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Annual Report 2021

Plain-text annual report

Annual Report 2021 A The McMillan Shakespeare Group is a trusted, market-leading provider of salary packaging, novated leasing, disability plan management and support co-ordination, asset management and related financial products and services. Through its subsidiaries, it offers a breadth of services and expertise, designed to responsibly deliver superior long-term value to its customers. The Group employs a highly committed team of c.1,300 people across Australia, New Zealand and the United Kingdom and domestically manages programs for some of the largest public sector, corporate and charitable organisations. Annual General Meeting The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held at the State Library of Victoria, Village Roadshow Theatrette, 328 Swanston Street, Melbourne (subject to COVID-19 restrictions) and online via https://web.lumiagm.com/351991812 (Meeting ID 351-991-812) on 22 October 2021 at 10.00am mmsg.com.au 2 MMS ANNUAL REPORT 2021HeaderSUBHEADERContents Chair and Chief Executive Officer’s Joint Report Our Vision, Purpose and Values Key Metrics Directors’ Report 2 5 6 8 8 Directors 9 Directors’ meetings 10 Principal activities 10 Results 10 Dividends 11 Review of operations 14 State of affairs 14 Risks 15 Outlook and likely developments 15 Events subsequent to balance date Directors’ experience and special responsibilities 16 17 Company Secretary 18 Remuneration Report 37 Unissued shares 37 Directors’ interests Environmental regulations Indemnification and insurance Non-audit services Corporate governance practices Auditor’s independence declaration Directors’ declaration Five year summary Financial Report Directors’ Declaration Independent Audit Report Auditor’s Independence Declaration Shareholder Information Corporate Directory 38 38 38 38 39 39 40 41 99 100 103 104 107 M M S A N N U A L R E P O R T 2 0 2 1 1 Chair and Chief Executive Officer’s Joint Report The McMillan Shakespeare (MMS) Group delivered revenue of $544.5 million and underlying net profit after tax and amortisation (UNPATA) of $79.2 million in FY21. A fully franked dividend of 61.3 cents per share was delivered for the year. We are pleased to present the Group’s full year results for FY21. Group Performance and Pandemic Impacts An improved profit performance for the Group in FY21 was achieved in a highly challenging operating environment, still impacted by the ongoing COVID-19 pandemic. Group UNPATA of $79.2 million represented growth of 14.8% on FY20. Revenue of $544.5m represented growth of 10.2% on FY20. Return on Capital Employed (ROCE) improved to 33.2%, up from 19.8% and underlying earnings per share at 102.4c was up 17.1%. The result reflects the varied and on-going impacts of COVID-19 on our businesses such as the automotive supply dynamic, as well as the benefits from execution of our key strategic priorities such as the restructure of our United Kingdom (UK) business, Plan Partners growth and improved customer engagement through an ongoing shift toward digital distribution. In response to the pandemic, we instituted a wage freeze for FY21 and no bonuses relating to FY20 were paid. Additionally, we extended senior debt maturities and non-essential spending was restricted. The Australian Government JobKeeper funding received ($7.3 million after-tax) in FY21 enabled the retention of our employees despite the challenges of COVID-19 and the negative impacts on our financial performance compared to FY19. The business by period end had returned to around 90% of its pre-pandemic performance, equating to approximately 80% in the absence of JobKeeper. A fully franked dividend of 61.3 cents per share was delivered for the year inclusive of the final dividend of 31.1 cents per share payable on 24 September 2021. This represents 66% of UNPATA excluding the contribution from the Jobkeeper program. The ongoing impacts of the COVID-19 pandemic include the way in which work is performed and constrained new vehicle supply globally. Vehicle supply issues were, and continue to be, the combined result of various COVID-19 related restrictions, behaviour shift away from public transport and shared mobility, and a shortage of vehicle semi-conductors impacting manufacturers globally. These factors combined to create an abnormal trading market, punctuated by increased vehicle values, which presented a range of both opportunities and challenges for the majority of our operating segments. M M S A N N U A L R E P O R T 2 0 2 1 2 Operating Segment Performance and Strategy Execution Group Remuneration Services Retail Financial Services Our Group Remuneration Services (GRS) business achieved segment UNPATA of $61.2 million representing an 0.4% increase on FY20. Total salary packages under management declined marginally (1.0%) on FY20, primarily as a result of the loss of the salary packaging arrangements within the New South Wales (NSW) public health network, despite the addition of 109 new client wins. Novated leases increased 2.2% against a backdrop of the limited supply of new vehicles, increased retail prices and net amount financed, with carry-over of sales orders increasing to over five times historical levels. Our ongoing commitment to improve customer engagement and strengthen our digital distribution capability, was a key driver of GRS performance, with traditional face-to-face customer engagement severely constrained. Digital innovations included our new online education hubs, the introduction of a remote online sign-up for new salary package customers