, – It is due to be settled within twelve months after reporting date, or – There is an unconditional right to defer the settlement of the liability for at least twelve months after reporting date. The Group classifies all other liabilities as non-current. (g) Income tax Income tax (i) The income tax expense for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to differences and unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the entities in the Group operate and generate taxable income. (ii) Deferred tax Deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those rates which are enacted or substantially enacted. Deferred tax is not recognised if they arise from the initial recognition of goodwill. Deferred tax assets MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 54 are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax bases of investments in subsidiaries where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax on items that are accounted for in other comprehensive income or equity are recognised in other comprehensive income and equity respectively. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and the deferred taxes relate to the same taxable entity and the same taxing authority. (iii) Tax consolidation The Company and its wholly-owned Australian resident entities are members of a tax consolidated group under Australian taxation law. The Company is the head entity in the tax consolidated group. Entities within the tax consolidated group have entered into a tax funding agreement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, the Company and each of the entities in the tax consolidated group have 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 head entity. (iv) Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances) or a tax credit under the Incentive regime in Australia in relation to eligible Research & Development expenditure. The Consolidated Group accounts for such allowances as a reduction in income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits. (h) Non-current assets held for sale and discontinued operations Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The criteria for classification as held for sale is satisfied when the sale is highly probable, the asset is available for immediate sale in its present condition and management is committed to the sale, is expected to successfully complete the sale within one year from the date of classification. A discontinued operation represents a major line of business or geographical area of operations that has been disposed of or is classified as held for sale, or is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. (i) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation on assets is calculated on a straight-line basis over the estimated useful life of the asset as follows: Class of Fixed Asset Plant and equipment Motor vehicles under operating lease Depreciation Rate 20% – 40% 20% – 33% The assets’ residual values and useful lives are reviewed and adjusted, at the end of the reporting period. Motor vehicles no longer held under an operating lease are classified as inventory. (j) Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets acquired in a business combination are recognised at their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at their initial value less any accumulated amortisation and accumulated impairment losses. Specific criteria for various classes of intangible assets are stated below. (i) Goodwill Goodwill represents the excess of the cost of the business combination over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (refer Note 15(c)). Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Any impairment is recognised immediately in the statement of profit or loss and cannot be subsequently reversed. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 55 inflows which are largely independent of cash inflows from other assets (cash-generating units). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. For assets other than goodwill where impairment losses previously recognised no longer exist or have decreased, the amount is reversed to the extent that the asset’s carrying amount does not exceed the recoverable amount, nor the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Goodwill is tested for impairment annually and whenever there is indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Operating lease assets are reviewed for impairment on an ongoing basis and at reporting date using both internal and external sources of information. (l) Financial instruments Recognition and de-recognition Regular purchases and sales of financial assets and liabilities are recognised on trade date, the date on which the Group commits to the financial assets or liabilities. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. The Group classifies financial assets into the following categories depending on the purpose for which the asset was acquired. (i) Cash and cash equivalents For statement of cash flow purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in value. (ii) Capitalised software development costs Software development costs are capitalised when it is probable that future economic benefits attributable to the software will flow to the entity through revenue generation and / or cost reduction. Development costs include external direct costs for services, materials and licences and internal labour related costs directly involved in the development of the software. Capitalised software development costs are amortised from the date of commissioning on a straight line basis over three to five years, during which the benefits are expected to be realised. (iii) Contract rights Contract rights acquired and amounts paid for contract rights are recognised at the value of consideration paid plus any expenditure directly attributable to the transactions. Contracts are amortised over the life of the contract, and reviewed annually for indicators of impairment in line with the Consolidated Group’s impairment policy (refer Note 1(k)). (iv) Identifiable intangible assets acquired on business combination Identifiable intangible assets with finite lives are amortised over their useful lives and assessed for impairment. Amortisation of identifiable intangible assets is calculated on a straight-line basis over the estimated useful lives as follows: Intangible asset Dealer relationships and networks Customer contracts Brand names Useful life 10 to 13 years 13 years 6 years to indefinite Brand names that have indefinite useful lives will consequently, not be amortised but are subject to annual impairment assessments. Brand names that are restructured or consolidated with other brands and which consequently, are considered to have a finite life are amortised over a useful life that represents the expected run-off of economic benefits expected from them. (k) Impairment of assets At each reporting date, the Group reviews the carrying amount of its tangible (including operating lease assets) and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the affected assets are evaluated. An impairment loss is recognised in profit or loss for the amount that the asset’s carrying value exceeds the recoverable amount. The recoverable amount of an asset is determined as the higher of the asset’s fair value less costs to sell and its value in use. For the purpose of assessing fair value, assets are grouped at the lowest levels for which there are separately identifiable cash MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 56 (ii) Loans and receivables (v) Other financial liabilities Trade and other receivables All receivables are classified as ‘loans and receivables’ under the requirements of AASB 139 Financial Instruments: Recognition and Measurement and are recognised initially at fair value, and subsequently at amortised cost, less provision for impairment. All trade and other receivables are classified as current as they are due for settlement within the agreed credit terms of settlement which are usually no more than 30 days from the date of recognition. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Loan receivables Loan receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. They are included in current assets, where their maturities are less than 12 months from reporting date and in non-current assets if longer. Loan receivables that have the ability to convert to a specified amount of equity shares of the borrower in restitution for defaulting loan repayments are designated as available-for-sale financial assets. These assets are measured at fair value at inception and subsequently, marked to market at reporting date with the movement taken to reserves. In measuring fair value at reporting date, the net present value of the loan is calculated using market interest rates at reporting date, or if it is probable that the loan receivable will be converted to shares of the borrower, the market value of the underlying shares attributable to the loan receivable is used. (iii) Separate Financial Statements Investments in subsidiaries are carried at cost and adjusted for any share based payments in the separate financial statements of the Company, under AASB 127: Separate Financial Statements. (iv) Available-for-sale financial assets Available-for-sale financial assets are non-derivative assets that are designated as available-for-sale or are not classified in any other category of financial assets. They include investments and debt instruments such as subordinated loans that may be convertible to equity. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments and subordinated loan reserve, with the exception of impairment losses which is recognised in profit or loss. Available-for-sale financial assets are included in non-current assets unless the investment matures or is intended to be disposed of within twelve months of the end of the reporting period. Trade and other payables Trade and other payables, including accruals, and borrowings are recorded initially at fair value, and subsequently at amortised cost using the effective interest rate method, with interest expense recognised on an effective yield basis. The effective interest rate method is a method of calculating the amortised cost of a financial liability and that allocates interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future payments through the expected life of the financial liability to the net carrying amount on initial recognition. Trade and other payables are non-interest bearing. Financial liabilities are derecognised when the Group’s obligations are discharged, cancelled or expire pursuant to its commitments. The difference between its carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. (vi) Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Impairment conditions are objective evidence of one or more events occurring after the initial recognition of the financial asset that affects estimated future cash flows of the investment. (vii) Impairment of trade and other receivables The collectability of receivables is reviewed on an ongoing basis and debts that are determined as not collectable are written off and expensed. An allowance for impairment is provided for when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The provision consists of allowances for specific doubtful amounts. The allowance account for receivables is used to record impairment losses unless the Group is satisfied that there is no possible recovery of the amount, at which point it is written off directly against the amount owing. The impairment loss and any subsequent reversal thereof, is recognised in the Statement of Profit or Loss within other expenses. There have been no amounts recorded for impairment for the parent entity. (viii) Impairment of available for sale equity securities In respect of available for sale equity securities, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income and accumulated in investment revaluation reserve within equity. In respect of available for sale debt securities, MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. (m) Employee benefits (i) Salaries and wages, annual leave and long service leave Short term liabilities for employee benefits arising from services rendered by employees to reporting date which are expected to be settled within twelve months after the end of the reporting date have been recognised and are measured at the amounts expected to be paid when the liabilities are settled. Long service leave and annual leave liabilities and other employee benefits that are not expected to be settled wholly within one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates attaching to high quality corporate bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. Employee leave liabilities and other obligations are presented as current liabilities in the statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. Annual leave and long service leave liabilities are included in provisions and other employee liabilities are included in other payables. (ii) Superannuation The amount charged to the profit or loss in respect of superannuation represents the contributions made by the Group to superannuation funds. (iii) Bonuses A liability for employee benefits in the form of bonuses is recognised in employee benefits. This liability is based upon pre-determined plans tailored for each participating employee and is measured on an ongoing basis during the financial period. The amount of bonuses is dependent on the outcomes for each participating employee. As has been past practice, an additional amount is included where the Board has decided to pay discretionary bonuses for exceptional performance and a provision recognised for this constructive obligation. 