and a new digital estimates function for novated leases. We are also now interacting with customers more intuitively and meeting their changing needs on a more individualised basis, with more than 80,000 customer interactions recorded through our digital live chat functions across the year. Plan Partners, largely unaffected by COVID-19, achieved strong customer organic growth, with funds under administration in FY21 increasing by 76% and support co- ordination hours increasing 43%. A significant milestone in the growth strategy for the business was achieved through the small acquisition of Plan Tracker, a well-established NSW based national plan management provider, on 1 July 2021. Plan Tracker has a footprint in NSW, Queensland, South Australia and Western Australia and is highly aligned with our culture and quality service. We warmly welcome the Plan Tracker team and look forward to being better together to make a positive impact on the disability sector. Asset Management Underlying net profit for our Asset Management business in Australia and New Zealand was $15.6 million, an increase of 44.3% on FY20. The business was impacted by the vehicle supply shortage, with a reduction in new business volumes, offset by increased demand for used vehicles leading to the generation of higher yields through our remarketing channels. The business recorded 30 new client wins including a strong number of returning customers. In Asset Management in the UK, underlying profit after tax for FY21 was $1.4 million, an increase of more than 100% on FY20, whilst we successfully finalised the restructure of our UK business during the period. This included the completion of the acquisition of the remaining 50% equity interest in the Maxxia Ltd joint venture and the internal re-organisation of our Asset Finance businesses. The sale of European Vehicle Contracts Limited (EVC) was also completed during the year which was materially at our carrying value. The UK business also continued to run down the existing on-balance sheet lease portfolio with no new funding being provided, a strategy commenced in FY20. The business achieved stronger than expected off-balance sheet originations with Net Amount Financed (NAF) increasing to $890 million, in part benefited by the UK CBILS, albeit at lower yields. Our Retail Financial Services (RFS) segment performed resiliently across the period given in particular the impact of COVID-19 lockdowns in the first half of the year, vehicle supply constraints and ongoing regulatory uncertainty in our retail business. The RFS segment delivered an uplift in revenue to $59.2 million, however UNPATA was down 15.1% to $2.6 million primarily as a result of an increase in the claim experience pattern giving rise to an increased deferral of revenue and associated acquisition costs, a $1.4 million reduction to UNPATA. While higher vehicle prices hampered the penetration of warranty and insurance products for the Retail side of the business, a strategic intent to diversify our distribution channels, particularly into the new vehicle franchise market, was a key driver of the improved performance. The Aggregation side of the business performed well, recording a 7% increase in Net Amount Financed, to over $1 billion worth of originations for the year. A strategic review of the RFS Retail business was completed in FY21 including an assessment of the current regulatory landscape and MMS business growth priorities. Funding Warehouse A securitisation and funding warehouse for the business commenced development in the latter stages of FY20, in order to create a more secure source of funding and increasing funding options and price benefits for novated lease customers. Equally, by transitioning to more annuity style revenue over the life of a lease, we will recognise higher overall value from each transaction. This strategic initiative is particularly important given some rationalisation of the automotive finance sector in FY21, with Westpac planning to exit the automotive finance market. Development of the warehouse progressed well in FY21 and remains on track, with the first volumes expected to be delivered during FY22. The Regulatory Environment The regulatory environment in which we operate remains subject to change, particularly following The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Most notable is the introduction of a Deferred Sales Model (DSM) in the second quarter of FY22, with respect to the sale of Add-on Insurance and Warranty Products within our GRS business. We are well placed to respond to and implement the necessary changes. Other potential reforms, including those being considered by the Australian Securities and Investments Commission (ASIC), continue to be monitored and assessed by the business. We maintain an active and ongoing dialogue with relevant policymakers and regulators alike, both directly and in conjunction with key industry advocacy bodies. M M S A N N U A L R E P O R T 2 0 2 1 3 Clear Sustainability Commitment During the year, the Board of MMS approved an inaugural Sustainability strategy for the Group, which sets out our focus and future direction on how we aim to create positive environmental and social outcomes and value for our stakeholders, including our shareholders, clients, customers, our people and broader communities. Board Committees were restructured effective 1 April 2021, with a People, Culture and Remuneration Committee chaired by Mr Bruce Akhurst and a Nomination Committee chaired by Helen Kurincic, replacing the former Nomination and Remuneration Committee. All Committee membership is now solely independent Directors. This strategy responds to key environmental, social and governance (ESG) risks and opportunities for the Group, including taking action on climate change, supporting greater accessibility and social inclusion, and our community engagement activities. These are supported by a number of targets for FY22 and beyond. Reflecting the development of the MMS Sustainability Strategy and our commitment to enhanced transparency, this year, we produced our Sustainability Report in accordance with the Global Reporting Initiative (GRI) Standard. This framework will help us report on the most material issues and impacts to our key stakeholders, and guide how we track and improve our sustainability performance over time. Some of our key sustainability highlights during the year included offsetting 100% of the Group’s Scope 1 (company car fleet) and Scope 2 (electricity use) carbon emissions, transition of six of our offices to renewable energy contracts, and investing over $733,000 in community causes and organisations. Investment in our people remained a priority for the Group in FY21 and continued to adapt to new ways of working as the pandemic persisted. Throughout the year, we also delivered more than 81,000 hours of training and professional development to our employees. We were delighted to see our Sustainable Engagement Score increase by 6% (since the previous employee engagement biennial survey in 2019) to 85%, a figure above the benchmark for financial services firms and in line with global high performing organisations. This suggests that our people feel more connected to the business, our values and culture than at any time in the past. Our risk culture was equally well appraised, with a score of 86%, in line with leading global high performance benchmarks. This indicates that employees feel well informed and trained about risk and are safe to speak up, and see an organisational culture of integrity and high ethical standard. Governance Changes Board renewal saw independent Non-Executive Director Ian Elliot retiring on 1 April 2021 after more than six years of committed service. Bruce Akhurst was appointed as an independent Non-Executive Director on 1 April 2021, a highly experienced former executive and ASX director with a deep understanding of digital, technology, consumer and regulated businesses. We are also grateful that independent Non-Executive Director Tim Poole has agreed to the Board’s request to offer himself for re-election this year. If shareholders approve his re-election, Tim’s term would conclude August 2022, allowing for a new NED recruitment and transition to occur given Tim’s corporate knowledge and contributions at an important time at MMS. M M S A N N U A L R E P O R T 2 0 2 1 4 Strategic Focus & Outlook We expect the abnormal trading conditions that characterised FY21 to continue throughout FY22, in particular given the ongoing response of Governments to the global pandemic, and motor vehicle supply constraints. Our strategic focus in FY22 centres on growth and efficiency across our businesses including the integration of the 1 July 2021 small acquisition of Plan Tracker into Plan Partners. We will continue to invest in enhancing our digital capability and reducing our cost to serve as we look to improve our value proposition and ensure that all of our business segments are well placed to continue to meet the changing needs of customers, in both business as usual circumstances and in the face of changing and disrupted market conditions. We expect the warehouse to be operational in FY22 to provide longer term strategic and financial benefits whilst recognising the accounting impacts and changes (FY22 impact to UNPATA $(4m) to $(5m)). As a result of the strategic review of the RFS Retail business, on 23 August 2021, we agreed to the sale of the business via a management buy-out as the most effective and efficient option, resulting in on-going service and support to existing customers and staff. We expect that this transaction will be completed in 1HFY22. We will also be developing a number of foundational programs which will enable us to make meaningful and lasting impact in the area of sustainability. These will include developing the first MMS Reconciliation Action Plan (RAP) and an Accessibility and Inclusion Plan (AIP), creating a pathway to achieve net zero carbon emissions for our own operations and completing a climate risk assessment in FY22. Finally, we again sincerely thank our people for their amazing efforts and commitment during such a challenging time. As always, we thank our customers and our shareholders for their ongoing engagement and support of the Group. Take care and stay well. Helen Kurincic Chair Mike Salisbury Managing Director & Chief Executive Officer Our Vision, Purpose and Values MMS’ vision, our values and our WHY guide the Group’s activities, in both a business sense and in our commitment to our communities and stakeholders, providing a framework to guide us in our day-to-day actions and long-term decision making. They are a guarantee to our people, our customers and our broader stakeholders that they are always at the center of what we do and that there is a considered and deliberate approach to delivering value through all our activities. Vision Values To build a sustainable business that creates long term value for our people, customers and shareholders. For our people we create value through long term job security; career opportunities and through being a values- based business. For our customers we create value through the quality services and products we