57 (n) Revenue Revenue is recognised at the fair value of consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured. Amounts disclosed as revenue are shown net of returns, trade allowances and duties, amortisation of pre-paid fee discounts included in deferred contract establishment costs and taxes paid. The Group has concluded that it acts as agent in some of its revenue arrangements and principal in other arrangements. The following are specific criteria that are applied for the recognition of revenue: (i) Rendering of services Revenue from services provided is recognised by reference to the stage of completion of the services provided to the customer. This includes revenue derived from services that the Group has performed mainly as agent and consequently, does not possess any significant credit, carry or residual risks of ownership of the underlying financial arrangement with the customer. Revenue is recognised when the customer accepts delivery or on completion of the contract for the underlying financial arrangement with the financier or insurer, Interest Revenue from interest is recognised as interest accrues using the effective interest rate method. The effective interest rate method uses the rate that exactly discounts the estimated future cash flows over the expected life of the financial asset. (ii) (iii) Dividends Revenue from dividends is recognised when the Group’s right to receive payment is established. (iv) Lease revenue (property, plant & equipment) Operating lease rental revenue is made up of operating lease interest and the principal that forms the net investment in the leased asset. Interest included in operating lease instalments is calculated on a straight- line basis for each customer contract based on the effective rate method using the interest rate in the lease contract, the net investment value of the leased asset and the residual value. The principal portion upon receipt reduces the net investment in the leased asset. (v) Sale of leased assets Revenue includes the proceeds from the routine sale of motor vehicles previously leased and included within property, plant and equipment following the cessation of the rental of these assets by a customer. (vi) Vehicle maintenance services Revenues from maintenance service contracts are recognised for services rendered when it is probable that economic benefits from the transaction will flow to the Group. When the amounts are uncollectable or recovery is not considered probable, an expense is recognised MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 58 immediately. Revenue is recognised for each reporting period by reference to the stage of completion when the outcome of the service contracts can be estimated reliably. The stage of completion of service contracts is based on the proportion that costs incurred to date bear to total estimated costs. When the outcome cannot be measured reliably, revenue is deferred and recognised 60 days after the contract terminates. (vii) Warranty revenue Warranty revenue comprises product income from direct business, charged to product holders, but excluding stamp duties, GST and other amounts collected on behalf of third parties. Warranty revenue, including that on unclosed business, is recognised when it has been earned, calculated from attachment date over the period of the contract for direct business. Where time does not approximate the pattern of risk, previous claims experience is used to derive the incidence of risk. The proportion of revenue received or receivable not earned in the profit and loss at reporting date is recognised in the consolidated statement of financial position as an unearned liability. Income on unclosed business is brought to account using estimates based on the previous year’s actual unclosed business with due allowance made for any changes in the pattern of new business and renewals. (o) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Statement of Financial Position. (p) Leasing Leases are classified as finance leases whenever the terms of the contract transfers substantially all the risk and rewards of ownership to the lessee. All other contracts are classified as operating leases. (i) Finance lease receivable portfolio Lease contracts with customers are recognised as finance lease receivables at the Group’s net investment in the lease which equals the net present value of the future minimum lease payments. Finance lease income is recognised as income in the period to reflect a constant periodic rate of return on the Consolidated Group’s remaining net investment in respect of the lease. (ii) Operating lease portfolio – the Group as lessor Lease contracts with customers other than finance leases are recognised as operating leases. The Group’s initial investment in the lease is added as a cost to the carrying value of the leased assets and recognised as lease income on a straight line basis over the term of the lease. Operating lease assets are amortised as an expense on a straight line over the term of the lease based on the cost less residual value of the lease. (iii) Operating leases – the Group as lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term except where another systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed. Where incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of lease expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the lease asset are consumed. (q) Share-based payments The fair values of options granted are recognised as an employee benefit expense with a corresponding increase in equity (share option reserve). The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. Fair value is determined using a binomial option pricing model. In determining fair value, no account is taken of any performance conditions other than those related to the share price of the Company (“market conditions”). The cumulative expense recognised between grant date and vesting date is adjusted to reflect the Directors’ best estimate of the number of options that will ultimately vest because of internal conditions attached to the options, such as the employees having to remain with the Consolidated Group until vesting date, or such that employees are required to meet internal targets. No expense is recognised for options that do not ultimately vest because internal conditions were not met. An expense is still recognised for options that do not ultimately vest because a market condition was not met. (r) Issued capital Ordinary shares and premium received on issue of options are classified as issued capital within equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax benefit. Costs directly attributable to the issue of new shares or options associated with the acquisition of a business are included as part of the business combination. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 59 (s) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Group, on or before the end of the financial year but not distributed at balance date. (t) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to members of the Company by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares during the year. (ii) Diluted earnings per share Earnings and the weighted average number of shares used in calculating basic earnings per share is adjusted for the following to calculate diluted earnings per share: – the after-tax effect of interest and any other financing costs associated with dilutive potential ordinary shares; and – the weighted average number of additional shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (u) Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identified as the Chief Executive Officer. (v) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and where it is probable that the Group is required to settle the obligation, and the obligation can be reliably estimated. Provisions are measured at the present value of expenditure expected at settlement. The discount rate used to determine the present value reflects the current pre-tax market rate of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. Provision for cancellations and clawbacks Specific provisions are provided for cancellation of contracts and the consequential clawback of commissions received at the time revenue is recognised. This provision reflects an obligation to refund commissions received from the financier or insurer for early termination of a loan or policy. Rebate provisions relate to the clawback of commission from financiers, based on the various financier clawback policies. Restructurings A restructuring provision is recognised when the Group has developed a plan for the restructuring and has communicated with those affected that it will carry out the plan. The provision is measured based on the direct cost arising from and necessary to undertake the restructuring plan and not with the ongoing activities of the Group. Onerous provision Contractual and unavoidable costs of meeting obligations that exceed the economic benefits expected to be received under it are recognised as an onerous provision. The provision is measured on the net cash outflow and present valued using the pre-tax rate that reflects current market rates to reflect the time value of money and any specific risks to the liability. (w) Deferred acquisition costs (DAC) Acquisition costs incurred in deriving warranty income are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to warranty revenue in subsequent reporting periods. Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence risk under the warranty contracts to which they relate. The pattern of amortisation corresponds to the earning pattern of warranty revenue. (x) Unearned premium liability The Group assesses the risk attached to unexpired warranty contracts based on risk and earning pattern analysis, to ascertain whether the unearned warranty liability is sufficient to cover all expected future claims against current warranty contracts. This assessment is performed quarterly, to ensure that there have been no significant changes to the risk and earning pattern and to ensure the liability recorded is adequate. (y) Outstanding claims liability The liability represents claims authorised, prior to reporting date, and paid in the subsequent reporting period. (z) Inventories The inventory of motor vehicles is stated at the lower of cost and net realisable value. Following termination of the lease or rental contract the relevant assets are transferred from Assets under Operating Lease to Inventories at their carrying amount. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs to make the sale. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 60 (aa) Operating cash flow (ii) Embedded derivatives All cash flows other than investing or financing cash flows are classified as operating cash flows. As the asset management segment provides operating and finance leases for motor vehicles and equipment, the cash outflows to acquire the lease assets are classified as operating cash outflows. Similarly, interest received and interest paid in respect of the asset management segment are classified as operating cash flows. (ab) Borrowings Borrowings are initially recorded at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. The effective interest rate method exactly discounts the estimated cash flows through the expected life of the borrowing. Transaction costs comprise fees paid for the establishment of loan facilities and are amortised over the term of the borrowing facilities. (ac) Derivative financial instruments The Group uses derivative financial instruments to manage its interest rate exposure to interest rate volatility and its impact on leasing product margins. The process to mitigate against the exposure seeks to have more control in balancing the spread between interest rates charged to lease contracts and interest rates and the level of borrowings assumed in its financing as required. In accordance with the Group’s treasury policy, derivative interest rate products that can be entered into include interest rate swaps, forward rate agreements and options as cash flow hedges to mitigate both current and future interest rate volatility that may arise from changes in the fair value of its borrowings. Derivative financial instruments are recognised at fair value at the date of inception and subsequently re- measured at fair value at reporting date. The resulting gain or loss is recognised in profit or loss unless the derivative or amount thereof is designated and effective as a hedging instrument, in which case the gain or loss is taken to other comprehensive income in the cash flow hedging reserve that forms part of equity. Amounts recognised in other comprehensive income are transferred to profit or loss and subsequently recognised in profit or loss to match the timing and relationship with the amount that the derivative instrument was intended to hedge. (i) Hedge accounting At the inception of the hedging instrument, the Group documents the relationship between the instrument and the item it is designated to hedge. The Group also documents its assessment at the inception of the hedging instrument and on an ongoing basis, whether the hedging instruments that are used have been and will continue to be highly effective in offsetting changes in the cash flows of the hedged items. Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through profit or loss. (iii) Non-trading derivatives Non-trading derivative financial instruments include the Group’s irrevocable option to purchase all of the shares owned by the partner in the joint venture entity. The financial instruments are measured at fair value initially and in future reporting dates. Fair value changes are recognised in profit or loss. (ad) Foreign currency translation The consolidated financial statements of the Group are presented in Australian dollars which is the functional and presentation currency. The financial statements of each entity in the Group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). (i) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Differences resulting at settlement of such transactions and from the translation of monetary assets and liabilities at reporting date are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Translation differences are recognised as part of the fair value change of the non-monetary item. (ii) Group companies On consolidation of the financial results and affairs of foreign operations, assets and liabilities are translated at prevailing exchange rates at reporting date and income and expenses for the year at average exchange rates. The resulting exchange differences from consolidation are recognised in other comprehensive income and accumulated in equity. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss. (ae) Critical judgements and significant accounting estimates The preparation of financial statements requires the Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 61 Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. All significant judgements, estimates and assumptions made during the year have been considered for significance. Key assumptions used for value-in-use calculations to determine the recoverable amount of assets in impairment tests are discussed in Note 15(d). Estimates of significance are used in determining the residual values of operating lease and rental assets at the end of the contract date and income from maintenance services, which is recognised on a percentage stage of completion. In determining residual values, critical judgements include the future value of the asset lease portfolio at the time of sale, economic and vehicle market conditions and dynamics. For income from maintenance contracts, judgement is made in relation to expected realisable margins. The estimates and underlying assumptions are reviewed on an ongoing basis. In recognising premium revenue for the direct business is the consequential recognition of unearned premium liability at reporting date. The measurement is based upon the expected future pattern of incidence of risk in relation to warranty contracts. In determining the estimated pattern of incidence of risk, the Group uses a variety of estimation techniques generally based on statistical analysis of the Group and industry experience that assumes that the development pattern of current claims will be consistent with past experience as appropriate. No other judgements, estimates or assumptions are considered significant. (af) New accounting standards and interpretations Several new accounting standards or amendments to accounting standards were issued during the year. None of these standards and amendments materially affected any of the amounts recognised in the current period or any prior period. The following new accounting standards, amendments to standards and interpretations (Standards) have been issued and are effective for annual reporting periods beginning after 30 June 2016, but have not been applied in preparing this financial report. None of these are expected to have a significant effect on the financial report of the Consolidated Group unless otherwise noted in the Standards below. The Consolidated Group has not or does not plan to adopt these Standards early and the extent of their impact has not been fully determined unless otherwise noted below. (i) AASB 9 Financial Instruments (effective for annual reporting periods on or after 1 January 2018) AASB 9 introduces new requirements for the classification and measurement and de-recognition of financial assets and financial liabilities. The new standard replaces AASB 139 Financial Instruments: Recognition and Measurement in its entirety. The new standard also sets out new rules for hedge accounting and introduces expanded disclosure requirements and changes in presentation. In relation to the impairment of financial assets, the new requirement is for the use of an expected credit loss model, to replace the current incurred credit loss model. The Group has not yet assessed in detail the impact of AASB 9. However, based on the Group’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2019. (ii) AASB 15 Revenue from Contracts with Customers (effective for annual reporting periods on or after 1 January 2018) The revenue-related interpretations in IFRS 15 will include the establishing of a new control-based revenue recognition model, changing the basis for deciding whether revenue is to be recognised over time or at a point in time, the provision of new and more detailed guidance on specific topics (eg multiple element arrangements, variable pricing, rights of return, warranties, licensing). The new standard will also expand and improve disclosures about revenue. The Group has not yet assessed in detail the full impact of this standard. However, from a preliminary assessment of the Group’s products sold, contractual terms with customers and current revenue recognition accounting policies, the Standard is not expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2019. (iii) AASB 16 Leases (effective from annual reporting periods on or after 1 January 2019) AASB 16 replaces AASB 117 Leases that introduces the accounting model that requires lessees to recognise all leases on balance sheet, except for short-term leases and leases of low value assets. The Group has not completed a detailed assessment of the impact of AASB 16 and it has not been practicable to provide a reasonable estimate until this has been completed. However, based on the preliminary assessment, the likely impact on the first time adoption of the Standard for the year ending 30 June 2020 includes the following. – It is not expected there is any significant impact on the Group’s accounting model and the disclosure of the transactions and balances as lessor. – The Group’s currently transacted operating leases for property will be brought on to the balance sheet. The outstanding commitments will be recognised as a liability with a corresponding asset for the right to use the asset. – It is probable that equity will be affected from the timing of the use of the asset which is likely to be quicker compared to the discharge of the liability. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 62 – Performance measures such as EBIT will be higher as the implicit interest in lease payments for former off balance sheet leases will be represented as part of finance costs rather than being included in operating expenses. – Operating cash flow in the statement of cash flows will be higher as principal repayments on all lease liabilities will now be included in financing activities rather than operating activities. Cash flow from financing activities will now be correspondingly, lower. (iv) AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure initiative: Amendments to AASB 101 (effective for annual reporting periods on or after 1 January 2016) The amendments to AASB 101 Presentation of Financial Statements are as follows. – Clarify the materiality requirements to include and emphasis on the potentially detrimental effect of obscuring useful information with immaterial information. – Clarify that AASB 101’s specified line items in the statement of profit or loss and other comprehensive income and the statement of financial position can be disaggregated. – Add requirements for how the Group should present subtotals in the statements of profit or loss and statements of financial position. – Clarify that entities have flexibility as to the order that notes are presented but also emphasise that understandability and comparability should be considered by an entity when deciding that order . When these amendments are first adopted for the year ending 30 June 2017, there will be no material impact on the financial statements. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (ag) Changes in accounting policies In the current year, the Group has adopted all of the new and revised Standards and Interpretations issues by the Australian Accounting Standards Board that are relevant to its operations and effective for the current annual reporting period. There have been no significant effects on current, prior or future periods arising from the first time application of the standards in respect of presentation, recognition and measurement in the current year financial statements. (ah) Parent entity accounts In accordance with ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191 the Group will continue to include parent entity financial statements in the financial report. (ai) Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 2 Financial Risk Management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management approach is to identify the risk exposures and implement safeguards which seek to manage these exposures and minimise potential adverse effects on the financial performance of the Group. The Board is responsible for monitoring and managing the financial risks of the Group. The Board monitors these risks through monthly board meetings, via regular reports from the Risk and Compliance Committee and ad hoc discussions with senior management, should the need arise. A risk report is presented to the Audit, Risk and Compliance Committee at least four times per year. The Credit and Treasury reports are provided to the Credit Committee and Interest Committee respectively, by the Group Treasurer and Head of Credit, including sensitivity analysis in the case of interest rate risk and aging / exposure reports for credit risk. These committee reports are discussed at Board meetings monthly, along with management accounts. All exposures to risk and management strategies are consistent with prior year, other than as noted below. (a) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Liquidity management strategy The Asset Management business and the resultant borrowings exposes the Group to potential mismatches between the refinancing of its assets and liabilities. The Group’s objective is to maintain continuity and flexibility of funding through the use of committed revolving bank club facilities based on common terms, asset subordination and surplus cash as appropriate to match asset and liability requirements. The Group’s policy is to ensure that there is sufficient liquidity through access to committed available funds to meet at least twelve months of average net asset funding requirements. This level is expected to cover any short term financial market constraint for funds. The Group monitors daily positive operating cash flows and forecasts cash flows for twelve month period. Significant cash deposits have been maintained which enable the Group to settle obligations as they fall due without the need for short term financing facilities. The Chief Financial Officer and the Group Treasurer monitor the cash position of the Group daily. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 63 Financing arrangements During the year, the Group increased its committed borrowing facilities for the Asset Management segment to finance its fleet management portfolio as follows. 2016 2015 Secured bank borrowings Maturity dates Facility Used Unused Facility Used Unused AUD’000 NZD’000 NZD’000 AUD’000 GBP’000 GBP’000 31/03/2018 165,000 132,000 31/03/2018 1 31/03/2019 1 31/03/2019 03/04/2018 31/03/2019 10,000 10,000 75,000 42,000 35,000 8,500 2,000 46,200 37,900 15,500 33,000 1,500 8,000 28,800 4,100 19,500 250,000 20,000 186,000 8,662 - - - - 64,000 11,338 - - 57,000 43,500 13,500 - - - Total borrowings (AUD) 398,148 284,654 113,494 386,995 283,947 103,048 1 Part of AUD facilities to be drawn in NZD20m The facilities have been provided by a financing club of three major Australian banks operating under common terms and conditions. During the year, the mix of facilities and amounts drawn from changed between Club members. The Group believes that this initiative has improved liquidity, provides funding diversification and has achieved a lower cost. The bank loans are sourced in local currency of the principal geographical markets to minimise foreign currency exposure. The maturity date for one of these facilities has been extended to 31 March 2019. In addition to the borrowing facilities to finance Asset Management’s lease portfolio, the Group has a GBP4.75 million facility that was fully drawn down for the acquisition of CLM Fleet Management plc. This borrowing is an amortising facility that matures on 31 August 2018. The Group also has a facility of AUD53.1 million which was fully drawn on to fund the acquisition of the Presidian Group. This is an amortising facility that matures on 31 March 2020. The level and type of funding will be reviewed on an on-going basis to ensure they meet the Group’s on-going requirements in the principal geographical market operated in. Maturities of financial liabilities The table below analyses the Group’s and the parent entity’s financial liabilities into relevant maturity groupings based on their contractual maturities and based on the remaining period to the expected settlement date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying value as the impact of discounting is not significant. Consolidated Group – at 30 June 2016: Contractual maturities of financial liabilities Trade payables Other creditors and liabilities Borrowings Less than 6 months $’000 20,792 64,706 9,733 95,231 6–12 months $’000 - 176 12,517 1–2 years $’000 2–5 years $’000 - 1,481 295,853 - 7,164 129,396 12,693 297,334 136,560 Consolidated Group – at 30 June 2015: Contractual maturities of financial liabilities Trade payables Other creditors and liabilities Borrowings Less than 6 months $’000 19,399 57,282 8,502 85,183 6–12 months $’000 - - 11,603 11,603 1–2 years $’000 2–5 years $’000 - - - - 27,415 346,136 27,415 346,136 Over 5 years $’000 - - - - Over 5 years $’000 - - - - Total contractual cash flows $’000 20,792 73,527 Carrying Amount / liabilities $’000 20,792 74,618 447,499 345,570 541,818 440,980 Total contractual cash flows $’000 19,399 57,282 Carrying Amount / liabilities $’000 19,399 57,282 393,656 351,704 470,337 428,385 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 64 Parent – at 30 June 2016: Contractual maturities of financial liabilities Less than 6 months $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 Amounts payable to wholly owned entities and other payables Borrowings Financial guarantee contracts 105,617 6,561 3,173 - 6,469 6,048 - - 12,664 283,189 31,287 98,109 115,351 12,517 295,853 129,396 Parent – at 30 June 2015: Contractual maturities of financial liabilities Less than 6 months $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 - - - - 105,617 105,617 56,981 390,519 53,028 - 553,117 158,645 Over 5 years $’000 Total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 Amounts payable to wholly owned entities and other payables Borrowings Financial guarantee contracts (b) Credit risk 47,908 2,836 5,666 - 3,817 7,786 - - 13,770 13,645 44,718 301,418 56,410 11,603 27,415 346,136 - - - - 47,908 47,908 65,141 328,515 57,018 - 441,564 104,926 Credit risk is the risk of financial loss to the Group if a customer or counter-party to a financial instrument fails to meet its contractual obligations. The Company and Group have exposure to credit risk through the receivables’ balances, customer leasing commitments and deposits with banks. The following carrying amount of financial assets represents the maximum credit exposure at reporting date. Trade and other receivables Deposits with banks Finance lease & CHP receivables Operating lease assets Consolidated Group Parent Entity 2016 $’000 37,396 95,583 135,559 292,825 561,363 2015 $’000 46,941 85,729 125,164 293,125 550,959 2016 $’000 - 5,716 - - 2015 $’000 - 2,598 - - 5,716 2,598 Lease assets of the Asset Management business represents future lease rentals that have yet to be invoiced. Such assets are secured against underlying assets. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 65 Credit risk management strategy Credit risk arises from cash and cash equivalents and deposits with banks as well as exposure from outstanding receivables and unbilled future rentals for leased vehicles and counterparty risks associated with interest and currency swaps. For deposits with banks, only independently rated institutions with upper investment-grade ratings are used, in accordance with the Board approved Investment Policy. Credit risk relating to the leasing of assets is managed pursuant to the Board approved Credit Policy by the Group CFO and the Group Treasurer and Head of Credit. The policy is reviewed annually and prescribes minimum criteria in the credit assessment process that includes credit risk rating of the customer, concentration risk parameters, type and intended use of the asset under lease and the value of the exposure. A two tiered Credit Committee structure is in place to stratify credit applications for assessment; a Local Credit Committee and an Executive Credit Committee reviewing applications based on volume, nature and value of the application. The Board receives a monthly report from the Credit Committee and periodically reviews concentration limits that effectively spread the risks as widely as possible across asset classes, client base, industries, regions and asset manufacturer. There is a broad spread of credit risk concentration through the Group’s exposure to individual customers, industry sectors, asset types, asset manufacturers or regions. Where customers are independently rated, these ratings are taken into account. If there is no independent official rating, management assesses the credit quality of the customer using the Group’s internal risk rating tool, taking into account information from an independent national credit bureau, its financial position, business segment, past experience and other factors using an application scorecard or other risk-assessment tools. Collateral is also obtained where appropriate, as a means of mitigating risk of financial loss from defaults. The overall debtor aging position is reviewed monthly by the Board, as is the provision for any impairment in the trade receivables balance. (c) Market risk (i) Interest rate risk The Group’s strong cash flow from operations and borrowings exposes the Group to movements in interest rates where movements could directly affect the margins from existing contracts and the pricing of new contracts for assets leased and income earned from surplus cash. Exposure to interest rate volatility is managed via the Group’s Treasury and pricing policies. The policies aim to minimise mismatches between the amortised value of lease contracts and the sources of financing to mitigate repricing and basis risk. Mismatch and funding graphs including sensitivity analysis, are reported monthly to the Board along with the minutes of the monthly Interest Committee meetings. Interest rate risk arises where movements in interest rates affect the net margins on existing contracts for assets leased. As the Group carries significant cash and borrowings, movements in interest rates can affect net income to the Group, particularly for the Group Remuneration Services segment. Borrowings issued at variable rates expose the Group to repricing interest rate risk. As at the end of the reporting period, the Group had the following variable rate borrowings under long-term revolving facilities attributable to the Asset Management business and other loan facilities drawn on. AUD’000 GBP’000 Total AUD’000 2016 2015 Borrowings ’000 Weighted average interest rate % Borrowings ’000 Weighted average interest rate % 241,365 58,150 345,570 2.94 1.40 2.64 251,803 49,250 351,704 3.00 1.36 2.73 The weighted average interest rate of each borrowing is used as an input to asset repricing decisions for the geographical markets operated in. An analysis of maturities is provided in note 2(a). To mitigate the cash flow volatility arising from interest rate movements, the Group has entered into interest rate swaps with counterparties rated as AA- by Standard & Poors, to exchange, at specified periods, the difference between fixed and variable rate interest amounts calculated on contracted notional principal amounts. The contracts require settlement of net interest receivable or payable on a quarterly basis. These swaps are designated to hedge underlying borrowing obligations and match the interest-repricing profile of the lease portfolio in order to preserve the contracted net interest margin. At 30 June 2016, the Group’s borrowings for the Asset Management business of $229,554,000 (2015: $295,750,000) were covered by interest rate swaps at a fixed rate of interest of 3.38% (2015: 3.58%). The Group’s interest rate risk also arises from cash at bank and deposits, which are at floating interest rates. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 66 At reporting date, the Group had the following variable rate financial assets and liabilities outstanding: Cash and deposits Bank loans (Asset Management segment) 1 Interest rate swaps (notional amounts) Bank loans (Presidian Group acquisition) 1 Net exposure to cash flow interest rate risk 2016 Balance $’000 95,583 (293,230) 229,554 (53,125) 2015 Balance $’000 85,729 (295,750) 275,554 (57,141) (21,218) 8,392 1 Excluding capitalised borrowing costs of $785,000 (2015: $1,064,000) for Asset Management and $97,000 (2015: $123,000) for the bank loan for Presidian. Sensitivity analysis – floating interest rates: At 30 June 2016, the Group’s and parent entity’s cash and cash equivalents give rise to credit and interest rate risk. Cash and cash equivalent funds held by the Group and the parent entity include funds at bank and in deposit net of bank borrowings that are not hedged. The Group also holds cash and cash equivalent funds in trust to which the Group has contractual beneficial entitlement to the interest. If the Australian interest rate weakened or strengthened by 25 basis points, being the Group’s view of possible fluctuation, and all other variables were held constant, the Group’s post-tax profit for the year would have been $649,000 (2015: $577,000) higher or lower and the parent entity $83,000 (2015: $95,000) higher or lower, depending on which way the interest rates moved based on the cash and cash equivalents and borrowings balances at reporting date. (ii) Foreign currency risk The Group’s exposure to foreign currency risk arises when financial instruments that are denominated in a currency other than the functional currency in which they are measured. This includes the Group’s inter-company receivables and payables which do not form part of the net investment in the UK and New Zealand entities. The Group’s exposure to translation related risks from financial and non-financial items of the UK and New Zealand entities do not form part of the Group’s risk exposure given that these entities are part of longer term investments and consequently, their sensitivity to foreign currency movements are not measured. The Group’s transactions are pre-dominantly denominated Australian dollars which is the functional and presentation currency. (iii) Other market price risk The Consolidated Group does not engage in any transactions that give rise to any other market risks. (d) Asset risk The Group’s exposure to asset risk is mainly from the residual value of assets under lease and the maintenance and tyre obligations to meet claims for these services sold to customers. Residual value is an estimate of the value of an asset at the end of the lease. This estimate, which is formed at the inception of the lease and any subsequent impairment, exposes the Group to potential loss from resale if the market price is lower than the value as recorded in the books. The risk relating to maintenance and tyre services arises where the costs to meet customer claims over the contracted period exceed estimates made at inception. The Group continuously reviews the portfolio’s residual values via a Residual Value Committee comprising experienced senior staff with a balance of disciplines and responsibilities, who measure and report all matters of risk that could potentially affect residual values and maintenance costs and matters that can mitigate the Group from these exposures. The asset risk policy sets out a framework to measure and factor into their assessment such critical variables as used car market dynamics, economic conditions, government policies, the credit market and the condition of assets under lease. At reporting date, the portfolio of motor vehicles under operating lease of $292,825,000 (2015: $293,125,000) included a residual value provision of $4,381,000 (2015: $5,237,000). (e) Fair value measurements The fair value of financial assets and financial liabilities is estimated for recognition and measurement for disclosure purposes. The following table is an analysis of financial instruments that are measured at fair value on a recurring basis subsequent to initial recognition, grouped into three levels based on the degree to which the fair value is observable. – Level 1: derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. – Level 2: derived from inputs other than quoted prices included in 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: derived from inputs for the asset or liability that are not based on observable market data (unobservable inputs). MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 67 Financial asset/ (financial liability) Interest rate swaps – cash flow hedge Fair value at 2016 $’000 2015 $’000 Fair value hierarchy (819) (699) 2 Valuation technique and key input Discounted cash flow using estimated future cash flows based on forward interest rates (from observable yield curves at the end of the reporting period) and contract interest rates, discounted to reflect the credit risk of various counterparties Except as detailed in the following table, the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values. The fair value of borrowings is not materially different to their carrying amounts since the interest payable is close to market rates. The carrying amount of cash, trade and other receivables, trade and other payables are assumed to be the same as their fair values, due to their short term nature. Carrying amount 2016 $’000 Consolidated Group Fair value 2016 $’000 Carrying amount 2015 $’000 Fair value 2015 $’000 Finance lease receivables – non-current 89,279 86,496 89,911 89,589 Current finance lease receivables are short term and their carrying amount is considered to equal their fair value. The fair value of non-current finance lease receivables were calculated based on cash flows discounted using an average of current lending rates appropriate for the geographical markets the leases operate of 3.83% (2015: 3.96%). They are classified as level 3 fair values in the fair values hierarchy due to the inclusion of unobservable inputs. 3 Revenue Revenue from continuing operations Remuneration services 1 Lease rental services Brokerage commissions and financial services Proceeds from sale of leased assets Dividends received Interest – other persons Other Total revenue Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 188,483 148,184 118,295 47,361 - 1,855 488 176,096 144,436 23,106 43,270 - 2,682 - - - - - - - - - 46,592 68,324 123 - 39 - 504,666 389,590 46,715 68,363 1 Included in remuneration services revenue is interest income derived from the holding of trust funds 9,587 10,108 Underwriting premium from direct business included in Retail Financial Services Revenue Gross written premium Movement in deferred income Premium revenue 31,700 (165) 31,535 13,483 (971) 12,512 - - - - - - - - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 68 4 Expenses (a) Profit before income tax includes the following specific expenses Depreciation and amortisation expenses and impairment Amortisation of software development Amortisation of contract rights acquired Depreciation of assets under operating lease Depreciation of plant and equipment Residual value impairment loss Amortisation of intangibles Rental expense on operating leases Minimum lease payments Superannuation Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 5,395 590 78,172 2,998 385 3,840 91,380 4,743 1,061 79,785 3,292 3,219 725 92,825 9,123 6,886 - - - - - - - - - - - - - - - - - - Defined contribution superannuation expense 8,259 6,677 (b) Other individually significant items Contracted property rental payments for vacant space included in property and corporate expense in the profit or loss Credit losses included in other expenses in the profit or loss (c) Auditor’s remuneration Remuneration of the auditor (Grant Thornton Audit Pty Ltd) of the parent entity for: Audit or review of the financial statements Other compliance Agreed upon procedures: – review of borrowing covenant Remuneration of a network firm of the parent entity auditor: Audit or review of the financial statements (UK) Other compliance Consolidated Group Parent Entity 2016 $’000 - - 2015 $’000 1,725 448 2016 $’000 2015 $’000 - - - - Consolidated Group Parent Entity 2016 $ 2015 $ 2016 $ 