deliver. For our shareholders we deliver value through the returns / dividends and share value growth. Purpose To create new ways to make people’s lives easier. Above and beyond – always going the extra mile. Better together – always supporting and challenging one another to learn, grow and develop – it’s OK to disagree. Make it count – Big or small, we make the most of each and every opportunity and always follow through and do what we say we will. Own it – always taking responsibility for our decisions, actions and interactions. Our ‘WHY’ – Driving What’s Possible We do this by: – Being a leader, not a follower – Being a smart, creative driven business – Investing in/sharing the thrill of BIG ideas – Seeing things differently – Challenging ideas and conventions – Shaping what’s to come M M S A N N U A L R E P O R T 2 0 2 1 5 Key Metrics Our Customers 357,388 Salary packages1 Down (1.0%) 73,375 Novated leases Up 2.2% 33,591 Assets pool – units Down (15.2%) $363m Assets managed – WDV 2 Down (18.3%) $2,770m Net amount financed Up 5.9% on pcp 60 Net Promoter Score (NPS)3 Up 15.4% (FY21 avg. monthly score) $1,179m Plan Partners client funds under administration Up 76.2% on pcp 1 Salary Package reduction includes the loss of NSW LHD (16,200 customers), underlying growth excluding this loss was 3.5%. 2 Inclusive of on and off balance sheet funding. WDV excludes off balance sheet Maxxia Ltd assets. 3 GRS salary packaging and novated leasing customer satisfaction measured through Net Promoter Score. Note: Movements compared to prior corresponding period. M M S A N N U A L R E P O R T 2 0 2 1 6 Our People and Environment 1,286 Employees (FTE) MMS Group Down (0.7%) as at 30 June 85% Employee Sustainable Engagement Score Up 6% (Aust. result of 86% is at Global High Performing Companies Norm) 81,928 Developing our people (training & development hours) Up 44.4% 1 Australian Operations only. 2 Australian and New Zealand Operations only. Board, Executive Committee and General Managers, Senior Managers and Other Managers. 3 Includes Scope 1 (fuel), Scope 2 (purchased electricity) and Scope 3 emissions (employee commute and working from home, business travel and third party services) from offices and facilities in Australia, NZ and the UK. Note: Movements compared to prior corresponding period. M M S A N N U A L R E P O R T 2 0 2 1 7 2.7% Absenteeism rate1 Down from 4.0%34% Women in leadership2 Consistent with FY204,191 Greenhouse gas emissions (CO2e tonnes)3 100% of Scope 1 and 2 greenhouse gas emissions offset27% Total electricity sourced from renewable sources Up from 0% 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 2021 (Group or MMS). Directors The Directors during the whole of the financial year and up to the date of this report (Directors) are as follows: Ms Helen Kurincic (Independent Non-Executive Director) Mr Tim Poole (Independent Non-Executive Director) Mr Bruce Akhurst (appointed Independent Non-Executive Director effective 1 April 2021) Mr John Bennetts (Non-Executive Director) Mr Ross Chessari (Non-Executive Director) Mr Ian Elliot (retired as Independent Non-Executive Director on 1 April 2021) Ms Kathy Parsons (Independent Non-Executive Director) Mr Mike Salisbury (Managing Director and CEO) Details of the qualifications, experience and special responsibilities of the Directors are set out on pages 16 and 17. 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 2021. M M S A N N U A L R E P O R T 2 0 2 1 8 Directors’ meetings The number of meetings held and attended by the board of Directors (Board) (including meetings of committees of the Board) during the financial year ended 30 June 2021 were as indicated in the table below. Director Ms H. Kurincic (Chair) 1 Mr T. Poole (Chair) 2 Mr M. Salisbury (Managing Director and CEO) Mr B. Akhurst 3 Mr J. Bennetts Mr R. Chessari Mr I. Elliot 4 Ms K. Parsons Director Ms H. Kurincic (Chair) 1 Mr T. Poole (Chair) 2 Mr M. Salisbury (Managing Director and CEO) Mr B. Akhurst 3 Mr J. Bennetts Mr R. Chessari Mr I. Elliot 4 Ms K. Parsons Board Meetings Audit, Risk & Compliance Committee Meetings Remuneration & Nomination Committee Meetings 5 Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended 17 17 17 5 17 17 13 17 17 17 17 5 17 17 11 17 13 13 - 2 11 - - 13 13 13 - 2 11 - - 13 4 4 - - - 4 4 4 4 4 - - - 4 4 4 People, Culture and Remuneration Committee 5 Nomination Committee 5 Eligible to Attend Attended Eligible to Attend Attended 2 2 - 2 - - - 2 2 2 - 2 - - - 2 1 1 - 1 - - - - 1 1 - 1 - - - - 1 Ms H Kurincic was appointed as Chair effective 20 October 2020 2 Mr T Poole stepped down as Chair effective 20 October 2020 3 Mr B Akhurst was appointed effective 1 April 2021 4 Mr I Elliot retired effective 1 April 2021 5 The Remuneration and Nomination Committee was last held on 21 September 2020 and was replaced by the separate People, Culture and Remuneration Committee and Nomination Committee M M S A N N U A L R E P O R T 2 0 2 1 9 Directors’ Report Principal activities The principal activities of the Company and its controlled entities was the provision of salary packaging, novated leasing, disability plan management and support co-ordination, asset management and related financial products and 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 2021 that are not otherwise disclosed in this Annual Report. Results Results for the financial year ended 30 June 2021 are as follows: Results 2021 2020 Net profit after income tax (NPAT) attributable to owners of the Company $61,065,330 $1,269,264 Underlying Net profit after income tax (UNPATA) 1 $79,212,985 $69,028,191 Basic earnings per share (EPS) Underlying earnings per share Basic earnings per share on a diluted basis (DPS) 78.9 cents 102.4 cents 78.4 cents 1.6 cents 87.4 cents 1.6 cents 1 UNPATA is calculated as net profit before-tax but before the after-tax impact of acquisition related items and non-business operational items (as outlined within Note 2.1 of the Financial Report). Dividends Dividends paid by the Company during the financial year ended 30 June 2021 are as follows: Dividends No final dividend for the financial year ended 30 June 2020 was declared (2019: 40.0 cents) per ordinary share (2019: fully franked at the tax rate of 30%) Interim dividend for the financial year ended 30 June 2021 of 30.2 cents (2020: 34.0 cents) per ordinary share paid on 26 March 2021 fully franked at the tax rate of 30% (2020: 30%) 2021 Nil 2020 $33,281,888 $23,369,094 $26,309,576 Total $23,369,094 $59,591,464 Subsequent to the financial year ended 30 June 2021, the Directors declared a final dividend of 31.1 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 24 September 2021, bringing the total dividend to be paid for the financial year ended 30 June 2021 to 61.3 cents per ordinary share. Ex-dividend date 9 September 2021 Record date for determining entitlements to the dividend 10 September 2021 Dividend payment date 24 September 2021 M M S A N N U A L R E P O R T 2 0 2 1 10 Review of operations – Group Segment Review Group Remuneration Services In the GRS segment UNPATA was $61.2 million, a small increase on the previous period. The result reflects our ongoing commitment to improve our value proposition through increased efficiency and enhancing the customer experience, a strategy that has proven particularly important with COVID-19 restrictions necessitating a transition to digital-centric customer engagement and distribution. Salary Packaging and Novated Leasing The global auto supply shortage negatively impacted revenue growth for the period. Despite increased enquiry levels from our customers, driven in part by COVID-19 and the shift away from public transport and shared mobility, the lack of available new car stock meant that customer orders have been carried forward into future periods. As at the end of the financial year, our carryover increased by over 500% on pre COVID-19 levels. The impact to revenue has partially been offset by the increase in average finance amounts driven by higher retail prices being charged by dealerships. We expect these challenging trading conditions to continue through FY22, with longer-term normalisation expected as global movement restrictions and supply challenges ease. Whilst we recorded strong growth in new salary packages during the period, this was offset by the transition out of the remaining New South Wales Local Health Districts, resulting in overall salary packages under management falling marginally below that recorded in the previous period. The business recorded 109 new client wins during the period, across the not for profit, health, government and private sectors. Significantly, Maxxia was appointed to the Commonwealth Government salary packaging panel during the period, with the new panel arrangement commencing from 1 July 2021 for an initial three-year period. Increased novated lease lead generation, new salary packages, and the increase in our client base was a positive endorsement of our strategy to improve the customer experience and reduce the cost to serve through digital enhancements, particularly in the context of the challenging operating conditions that prevailed during the year. The MMS Group delivered an improved profit performance in FY21, achieved against the backdrop of a highly challenging operating environment. This result is encouraging, whilst also reflecting the varied and on-going impacts of COVID-19, including the way in which we engage with our customers, the way our people perform their roles and the challenges of constrained new vehicle supply globally. We took steps to ensure the sustainability and financial security of the Group in the face of the ongoing pandemic, including reducing all non-essential operating and capital expenditure, whilst also developing new ways to connect and support our remote workforce, and maintaining high levels of service to our customers through enhanced digital capabilities. In the year we also executed on a number of strategic priorities, successfully completing the restructure of our UK business, delivering strong organic customer growth in Plan Partners, whilst delivering on our market consolidation strategy by completing the acquisition of NSW national plan management provider, Plan Tracker, on 1 July 2021. This combination of factors has made for a very complex and challenging year. The improved profit performance on FY20 speaks to the organisation’s ability to anticipate, react and respond to these conditions, which is testament to the engagement and commitment of our people. We acknowledge the support of the Australian Government JobKeeper Program in the first quarter of the financial year of approximately $7.3 million after tax, ensuring we were able to retain all staff, many of whom had been either partially or fully stood down as a result of COVID-19. Despite the JobKeeper support, our operating performance remains below pre-pandemic levels, recovering to approximately eighty percent of FY19 levels. Financial Performance Key Indicators – Revenue of $544.5 million, up 10.2% – Earnings before interest, tax, depreciation and amortisation (EBITDA) of $130.7 million, up 31.4% on FY20 – UNPATA of $79.2 million, up 14.8% – Return on Equity (ROE) of 31.1% – ROCE of 