2015 $ 278,000 46,400 277,000 46,400 1,900 1,900 139,656 100,265 4,062 - - - - - - - - - - - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 69 2015 $’000 (425) - (92) (517) 2015 $’000 66,608 19,982 - - - - - - 5 Income Tax Expense / (Benefit) Consolidated Group Parent Entity (a) Components of tax expense / (benefit) Current tax expense/(benefit) Adjustments for current tax of prior years Deferred tax Income tax expense / (benefit) 2016 $’000 39,066 668 (2,740) 36,994 2015 $’000 22,054 (311) 4,712 26,455 2016 $’000 (1,494) 115 645 (734) Consolidated Group Parent Entity (b) The prima facie tax payable on profit before income tax is reconciled to the income tax expense / (benefit) as follows: Profit before income tax 2016 $’000 119,463 Prima facie tax payable on profit before income tax at 30% (2015: 30%) 35,839 Add tax effect of: – non-deductible costs – overseas tax rate differential of subsidiaries – over-provision of tax from prior year – share based payments – research & development – deductible expenses not previously recognisable Less tax effect of: – dividends received Income tax expense/(benefit) Amounts recognised directly in equity Expense relating to the setting up of Employee Share Trust for the distribution of employee share-based payments Deductible share-based payments that were not previously recognisable as there was no basis for a tax deduction Unrecognised temporary differences Foreign currency translation of investments in subsidiaries for which no deferred tax (assets)/liabilities have been recognised 2015 $’000 93,942 28,182 409 (154) (311) 121 (354) (1,438) 26,455 2016 $’000 43,260 12,978 150 - 116 - - - 828 (341) 668 - - - 36,994 13,244 19,982 - - (13,978) (20,499) 36,994 26,455 (734) (517) - - - 67 2,275 2,342 (5,391) 2,754 - - - - 67 2,275 2,342 - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 70 6 Earnings per Share Basic earnings per share Basic EPS – cents per share Net profit after tax Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Diluted earnings per share Diluted EPS – cents per share Earnings used to calculate basic earnings per share (EPS) Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Weighted average number of options on issue outstanding Consolidated Group 2016 000 99.4 $82,469 82,927 2015 000 87.0 $67,487 77,537 99.0 86.8 $82,469 $67,487 82,927 77,537 335 211 Weighted average number of ordinary shares outstanding during the year used in the calculation of diluted EPS 83,262 77,748 7 Dividends Final fully franked ordinary dividend for the year ended 30 June 2015 of $0.27 (2014: $0.31) per share franked at the tax rate of 30% (2014: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2016 of $0.29 (2015: $0.25) per share franked at the tax rate of 30% (2015: 30%) Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 22,463 23,632 22,463 23,632 24,126 20,280 24,126 20,280 46,589 43,912 46,589 43,912 Franking credits available for subsequent financial years based on a tax rate of 30% (2015 – 30%) 90,370 78,806 90,370 78,806 The above amounts represent the balance of the franking account at the end of the financial year end adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 8 Cash and Cash Equivalents Consolidated Group Parent Entity Cash on hand Bank balances Short term deposits 2016 $’000 3 14,992 80,588 95,583 2015 $’000 4 47,437 38,288 85,729 2016 $’000 - 86 5,630 5,716 71 2015 $’000 - 173 2,425 2,598 Cash and cash equivalents are subject to interest rate risk as they earn interest at floating rates. Cash at bank is invested at floating rates. In 2016, the floating interest rates for the Group and parent entity were between 1.43% and 2.06% (2015: 1.53% and 3.46%). The short term deposits are also subject to floating rates, which in 2016 were between 2.04% and 3.04% (2015: 2.42% and 3.39%). These deposits have an average maturity of 90 days (2015: 90 days) and are highly liquid. 9 Trade and Other Receivables Current Trade receivables Other receivables Amounts receivable from wholly owned entities 2016 $’000 2015 $’000 13,998 23,398 - 37,396 16,246 30,695 - 46,941 The carrying amount of all current receivables are equal to their fair value as they are short term and fully recoverable. (a) Ageing and impairment losses The ageing of trade receivables for the Group at reporting date was: Consolidated Group Not past due Past due 30 days Past due 31–60 days Past due 61–90 days Past due >90 days Total (b) Concentration of risk 2016 Amount impaired $’000 Amount not impaired $’000 (451) (145) (119) (65) (496) 10,792 2,463 327 136 280 Total $’000 11,243 2,608 446 201 776 Total $’000 13,766 1,747 497 213 944 15,274 (1,276) 13,998 17,167 2015 $’000 - 130 2,283 2,413 2016 $’000 - 70 6,407 6,477 2015 Amount impaired $’000 Amount not impaired $’000 - (59) (128) (105) (629) (921) 13,766 1,688 369 108 315 16,246 The Group’s maximum exposure to credit risk at reporting date by geographic region is predominantly in Australia based on the location of originating transactions and economic activity. (c) Other receivables These amounts generally arise from transactions outside the usual operating activities of the Group. None of the other current receivables are impaired or past due. (d) Doubtful debts policy Refer Note 1(k). MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 72 10 Finance Lease Receivables Consolidated Group Parent Entity Current finance lease receivables Non-current finance lease receivables Amounts receivable under finance lease receivables Within one year Later than one but not more than five years Later than five years 2016 $’000 46,280 89,279 2015 $’000 35,253 89,911 135,559 125,164 2016 $’000 2015 $’000 - - - - - - Consolidated Group Minimum lease payments 2016 $’000 Present value of lease payments 2016 $’000 Minimum lease payments 2015 $’000 Present value of lease payments 2015 $’000 51,411 94,795 66 44,653 90,841 65 39,842 95,551 186 35,253 89,727 184 146,272 135,559 135,579 125,164 Less: unearned finance income (10,713) - (10,415) - Present value of minimum lease payments 135,559 135,559 125,164 125,164 There were no unguaranteed residual values of assets leased under finance leases at reporting date (2015: nil) 11 Other Financial Assets (a) Investment in subsidiaries Shares in subsidiaries at cost Consolidated Group Parent Entity 2016 $’000 - 2015 $’000 2016 $’000 2015 $’000 - 337,900 261,646 The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(c). MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 73 Name Parent entity McMillan Shakespeare Limited Subsidiaries in Group Maxxia Pty Limited 1 Remuneration Services (Qld) Pty Limited 1 Interleasing (Australia) Ltd 1 TVPR Pty Ltd 1 Maxxia Limited (NZ) Maxxia Fleet Limited Maxxia (UK) Limited Maxxia Finance Limited CLM Fleet Management plc Anglo Scottish Asset Finance Limited plc Presidian Holdings Pty Ltd Davantage Group Pty Ltd Money Now Pty Ltd National Finance Choice Pty Ltd Franklin Finance Group Pty Ltd Australian Dealer Insurance Pty Ltd National Finance Solutions Pty Ltd National Insurance Choice Pty Ltd United Financial Services Pty Ltd United Financial Services Network Pty Ltd United Financial Services (Queensland) Pty Ltd Country of Incorporation Percentage Owned 2016 Percentage Owned 2015 Principal activities Australia Australia Australia Australia Australia New Zealand New Zealand United Kingdom United Kingdom United Kingdom United Kingdom Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% - - - Remuneration services provider Remuneration services provider Asset management and services Asset management and services Dormant Asset management and services Investment holding Asset management Fleet management services Fleet management services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services Retail financial services 1 These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 30. (b) Loan receivable Loan receivable Other expense receivable Share of losses of equity accounted joint venture Change in foreign currency Carrying value at end of the financial year Consolidated Group Parent Entity 2016 $’000 3,827 1,297 (3,504) 112 1,732 2015 $’000 3,211 996 (2,009) (327) 1,871 2016 $’000 2015 $’000 - - - - - - - - - - The loan and other expense receivable is made up of advances to the joint venture entity as part of the working capital facility provided pursuant to the Group’s investment arrangement and forms part of the net investment in the joint venture. Its carrying value includes the share of the joint venture’s loss of $1,495,000 (2015: $816,000) recognised under the equity method that is in excess of the Company’s fully written down carrying value of its investment (2015: $nil - refer note 12). Risk exposure The maximum facility under the arrangement is GBP1.8 million together with other expenses agreed between the JV parties to accelerate growth are fully repayable no later than 31 January 2017. Under certain conditions of default on the repayments, the Group has an option to convert a portion of the amount outstanding to increase the Group’s interest in the joint venture from 50% to 60%. The loan accrues interest at commercial rates and the balance at reporting date approximates to fair value. At reporting date, the fair value of the option was not material. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 74 12 Investment in Joint Venture Consolidated Group Parent Entity Acquired Share of losses after income tax Carrying value at end of the financial year 2016 $’000 337 (337) - 2015 $’000 337 (337) - 2016 $’000 2015 $’000 - - - - - - A subsidiary has a 50% interest in Maxxia Limited (UK), a company resident in the UK and the principal activity of which is provider of financing solutions and associated management services on motor vehicles. By contractual agreement, the Group together with the joint venture partner jointly control the economic activities and key decisions of the joint venture entity. The arrangement requires unanimous consent of the parties for key strategic, financial and operating policies that govern the joint venture. By agreement, the Group assumes responsibility for key decisions of the joint venture entity when its interest is greater than 75%. The Group has an option to acquire the residual interest in the joint venture entity from the joint venture partner after five years from acquisition and the joint venture partner has an option to sell its interest to the Group during the same period. At reporting date, the fair value of the option is not materially different to the carrying value. The interest in Maxxia Limited is equity accounted in the financial statements. Information relating to the joint venture investment is set out below. Consolidated Group Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net liabilities The net liabilities of Maxxia Limited (UK) is reconciled to the carrying amount of the Group’s interest is as follows. Net liabilities of JV Group ownership interest (50%) Carrying amount Cumulative losses of JV equity accounted Joint venture financial results Revenues Expenses Loss before income tax Income tax Loss after income tax Share of joint venture capital commitments 2016 $’000 3,632 - 3,632 5,557 5,124 10,681 (7,049) (7,049) (3,524) - 2015 $’000 1,649 853 2,502 2,397 5,070 7,467 (4,965) (4,965) (2,483) - (3,841) (2,346) Consolidated Group 2016 $’000 2,906 (5,896) (2,990) - (2,990) - 2015 $’000 2,644 (4,684) (2,040) 408 (1,632) - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 13 Property, Plant and Equipment Consolidated Group Parent Entity 75 (a) Plant and equipment At cost Less accumulated depreciation Assets under operating lease At cost Less accumulated depreciation Total plant and equipment (b) Movements in cost and accumulated depreciation Year ended 30 June 2016 Balance at the beginning of year Additions Acquisitions through business combination Transfer to software Disposals / transfers to assets held for sale Depreciation expense Impairment loss Change in foreign currency Balance at 30 June Year ended 30 June 2015 Balance at the beginning of year Additions Acquisitions through business combination Transfer to software Disposals / transfers to assets held for sale Depreciation expense Impairment loss Change in foreign currency Balance at 30 June 2016 $’000 28,667 (19,360) 9,307 2015 $’000 31,393 (19,390) 12,003 457,722 (164,897) 457,684 (164,559) 292,825 293,125 302,132 305,128 2016 $’000 2015 $’000 - - - - - - - - - - - - - - Consolidated Group Plant and equipment $’000 Assets under operating lease 1 $’000 12,003 4,626 283 (2,800) (1,623) (2,998) - (184) 293,125 126,520 - 2,800 (51,953) (78,172) (385) 890 Total $’000 305,128 131,146 283 - (53,576) (81,170) (385) 706 9,307 292,825 302,132 9,797 7,248 1,075 (1,246) (1,863) (3,292) - 284 303,408 122,124 - - (49,136) (79,785) (3,219) (267) 313,205 129,372 1,075 (1,246) (50,999) (83,077) (3,219) 17 12,003 293,125 305,128 1 Accumulated provision for impairment loss at reporting date is $4,381,000 (2015: 5,237,000). (c) Security The above assets form part of the security supporting the fixed and floating charge pledged to the Group’s financiers. (d) Property, plant and equipment held for sale Property, plant and equipment no longer held under operating leases are classified as inventory. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 76 14 Deferred Tax Assets / (Liabilities) Consolidated Group Parent Entity (a) Asset / (Liability) 2016 $’000 2015 $’000 2016 $’000 2015 $’000 The balance comprises temporary differences and tax losses attributed for: Amounts recognised in profit or loss Doubtful debts Provisions Property, plant and equipment Accrued expenses Other receivables/prepayments Other Losses Deferred acquisition expenses Intangible assets Unearned income Employee share rights Amounts recognised in equity Derivatives recognised directly in equity Closing balance at 30 June Recognised as: Deferred tax asset Deferred tax liability (b) Movement Opening balance at 1 July Charged to profit or loss Charged to other comprehensive income Acquired at acquisition Change in foreign currency Closing balance at 30 June 137 4,290 (8,435) 7,061 467 (9) 511 1,708 (8,093) 217 885 (1,261) 204 (1,057) 194 (1,251) (1,057) 249 3,193 (16) (4,620) 137 (1,057) 185 4,070 (10,021) 6,954 - 389 467 1,356 (3,799) 150 278 29 220 249 1,183 (934) 249 5,073 (3,673) 28 (1,130) (49) 249 - - - - - (540) - - (540) - (540) - (540) (540) 105 (645) - - - - - - 88 - 17 - - - - 105 - 105 105 - 105 13 92 - - - (540) 105 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 77 Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 182,665 134,877 (36) (36) 182,629 134,841 22,443 6,598 (1,532) 27,509 21,795 (1,881) 19,914 38,930 (21,286) 17,644 13,070 (11,541) 1,529 6,713 (1,306) 5,407 22,443 - - 22,443 12,033 (309) 11,724 35,631 (15,988) 19,643 13,070 (10,616) 2,454 4,302 (736) 3,566 254,632 194,671 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 Intangible Assets (a) Carrying values Goodwill Cost Impairment loss Net carrying value Brands Brands at cost - indefinite life Brands at cost - finite life Accumulated amortisation Net carrying value Dealer relationships Cost Accumulated amortisation Net carrying value Software development costs Cost 1 Accumulated amortisation Net carrying value Contract rights Cost Accumulated amortisation Net carrying value Customer list and relationships Cost Accumulated amortisation Net carrying value Total Intangibles 1 Software includes capitalised internal costs. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 78 (b) Reconciliation of net book amount Goodwill $’000 Brands $’000 Dealer relationships $’000 Customer lists and relationships $’000 Software development costs $’000 Contract rights $’000 Total $’000 2016 Net book amount Balance beginning of year 134,841 Additions Acquisition through business combination (note 29(d)) Amortisation1 - 52,186 22,443 - 6,598 - (1,532) Change in foreign currency (4,398) - Closing balance 182,629 27,509 11,724 - 10,115 (1,585) (340) 19,914 3,566 - 3,235 (723) (671) 5,407 19,643 3,396 - (5,395) - 17,644 2,454 194,671 - - 3,396 72,134 (925) - (10,160) (5,409) 1,529 254,632 2015 Net book amount Balance beginning of year Additions Acquisition through business combination Transfer from property, plant & equipment Amortisation1 Change in foreign currency Goodwill $’000 Brands $’000 Dealer relationships $’000 Customer lists and relationships $’000 Software development costs $’000 Contract rights $’000 46,387 - 86,672 - - 1,782 - - 22,443 - - - - - 12,033 - (309) - 14,655 4,312 4,173 1,246 3,050 465 - - (4,743) (1,061) - - 2,567 - 1,100 - (416) 315 3,566 Total $’000 66,659 4,777 126,421 1,246 (6,529) 2,097 Closing balance 134,841 22,443 11,724 19,643 2,454 194,671 1 Amortisation of contract rights is recognised in expenses of $590,000 (2015: $1,061,000) and as a discount to revenue of $335,000 (2015: Nil) MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 79 (c) Impairment test for goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified arising from the acquisitions of subsidiaries. The carrying amount of goodwill allocated to each CGU: Maxxia Pty Limited Remuneration Services (Qld) Pty Limited CLM Fleet Management plc Anglo Scottish Finance Limited Retail Financial Services segment risk business Retail Financial Services segment retail finance business Consolidated Group 2016 $’000 24,190 9,102 13,086 16,882 51,608 67,761 2015 $’000 24,190 9,102 14,877 86,672 - 182,629 134,841 The recoverable amount of each CGU above is determined based on value-in-use calculations. These calculations use the present value of cash flow projections based on financial budgets approved by the Board for next year and financial projections by management for four years hence covering a five-year period in total. (d) Key assumptions used for value-in-use calculation Discount rate Maxxia Pty Limited Remuneration Services (Qld) Pty Limited CLM Fleet Management plc Anglo Scottish Finance Limited Retail Financial Services segment risk business Retail Financial Services segment retail finance business 2016 % 10.46 10.46 14.01 14.01 10.46 10.46 2015 % 15.06 15.06 12.08 - 15.06 15.06 The budgets use historical average growth rates to project revenue. Costs are determined taking into account historical margins and estimated cost increases. The average growth rates used in the five year projection is between 1% and 10% based on business plans and initiated strategies. Cash flows beyond the five-year period are extrapolated using conservative growth rates between 0% and 3%. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. In performing the value-in-use calculations for each CGU, the Group has applied pre-tax discount rates to discount the forecast future attributable pre-tax cash flows. The pre-tax discount rates are disclosed above. The discount rates used reflect specific risks relating to the relevant business each subsidiary is operating in. These assumptions have been used for the analysis of each CGU within each business. The recoverable amounts of the CGUs exceed the carrying amounts by substantial margins. Consequently, a sensitivity analysis of possible changes in key assumptions is not considered necessary. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 80 16 Trade and Other Payables Consolidated Group Parent Entity Unsecured liabilities Trade payables GST payable Sundry creditors and accruals Amounts payable to wholly owned entities 2016 $’000 2015 $’000 2016 $’000 2015 $’000 20,792 1,677 48,092 - 70,561 19,399 2,046 42,417 - - - 181 105,436 63,862 105,617 - - 599 47,309 47,908 Trade and other payables are non-interest bearing. These are short-term liabilities and the carrying value is representative of the fair value. 17 Other Liabilities Maintenance instalments received in advance Receivables in advance Unearned property incentives 18 Provisions Current Employee benefit liabilities Provision for rebate and cancellations Provision for onerous contracts Other Non current Provision for long service leave Provision for onerous contracts 2016 $’000 5,815 5,300 5,269 2015 $’000 6,622 4,379 5,186 16,384 16,187 2016 $’000 9,333 3,337 353 - 2015 $’000 7,586 2,174 650 181 13,023 10,591 717 988 1,705 1,139 1,089 2,228 2016 $’000 2015 $’000 - - - - - - - - 2016 $’000 2015 $’000 - - - - - - - - - - - - - - - - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 81 Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 12,944 5,658 11,500 4,016 332,626 346,046 41,528 53,002 19 Borrowings Current Bank loans – at amortised cost Non current Bank loans – at amortised cost (a) Security The parent entity guarantees all bank loans of subsidiaries in the Group, totalling $345,570,000 (2015: $351,704,000). Fixed and floating charges are provided by the Group in respect to financing facilities provided to it by its syndicate of financiers. The Group’s loans are also secured by the following financial undertakings from all the entities in the Group. (i) Group Asset Management bank loans excluding cash assets, is not to exceed 80% of the sum of the Group’s aggregate of the written down value of net operating lease assets, finance lease receivables and commercial hire purchase receivables. (ii) Group shareholder’s funds is not less than $200,000,000 at all times. (iii) Group ratio of consolidated earnings before interest and tax to consolidated interest expense is not less than 3:1. The following are other undertakings that have been provided by entities in the Group receiving the loans. (i) Negative pledge that imposes certain covenants including a restriction to provide other security over its assets, a cap on its maximum finance debt, do not acquire assets which are non-core business to the Group, disposal of a substantial part of its business and reduction of its capital. (ii) Maintenance of certain financial thresholds for shareholders’ equity, gearing ratio and fleet asset portfolio performance. (iii) The business exposures of the Interleasing Group and CLM Fleet Management plc satisfy various business parameters. At all times throughout the year, the Group operated with significant headroom against all of its borrowing covenants. (b) Fair value disclosures The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not significant. (c) Risk exposures Details of the Group’s exposure to risks arising from current and non-current borrowings are set out in Note 2. 20 Other Financial Liabilities Consolidated Group Parent Entity Contingent consideration 2016 $’000 6,740 2015 $’000 - 2016 $’000 - 2015 $’000 - Contingent consideration represents the estimated fair value of future consideration payable upon the achievement of certain performance targets in relation to the acquisition of Anglo Scottish Asset Finance Limited. There has been no change to fair value since acquisition date. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 82 21 Issued Capital (a) Share capital Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 83,204,720 (2015: 81,810,993) fully paid ordinary shares 144,380 121,617 144,380 121,617 (b) Movements in issued capital Number of shares Issue price Balance at 1 July 2015 Shares issued for the acquisition of the United Financial Services companies Fully paid shares issued pursuant to the exercise of employee options Shares distributed from the employee share trust to employees on exercise of options Total issued capital at 30 June 2016 Treasury shares Shares held by public at 30 June 2016 Balance at 1 July 2014 Shares issued for the acquisition of Presidian Holdings Pty Ltd Shares purchased by the McMillan Shakespeare Limited Share Plan Trust (“EST”) Shares purchased by the employee share trust and distributed to employees Fully paid shares issued pursuant to the exercise of employee options Proceeds from issue of new options Share issue expenses Less: tax effect of expenses Total issued capital at 30 June 2015 Treasury shares Shares held by public at 30 June 2015 $12.96 $7.31 - 81,810,993 1,342,926 733,007 (682,206) 1,393,727 83,204,720 (10,276) 83,194,444 Number of shares Issue price $11.66 - $6.53 $7.31 74,523,965 4,285,192 692,482 2,035,301 274,053 - 7,287,028 81,810,993 (692,482) 81,118,511 Ordinary shares $’000 121,617 17,405 5,358 - 22,763 144,380 Ordinary shares $’000 56,456 49,982 - 13,283 2,003 50 (224) 67 65,161 121,617 Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of members’ shares held. At members’ meetings, each fully paid ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 Notes to the Financial Statements For the year ended 30 June 2016 (c) Treasury shares Balance of shares at the beginning of the year Shares distributed from the exercise of options Balance of treasury shares at 30 June 2016 (d) Options 83 Number of shares 692,482 (682,206) 10,276 At 30 June 2016, there were 1,825,334 (2015: 2,876,147) unissued ordinary shares for which options were outstanding. Details relating to options issued, exercised and lapsed during the year and options outstanding at the end of the reporting period is set out in Note 28 on page 88. (e) Capital management strategy The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. In order to maintain or adjust the capital structure, the Group may adjust the amount of divi- dends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as long and short term borrowings (excluding derivatives and financial guarantees) less cash and cash equivalents. Total capital is calculated as equity as shown in the statement of financial position plus net debt. The Groups’ gearing ratio was 40% (2015: 46%) calculated as net debt of $249,987,000 (2015: $267,162,000) divided by total debt and equity of $620,482,000 (2015: $585,605,000). The Group’s Risk and Compliance Committee reviews the capital structure of the Group on an on-going basis. As part of this review the committee considers the cost and allocation of capital and the risks associated with each class of capital. 22 Reserves (a) Option reserve Movements in the reserve are detailed in the Statements of Changes in Equity. The reserve records amounts for the fair value of options granted and recognised as an employee benefits expense but not exercised. (b) Cash flow hedge reserve Revaluation - gross Deferred tax Balance at the end of the financial year Consolidated Group Parent Entity 2016 $’000 (819) 204 (615) 2015 $’000 (746) 220 (526) 2016 $’000 2015 $’000 - - - - - - The hedging reserve is used to record gains and losses on interest rate swaps that are designed and qualify as cash flow hedges and that are recognised in other comprehensive income. (c) Foreign currency translation reserve Balance at the end of the financial year Consolidated Group Parent Entity 2016 $’000 (5,391) 2015 $’000 2,754 2016 $’000 - 2015 $’000 - The foreign translation reserve account accumulates exchange differences arising on translation of foreign controlled entities which are recognised in other comprehensive income. The carrying amount is reclassified to profit or loss when the net investment is disposed of. The decline in the foreign currency reserve was a direct result of GBP weakening sharply against the Australian dollar several days before reporting date following the referendum in the United Kingdom to leave the European Union. The Group does not have plans to realise its investments in the UK in the foreseeable future. MMS Financial Report 2016 MMS Financial Report 2016 84 Notes to the Financial Statements For the year ended 30 June 2016 23 Cash Flow Information Consolidated Group Parent Entity (a) Reconciliation of cash flow from operations with profit from operating activities after tax 2016 $’000 2015 $’000 2016 $’000 2015 $’000 Profit for the year Non cash flows in profit from operating activities Amortisation Impairment loss Depreciation Option expense Share of equity accounted joint venture loss Purchase of assets under lease Written down value of assets sold Finance lease receivables principle repayments Changes in assets and liabilities, net of the effects of purchase of subsidiaries Decrease / (increase) in trade receivables and other assets Increase / (decrease) in trade payables and accruals Increase / (decrease) in income taxes payable (Decrease) / increase in deferred taxes Increase in other liabilities (Decrease) in unearned revenue Increase / (decrease) in provisions Net cash from operating activities 82,469 67,487 43,994 67,125 9,825 385 81,170 1,643 1,495 (234,601) 94,101 33,202 11,898 9,738 5,677 (3,278) - (49) 1,297 94,972 6,529 3,219 83,077 1,326 816 (243,441) 34,816 11,727 (11,722) 34,155 (5,816) 1,282 (113) (918) 1,919 (15,657) - - 1,643 - - - 64 (10,669) 7,257 645 - - - 42,934 - - - 1,326 - - - (1,456) 8,076 (8,101) (92) - - - 66,878 (b) Proceeds from sale of lease portfolio Proceeds from a portion of the UK fleet that was moved off balance sheet as part of principal and agency arrangements with a number of funding providers. (c) Proceeds and repayments of borrowings Proceeds from and repayments of borrowings were predominantly to change the mix of funding between syndicate banks together with the repayment of amortising loans. 