33.2% which is based on underlying earnings before interest and tax (EBIT) as the numerator – Statutory Net Profit After Tax (NPAT) $61.1 million up significantly on FY20 – Final dividend declared of 31.1cps M M S A N N U A L R E P O R T 2 0 2 1 11 Directors’ Report Digital Strategy for 2021 Plan Partners The progression of our Digital Strategy, designed to lower costs and improve execution and distribution, was central to our performance. A focus on digital customer engagement and distribution was particularly important during FY21 with traditional face to face customer interaction significantly reduced, as a result of COVID-19 restrictions. Initiatives during FY21 included: – Enhanced digital functionality, with online claim take-up for both Maxxia and RemServ increasing by 6%; – A range of new online education and engagement hubs were established, with live streaming and video-on- demand used to replicate the traditional on-site experience of approximately 20,000 customer engagement sessions; – A Novated Leasing Digital Estimates platform designed to provide more flexibility and convenience for customers, demonstrating positive early adoption among customers; – An online sign-up function for salary packaging, driven by an ongoing focus on enabling customers to self-service at their own convenience and to offset face to face distribution challenges; and – Introduction of enhanced digital live chat functionality substantially increased novated lease leads, with more than 80,000 customer interactions recorded, a 30% increase on FY21. These initiatives were central to increasing our average monthly Net Promoter Score (NPS) to 60, well above the sector benchmark and a pleasing 15.4% increase from 52 in FY20. Plan Partners delivered another strong performance for the period, with Funds under Administration growing by more than 76% to $1.179 billion and support co-ordination hours increasing 43% to 49,218 hours. Over the year, the National Disability Insurance Agency continued to execute on the roll-out of the Scheme, with approximately 93% of eligible individuals now in receipt of funding. The number of people with plan management included in their National Disability Insurance Scheme (NDIS) plans has also continued to increase and now represents 49% of all plans, up from 40% at the same time last year. Our focus was on creating a more efficient customer experience through further investment in technology, including: – Enhancements to our online Dashboards to improve self-service functionality; – A redesign of our website to improve accessibility and deliver richer educational content to customers, carers, and service providers; and – The introduction of live chat functionality as an additional communication tool recording more than 11,000 sessions in the year. We ended the year well positioned to continue to progress our growth strategy in FY22, with a focus on expanding our investment in people and capability, through product and service enhancements. Immediately post the end of the period we successfully completed the small acquisition of Plan Tracker, a NSW based plan management provider that represents a strong operational and cultural alignment with our business. The acquisition demonstrates pleasing progression of our growth and consolidation strategy. Merger and acquisition opportunities, with the right cultural fit, will continue to be a strategic priority. 12 MMS ANNUAL REPORT 2021The business reported stronger than expected off-balance sheet originations with Net Amount Financed (NAF) increasing by 2% to $890 million. NAF was benefited by the UK Government Coronavirus Business Interruption Loan Scheme (CBILS), albeit at lower yields. The Asset Finance business also successfully completed an internal re-organisation which has resulted in a new leadership structure under the consolidated Anglo Scottish brand. The business also continued to execute on the strategy to run down the existing on balance sheet lease portfolio with no new funding being provided. Retail Financial Services Segment UNPATA was $2.6 million, representing a 15.1% decrease on FY20, with solid year on year improvement in both businesses, offset by a $1.4m adjustment for deferred warranty income reflecting the enhanced product terms and recent claims experience. Retail The Retail Financial Services Retail segment overall performance was impacted by challenging trading conditions, primarily associated with the impact of COVID-19 on the used vehicle market. Despite the conditions, work done in previous periods to reinforce the business value proposition through enhanced products, distribution into new markets and strengthening stakeholder relationships continued across FY21. We were also pleased to see the Federal Court approval of the Davantage class action settlement. On 23 August 2021 MMS entered into an agreement to sell its RFS Retail business to the current management team. This will include the sale of Davantage Group Pty Ltd (trading as Presidian, National Warranty Company and National Roadservice Australia) and Presidian Management Services Pty Ltd. The transaction is expected to close during 1HFY22. The sale is the result of a strategic review of the RFS Retail business including an assessment of the current regulatory landscape and the strategic priorities of MMS. Sale to the existing management team was the preferred and most effective and efficient alternative arising from the review, resulting in the ongoing service and support to the Retail business’ existing customers and staff. Asset Management - Australia and New Zealand The AM ANZ segment achieved UNPATA of $15.6 million, an increase of 44.3% on FY20, and continued to operate in a market both buoyed and impacted by COVID-19. A fall in new vehicle supply hampered new business volumes and presented challenges in replacing assets that had reached end-of-contract periods. However most customers were retained and continued to utilise existing assets. This was offset by strong increased demand for used vehicles, which resulted in higher yields through the wholesale and retail remarketing channels. The rise in contract extensions and reductions to overall fleet sizes led to a reduction in overall written down value of assets under management by 11.2% to $311.2 million. The market remains highly competitive and this is expected to continue in FY22 and beyond. The business recorded 30 new client wins during the period and renewed several large contracts, including with the NSW Government, the largest outsourced funded fleet in the Australian market. These wins reflect a focus in recent periods of improving our value proposition and reinforcing our core capability - centred around strengthening customer relationships and improving our service provision through technology enhancements. Such initiatives included the introduction of a new customer portal, Interleasing Connect, to improve the customer self- service experience through enhanced navigation to core fleet management and other value-add services. Off-balance sheet funding of assets remained above 30% concentration levels, reflecting the focus of recent periods on increasing principal and agency funding. Asset Management - UK In the UK, UNPATA for FY21 was $1.4 million, an increase of more than 100% on FY20. The result was pleasing given economic conditions remained challenging, with the UK heavily impacted by COVID-19 restrictions throughout the year. Used vehicle disposal profitability was impacted by widespread lockdowns, as sales channels were limited to online click-and-collect distribution during the period. CLM reported an impairment of $2.0 million against the carrying value of goodwill with lockdowns having a greater than anticipated impact on maintenance management and outsourced fleet management services. A restructure of the UK business was completed during the year with a new senior leadership team being established. The restructure resulted in a cash cost of $1.8 million and non-cash costs of $12.8 million, primarily attributable to the acquisition of the remaining 50% equity interest in the Maxxia Ltd joint venture. The disposal of the underperforming EVC business was completed which approximated our carrying value. 13 MMS ANNUAL REPORT 2021Directors’ Report Aggregation Despite challenging market conditions in the Broker Asset Finance Aggregation market, the Aggregation business performed soundly, with NAF increasing 7% compared to FY20. The result was driven by a strong recovery in consumer and small business confidence during the period, and particularly the demand for vehicles and leisure goods. Acquisition of new broker accounts combined with organic growth by a number of large existing brokers resulted in NAF exceeding the $1 billion threshold for only the second time in the business’s history. The Aggregation team focussed on maintaining relationships with brokers and lenders throughout the COVID-19 pandemic, which included holding virtual events and enhancing the use of video calling, social media channels and websites to offer improved connectivity and convenience. This focus on relationships, a core component of our value proposition, helped the business grow the lender panel to 32 funders during the period, providing brokers and their customers – consumers and businesses – with even greater choice and range of products and lending solutions and was a key contributor to the business performance and result. State of affairs There were no other significant changes in the state of affairs of the Company and its controlled entities during the financial year ended 30 June 2021 that are not otherwise disclosed in this Annual Report. Risks In order to achieve our business objectives and build a more resilient business, the Board and Management at MMS have a responsibility to effectively govern and manage the financial, operational, compliance, environmental and social risks to which it is exposed. MMS’ approach to risk management, underpinned by the Group’s risk management policy, framework and risk appetite, overseen by the Audit, Risk and Compliance Committee, is embedded in our culture and reflected in our decision making. Our approach is to proactively manage the risks facing the business, including the early identification and assessment of risks, the implementation of controls and the active monitoring and reporting of risks. MMS bases its risk management procedures on the Risk Management Standard AS ISO 31000:2018. As part of normal business activities, the Senior Executives formally identify and/or review key risks. The results of these reviews are recorded in the MMS risks register, which is used by the Management Risk and Compliance Committee and the Board Audit, Risk and Compliance Committee to actively monitor risks and mitigation strategies. Key risks include: – The COVID-19 pandemic and its potential ongoing adverse impact on consumer movement and confidence, business investment, the health and safety of our people, asset values, vehicle/asset supply, and access to client and MMS premises; – Deteriorating economic conditions and related conditions in the markets we operate in and their influence on business and consumer sentiment, including post