24 Commitments (a) Operating lease commitments Non cancellable operating leases contracted for but not capitalised in the financial statements: Payable minimum lease payments – Not later than 12 months – Between 12 months and 5 years – Greater than 5 years Consolidated Group Parent Entity 2016 $’000 2015 $’000 2016 $’000 2015 $’000 8,891 30,071 14,447 53,409 8,568 30,738 19,444 58,750 - - - - - - - - The property leases are non cancellable leases with varying terms, with rent payable monthly in advance. Individual rental agreements specify each rental adjustment. The equipment leases are non cancellable leases with varying terms, with rent payable quarterly in arrears. Notes to the Financial Statements For the year ended 30 June 2016 25 Segment Reporting Reportable segments (a) Description of Segments MMS Financial Report 2016 85 The Group has identified its operating segments based on the internal reports reviewed and used by the Group’s chief decision maker (the CEO) to determine business performance and resource allocation. Operating segments have been identified after considering the nature of the products and services, nature of the production processes, type of customer and distribution methods. Three reportable segments have been identified, in accordance with AASB 8 “Operating Segments” based on aggregating operating segments taking into account the nature of the business services and products sold and the associated business and financial risks and how they affect the pricing and rates of return. Group Remuneration Services - This segment provides administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers, but does not provide financing. The segment also provides ancillary services associated with motor vehicle novated lease products. Asset Management - This segment provides financing and ancillary management services associated with motor vehicles, commercial vehicles and equipment. Retail Financial services - This segment provides retail brokerage services, aggregation of finance originations and extended warranty cover, but does not provide financing. The United Financial Services group of companies were added to this segment from 31 July 2015. (b) Segment information provided to the Chief Decision Maker The following is an analysis of the Group’s revenue and results from operations by reportable segment. Segment revenue Segment profit after tax Group Remuneration Services Asset Management Retail Financial Services 1 Segment operations Corporate administration and directors’ fees Acquisition expenses Net interest income Tax on unallocated items Profit after tax from continuing operations for the year 2016 $’000 188,310 204,812 110,037 2015 $’000 176,096 188,061 23,106 503,159 387,263 2016 $’000 58,662 14,634 11,827 85,123 (1,398) (2,289) (438) 1,471 82,469 2015 $’000 54,306 11,281 3,027 68,614 (1,250) (2,196) 1,836 483 67,487 1 Retail Financial Services comprising the Presidian Group is reported from 27 February 2015 to 30 June 2015. The UFS entities joined this segment from 31 July 2015 to 30 June 2016. 86 (c) Other segment information (i) Segment revenue Segment revenue is reconciled to the Statement of Profit of Loss as follows: Total segment revenue Interest revenue Total revenue per Consolidated Statement of Profit or Loss 2016 $’000 503,159 1,507 2015 $’000 387,263 2,327 504,666 389,590 Segment revenue above represents sales to external customers and excludes inter-segment sales, consistent with the basis by which the financial information is presented to the Chief Decision Maker. The accounting policies of the reportable segments are the same as the Group’s policies. Segment profit includes the segment’s share of centralised general management and operational support services which are shared across segments based on the lowest unit of measurement available to allocate shared costs that reasonably measure each segment’s service level requirements and consumption. Segment profit does not include corporate costs of the parent entity, consisting of listing and company fees, director’s fees and finance costs relating to borrowings not specifically sourced for segment operations, costs directly incurred in relation to the acquisition of specific acquisition and strategic investment targets or interest revenue not directly attributable to a segment. Included in the revenue for the Group Remuneration Services segment are revenues of $63,714,000 (2015: $61,898,000) in respect of the Group’s largest contract. (ii) Segment result The following items are included in the segment results. Segment depreciation and amortisation Group Remuneration Services Asset Management Retail Financial Services Share of loss from joint venture Group Remuneration Services Asset Management Retail Financial Services 2016 $’000 2015 $’000 4,782 82,203 4,395 91,380 - 1,495 - 1,495 5,587 86,323 915 92,825 - 816 - 816 (iii) Segment assets and liabilities The segment information with respect to total assets is measured in a consistent manner with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The parent entity’s borrowings are not considered to be segment liabilities MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 The reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Group Remuneration Services Asset Management Retail Financial Services Segment assets Non-segment assets Unallocated assets 1 Consolidated assets per statement of financial position Segment liabilities Group Remuneration Services Asset Management Retail Financial Services Segment liabilities Non-segment liabilities Unallocated liabilities 1 Consolidated liabilities per statement of financial position 87 2016 $’000 2015 $’000 59,067 520,785 184,573 764,425 77,080 483,898 141,280 702,258 80,960 75,065 845,385 777,323 53,680 337,537 38,437 429,654 44,149 335,617 27,878 407,644 45,236 51,236 474,890 458,880 1 Unallocated assets comprise cash and bank balances of segments other than Asset Management, maintained as part of the centralised treasury and funding function of the Group. Unallocated liabilities comprise borrowings for the acquisition of the Retail Financial Services segment, utilising the Group’s borrowing capacity and equity to fund the initial acquisition and ongoing loan maintenance utilising centralised treasury controlled funds. Additions to non-currrent assets Group Remuneration Services Asset Management Retail Financial Services 2016 $’000 2015 $’000 5,302 154,210 47,328 5,634 128,189 127,822 206,840 261,645 (d) Geographical information The Group’s revenue from continuing operations from external customers by location of operations and information about its non-current assets by location of assets are detailed below. Australia United Kingdom New Zealand 1 Non-current assets do not include deferred tax asset and subordinated loans. Revenue from external customers Non-current assets 1 2016 $’000 475,507 25,277 3,902 504,666 2015 $’000 374,520 12,628 2,442 389,590 2016 $’000 576,704 60,532 9,771 647,007 2015 $’000 477,521 101,257 11,905 590,683 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 88 26 Contingent Liabilities Consolidated Group Parent Entity Estimates of the potential financial effect of contingent liabilities that may become payable Guarantee provided for the performance of a contractual obligation not supported by term deposit. Guarantees provided in respect of property leases. 27 Related Party Transactions (a) Wholly owned group 2016 $’000 11,050 5,967 17,017 2015 $’000 10,050 5,970 16,020 2016 $’000 2015 $’000 50 - 50 50 - 50 Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2016 and 2015 consisted of: (a) loans advanced to the Company; and (b) the payment of dividends to the Company. Aggregate amounts included in the determination of profit from ordinary activities before income tax that resulted from transactions with entities in the wholly owned group: Consolidated Group Parent Entity Dividend revenue Aggregate amounts payable to entities within the wholly owned group at balance date: Current payables (b) Key management personnel compensation Compensation Short-term employment benefits Post-employment benefits Long-term employment benefits Share-based payments 28 Share-based Payments 2016 $ 2015 $ 2016 $ 2015 $ - - - - 46,592,000 68,324,463 105,436,102 47,309,114 3,218,477 3,513,224 2,054,809 2,153,525 186,698 68,915 876,748 216,247 54,206 836,041 131,763 38,912 500,381 153,072 82,456 505,938 4,350,838 4,619,718 2,725,865 2,894,991 The Company issued options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan. Two types of options have been granted under this plan, performance options and voluntary options. No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Performance Options Performance options over unissued ordinary shares in the Company are granted for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Performance options carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration and Nomination Committee recommends to the Board the number of performance options to be granted on the basis of the posi- tion, duties and responsibilities of the relevant executive. Set out below are summaries of options granted under the plans: MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 Consolidated Group and parent entity - 2016 Grant date Expiry date 16 August 2011 30 September 2015 16 August 2011 30 September 2015 19 August 2014 30 September 2019 19 August 2014 30 September 2018 23 September 2014 30 September 2018 28 October 2014 30 September 2018 24 March 2015 30 September 2018 26 May 2015 30 September 2018 25 August 2015 30 September 2018 89 Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year 1 Balance at end of the year Exercisable at end of the year $7.31 $7.31 $10.18 $10.18 $10.83 $10.17 $11.87 $12.88 $13.82 682,206 50,801 978,417 567,676 107,877 109,142 294,336 85,692 - - - - - - - - - 33,436 (682,206) (50,801) - - - - - - - - - - (98,595) - (109,142) (143,505) - - - - 978,417 469,081 107,877 - 150,831 85,692 33,436 2,876,147 33,436 (733,007) (351,242) 1,825,334 - - - - - - - - - - - Weighted average exercise price $9.73 $13.82 $7.31 $10.87 $10.55 Consolidated Group and parent entity - 2015 Grant date Expiry date 28 May 2010 1 October 2015 16 August 2011 30 September 2015 16 August 2011 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 24 July 2012 30 September 2015 19 August 2014 30 September 2019 19 August 2014 30 September 2018 23 September 2014 30 September 2018 28 October 2014 30 September 2018 24 March 2015 30 September 2018 26 May 2015 30 September 2018 Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year 1 Balance at end of the year Exercisable at end of the year $3.42 $7.31 $7.31 $8.54 $9.29 $11.42 $10.18 $10.18 $10.83 $10.17 $11.87 $12.88 537,634 1,805,957 314,578 352,942 31,250 121,331 - - - - - - - - - - - - 978,417 832,719 107,877 109,142 294,336 85,692 (537,634) (1,123,751) (263,777) (352,942) (31,250) - - - - - - - - - - - - (121,331) - (265,043) - - - - - - 682,206 682,206 50,801 50,801 - - - 978,417 567,676 107,877 109,142 294,336 85,692 - - - - - - - - - 3,163,692 2,408,183 (2,309,354) (386,374) 2,876,147 733,007 Weighted average exercise price $6.96 $10.51 - $10.57 $9.73 $7.31 The weighted average remaining contractual life of options outstanding at the end of the year was 1.9 years (2015: 2.17 years). 1 None of the forfeited options represented expired options (2015: Nil). MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 90 Fair value of options granted The assessed fair value at grant date of options granted during the year is disclosed in the table below. The fair value at grant date is determined using a binomial option pricing model that takes into account the exercise price, the term of the option, the share price at the grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The expected price volatility is based on historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Model input Consideration payable upon grant Exercise price Grant date Expected life Share price at grant date Expected price volatility Expected dividend yield Risk-free interest rate August 2015 Nil $13.82 25 August 2015 2.1 years $13.82 47% 3.5% 1.7% The expected price volatility is based on historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the year as part of employee and Director benefits expense were as follows: Consolidated Group Parent Entity Options expense recognised under the Employee Option Plan 1,643,091 1,326,493 2016 $ 2015 $ 2016 $ - 2015 $ - MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 91 29 Business Combination (a) Businesses acquired The Group completed its acquisition of 100% of United Financial Services Pty Ltd, United Financial Services Network Pty Ltd and United Financial Services (Queensland) Pty Ltd (collectively known as “UFS”) on 31 July 2015. The UFS companies are incorporated in Australia and specialise in the delivery of consumer and commercial finance and insurance products in the Australian sector. The acquisition consolidates MMS’ position in the auto financing sector and builds on the investment in Presidian that was completed in February 2015. The addition of UFS will enhance the Retail Financial Services business segment and brings cross selling opportunities across the businesses in MMS and the realisation of corporate and operational synergies. In addition to the acquisition of the UFS companies to complement the RFS segment, an ancillary UFS business was acquired for $250,000 to provide coverage of a certain geographical area. On 4 November 2015, the Group completed the acquisition of 100% of Anglo Scottish Asset Finance (“Anglo Scottish”). Anglo Scottish is incorporated in the UK and provides integrated asset finance and asset management services in the UK sector. Anglo Scottish brings a comprehensive network of funder relationships and will complement the existing CLM business in the UK. The addition of Anglo Scottish to the Asset Management segment is anticipated to facilitate the cross-sharing of service capabilities to enhance operational efficiencies and a broader range of asset finance solutions. Its addition to existing UK operations also strengthens business capability and reach through wider geographic access across the UK. (b) Consideration transferred Consideration for the UFS acquisition was $44.2m, funded by $26.8m of cash and 1,342,926 of fully paid ordinary shares that were fair valued at $17.4m on completion. Cash assumed from UFS was $2.1m. Fair value was determined using the Company’s share price. The shares issued are free from encumbrances but will be held in escrow for various periods up to a maximum of 24 months. Anglo Scottish was acquired for consideration of $26.6m (£12.8m) that comprised upfront cash payments of $18.9 (£9.0m) and a contingent consideration that has been fair valued at $7.7m (£3.8m). Cash assumed from Anglo Scottish was $4.5m (£2.2m). Under the arrangement, the contingent consideration payable is £4m, £5m or up to £7m, depending on the achievement of EBITDA against EBITDA targets over the three year period from 1 January 2016 to 31 December 2018. At reporting date, it has been estimated that a potential undiscounted earn-out consideration of £4.0m ($8.4m) is payable under the sale agreement. The fair value is based on a probability weighted assessment of projected EBITDA under the existing business plan and present valued using the segment’s incremental borrowing rate of 2.8%. Consideration for the acquisitions is summarised as follows. Cash Shares Contingent consideration Total UFS $’000 Anglo Scottish $’000 26,755 17,405 - 44,160 18,857 - 7,690 26,547 Total $’000 45,612 17,405 7,690 70,707 The assets and liabilities acquired have been fair valued in accordance with AASB 3 “Business Combinations” and, translated at acquisition date foreign exchange rates, has resulted in goodwill of $52.2m. Acquisition-related expenses of $2.3m were incurred and expensed on consolidation and included in the Statement of Consolidated Profit or Loss and Other Comprehensive Income for the period. (c) Reconciliation of consideration to cash flow Cash consideration Cash acquired Net cash outflow UFS $’000 Anglo Scottish $’000 26,755 (2,147) 24,608 18,857 (4,465) 14,392 Total $’000 45,612 (6,612) 39,000 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 92 (d) Assets acquired and liabilities assumed at the date of acquisition Fair Value at acquisition date (provisional) Cash Brands Dealer relationships Customer contracts and JV agreement Property, plant & equipment and software Trade, other receivables and prepayments Assets acquired Trade payables and accrued expenses Income tax provision Deferred tax liabilities Liabilities assumed Identifiable net assets acquired Goodwill Consideration The following trade receivables of UFS and Anglo Scottish have resulted from trade sales with customers and are considered fair value and their collection and conversion to cash are expected in full pursuant to customer terms. UFS Anglo Scottish Total fair value of Trade Receivables (e) Impact of acquisition on the results of the Group The profit result for the period includes sales revenue and net profit after tax of the new acquisitions as follows. UFS (period 31 July 2015 to 30 June 2016) Anglo Scottish (period 4 November 2015 to 30 June 2016) Total UFS $’000 2,148 6,598 7,513 - 245 2,242 Anglo Scottish $’000 4,465 - 2,602 3,235 37 1,518 18,746 11,857 3,932 - 3,311 7,243 11,503 32,657 44,160 2,880 650 1,309 4,839 7,018 19,529 26,547 Total $’000 6,613 6,598 10,115 3,235 282 3,760 30,603 6,812 650 4,620 12,082 18,521 52,186 70,707 FV of Trade Receivables $’000 2,198 1,418 3,616 Revenue $’000 Net profit after tax $’000 38,377 9,271 47,648 2,337 1,414 3,751 Had the acquisitions occurred effective 1 July 2015, the respective “pro-forma” revenue and net profit after tax adjusted for differences in the accounting policies between the Group and the acquired entities including the recognition of the amortisation of Dealer networks and customer contracts and JV agreement at their fair value is summarised below. UFS Anglo Scottish Total Revenue $’000 Net profit after tax $’000 42,251 13,538 55,789 2,445 2,122 4,567 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 93 30 Deed of Cross Guarantee McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd are parties to a deed of cross guarantee entered into during the year ended 30 June 2009 and Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd (Interleasing Group) entered into deeds of cross guarantee in the year ended 30 June 2010. Under the deeds, each company guarantees the debts of the others and is relieved from the requirement to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. This closed group and the Presidian group of entities no longer holds deeds of cross guarantee. The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by McMillan Shakespeare Limited, they also represent the ‘Extended Closed Group’. Set out below is a statement of comprehensive income, statement of financial position and a summary of movements in consolidated retained profits for the year ended 30 June 2016 of the Closed group consisting of McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd. (a) Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained profits 2016 $’000 2015 $’000 Statement of Comprehensive Income Revenue and other income Employee and director benefits expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Brokerage commissions and incentives Net claims incurred Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Acquisition expenses Profit before income tax Income tax expense Profit attributable to members of the parent entity Other comprehensive income Other comprehensive income for the year after tax Total comprehensive income for the year Movements in consolidated retained earnings Retained earnings at the beginning of the financial year De-consolidation of Presidian group no longer supported by deeds of cross guarantee Profits for the year Dividends paid Retained earnings at the end of the financial year 370,321 (87,714) (83,169) (54,822) - - (2,100) (2,286) (7,893) (7,918) (9,942) (7,451) (1,387) 105,639 (31,732) 73,907 374,442 (91,718) (90,611) (49,438) (5,535) (2,160) (1,580) (2,738) (9,375) (7,964) (9,429) (8,206) (2,196) 93,492 (26,242) 67,250 1,643 3,559 75,550 70,809 189,094 (3,027) 73,907 (46,589) 165,756 - 67,250 (43,912) 213,385 189,094 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 94 (b) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Deferred acquisition costs Inventory Total current assets Non current assets Property, plant and equipment Intangible assets Deferred tax asset Finance lease receivables Other financial assets Deferred acquisition costs Total non current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Unearned premium liability Provisions Borrowings Total current liabilities Non current liabilities Provisions Unearned premium liability Borrowings Total non current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY 2016 $’000 2015 $’000 76,395 26,810 3,337 - 7,218 80,606 47,869 3,752 973 7,021 113,760 140,221 285,294 48,985 3,970 3,625 226,045 - 291,177 177,306 1,120 7,882 38,404 2,137 567,919 518,026 681,679 658,247 63,675 9,672 - 8,381 11,500 93,228 1,597 - 219,257 220,854 71,984 3,552 6,105 10,588 2,451 94,680 2,227 2,781 239,888 244,896 314,082 339,576 367,597 318,671 144,380 9,832 213,385 121,617 7,960 189,094 367,597 318,671 MMS Financial Report 2016Notes to the Financial Statements For the year ended 30 June 2016 Directors’ Declaration The Directors are of the opinion that: 1. the financial statements and notes on pages 47 to 94 are in accordance with the Corporations Act 2001 (Cth), including: (a) compliance with Accounting Standards, the Corporations Regulations 2001 (Cth) and other mandatory professional reporting requirements; and (b) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and financial performance for the financial year ended on that date; and 2. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 3. at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in Note 30 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 30. MMS Financial Report 2016 95 Note 1(b) confirms that the financial statements also comply with International Financial Reporting Standards as disclosed as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Tim Poole Chairman Michael Salisbury Managing Director 24 August 2016 Melbourne, Australia MMS Financial Report 2016 96 Independent Audit Report As at 30 June 2016 Independent Audit Report As at 30 June 2016 MMS Financial Report 2016 97 MMS Financial Report 2016 98 Auditor’s Independence Declaration As at 30 June 2016 Shareholder Information MMS Financial Report 2016 99 Additional information required by the ASX Listing Rules and not disclosed elsewhere in this Annual Report is set out below: SUBSTANTIAL SHAREHOLDINGS As at 8 August 2016, the number of shares held by substantial shareholders and their associates is as follows: Shareholder Number of Ordinary Shares Percentage of Ordinary Shares 1 HSBC Custody Nominees (Aust) Ltd JP Morgan Nominees Australia Limited Chessari Holdings Pty Limited 2 26,508,197 11,842,740 6,050,941 31.86 14.23 7.27 1 As at 8 August 2016, 83,204,720 fully paid ordinary shares have been issued by the Company. 2 Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. NUMBER OF SHARE & OPTION HOLDERS As at 8 August 2016, the number of holders of ordinary shares and options in the Company was as follows: Class of Security Fully paid ordinary shares Options exercisable at $10.18 and expiring on 30 September 2019 Options exercisable at $10.18 and expiring on 30 September 2018 Options exercisable at $10.83 and expiring on 30 September 2018 Options exercisable at $11.87 and expiring on 30 September 2018 Options exercisable at $12.88 and expiring on 30 September 2018 Options exercisable at $13.82 and expiring on 30 September 2018 Number of Holders 5,944 4 13 1 2 2 2 VOTING RIGHTS In accordance with the Constitution of the Company and the Corporations Act 2001 (Cth), every member present in person or by proxy at a general meeting of the members of the Company has: – on a vote taken by a show of hands, one vote; and – on a vote taken by a poll, one vote for every fully paid ordinary share held in the Company. A poll may be demanded at a general meeting of the members of the Company in the manner permitted by the Corporations Act 2001 (Cth). DISTRIBUTION OF SHARE & OPTION HOLDERS As at 8 August 2016, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options Number of Holders of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ 3,376 2,012 312 208 35 As at 8 August 2016 there were 201 shareholders who held less than a marketable parcel of 37 fully paid ordinary shares in the Company. ON-MARKET BUY BACK The Company does not have a current on-market buy-back. MMS Financial Report 2016 100 Shareholder Information TOP 20 SHAREHOLDERS As at 8 August 2016, the details of the top 20 shareholders in the Company are as follows: No. Name Number of Ordinary Shares Percentage of Ordinary Shares 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Aust) Ltd J P Morgan Nominees Australia Limited Chessari Holdings Pty Limited 2 Citicorp Nominees Pty Limited Asia Pac Technology Pty Limited 3 BNP Paribas Noms Pty Ltd < DRP> National Nominees Limited NWC Group Pty Ltd Ann Leslie Ryan RBC Investor Services Australia Nominees Pty Ltd BNP Paribas Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Ltd Magic Bay Nominees Pty Ltd (Findus Property A/C) Milton Corporation Limited AFICO Pty Ltd I-Capital Australia Pty Ltd (Hewtom Family Disc A/C) AMP Life Limited MOHL Invest Pty Ltd (MOHL Super Fund A/C) HSBC Custody Nominees (Australia) Limited – A/C 2 Citicorp Nominees Pty Limited Totals: Top 20 holders of issued Capital Total Remaining Holders Balance 26,508,197 11,842,740 6,050,941 3,563,393 3,543,025 3,536,157 3,167,827 1,178,427 1,008,418 975,831 769,968 725,240 607,829 532,488 512,776 462,399 414,297 365,000 318,308 310,605 66,393,866 16,810,854 1 As at 8 August 2016, 83,204,720 fully paid ordinary shares have been issued by the Company. 2 Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. 3 Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a Non-Executive Director. RESTRICTED SECURITIES As at the date of this Annual Report, the following securities in the Company were subject to voluntary escrow. 31.86 14.23 7.27 4.28 4.26 4.25 3.81 1.42 1.21 1.17 0.93 0.87 0.73 0.64 0.62 0.56 0.50 0.44 0.38 0.37 79.80 20.20 Number of ordinary shares 1,863,122 671,464 279,470 UNQUOTED SECURITIES Date of escrow expiry 27 February 2017 31 July 2017 26 February 2019 As at the date of this Annual Report, the details of unquoted securities in the Company are as follows: Class Number of Securities Number of Holders Options exercisable at $10.18 and expiring on 30 September 2019 Options exercisable at $10.18 and expiring on 30 September 2018 Options exercisable at $10.83 and expiring on 30 September 2018 Options exercisable at $11.87 and expiring on 30 September 2018 Options exercisable at $12.88 and expiring on 30 September 2018 Options exercisable at $13.82 and expiring on 30 September 2018 Options do not carry a right to vote 978,417 469,081 107,877 150,831 85,692 33,436 4 13 1 2 2 2 Corporate Directory Registered Office Level 21, 360 Elizabeth Street Melbourne Victoria 3000 Tel: +61 3 9097 3000 Fax: +61 3 9097 3060 Company Auditor Grant Thornton Audit Pty Ltd The Rialto, Level 30, 525 Collins Street Melbourne Victoria 3000 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Tel: +61 3 9415 4000 www.mmsg.com.au McMillan Shakespeare Limited ABN 74 107 233 983 AFSL No. 299054 Level 21, 360 Elizabeth Street Melbourne Victoria 3000 www.mmsg.com.au 

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