Brexit impact on the UK economy, and cross border flow of assets; – Movements in the health of the new and used vehicle sales markets, including the ongoing available supply of vehicles and fluctuations in used vehicle values and potential residual value risks; – Impact of recommendations arising out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – including the sector requirement to introduce a deferred sales model across add-on financial products sold in connection with a motor vehicle in FY22; ASIC’s consideration of the imposition of a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products; and forthcoming product Design and Distribution obligations; – Adverse change in the regulatory conditions relating to consumer lending products and similar change to the policy settings relating to products and services administrated or offered by the Group; – Adverse regulatory policy changes impacting the business including for example Fringe Benefits Tax legislation or NDIS legislation; – Capital market constraints impacting the security and ongoing commitment of funding in the automotive segment; – The loss or non-renewal of a material client or clients to the business; – Competitive intensity due to new entrants, mergers between existing competitors and/or due to the failure to respond to changes in market conditions, customer demands or technology changes; – Climate change risks, including those associated with the transport sector’s transition to a low carbon future; – The threat of a cybersecurity attack, including during a period where many MMS employees are working remotely; – The non-performance or failure of key technology and operating systems; – The occurrence of a significant breach of MMS’s privacy obligations; – The non-performance or failure of MMS key suppliers; and – The inherent credit risk that exists within the asset financing businesses. M M S A N N U A L R E P O R T 2 0 2 1 14 Header SUBHEADER Outlook and likely developments Events subsequent to balance date We expect COVID-19 to continue to challenge the environments within which we operate, with the unpredictable imposition of restrictions expected to remain, impacting our operations and remaining a material risk during FY22. The constrained auto supply conditions that impacted the market in FY21, are also expected to continue throughout FY22 and potentially beyond. In response, the focus for the GRS segment will be to continue to work to enhance our digital distribution channels and increase choice and convenience for customers. Further customer insights research will also be pursued in order to tailor our offering to meet customers specific needs to ensure our point of competitive difference remains compelling. Other than the matters disclosed at Note 8.9 of the Financial Report and below, there were no material events subsequent to reporting date. On 1 July 2021, the Group successfully completed the small acquisition of Plan Tracker, a NSW based plan management provider. On 23 August 2021 the Group executed an agreement with a Management Buy-Out consortium to dispose of the RFS Retail business. Completion is expected to occur in 1HFY22. The Divestment is expected to result in an estimated loss of ($1.8m). Further details on the financial impact to the Group are included in the Events Subsequent to the Reporting Date section in the Notes to the Financial Statements (Note 8.9). We expect the warehouse to be operational in FY22 to provide longer term strategic and financial benefits whilst recognising the accounting impacts and changes (FY22 impact to UNPATA $(4m) to $(5m)). In the Plan Partners business, we will continue to invest in technologies that support our customer’s experience. Continued focus on both customer acquisition and retention is expected to further expand our customer base, in addition to the successful integration of Plan Tracker into the group. A targeted approach to further market consolidation will continue to be a strategic priority. In the AM ANZ business, we will continue to focus on leveraging the abnormal conditions in the used vehicle market, whilst reinforcing our value proposition through further technology enhancements and introducing new driver products and services. As COVID-19 lockdowns ease in the UK, more favourable trading conditions are expected. Following the successful management restructure, a key concentration for the business will be the growth of the broker business and the profitable realisation of Maxxia Limited end of lease vehicles. M M S A N N U A L R E P O R T 2 0 2 1 15 Directors’ experience and special responsibilities Helen Kurincic MBA, FAICD, FGIA Appointed: 15 September 2018 (Non-Executive Director), 20 October 2020 (Chair) Positions: Chair of the Board, Member of the Audit, Risk and Compliance Committee, Member of the People, Culture and Remuneration Committee, Chair of the Nomination Committee Ms Kurincic is Non-Executive Chair of Integral Diagnostics Limited, Non-Executive Director of Estia Health Limited, HBF Health Limited and the Victorian Clinical Genetics Service. Formerly, Ms Kurincic was the Chief Operating Officer and Director of Genesis Care from its earliest inception, creating and developing the first and largest radiation oncology and cardiology business across Australia. She has also formerly held Board roles across the publicly listed, private, not-for-profit and government sectors as well as being the former CEO of Benetas and Heart Care Victoria. Ms Kurincic is a Fellow of the Australian Institute of Company Directors and Governance Institute of Australia. Ms Kurincic is considered an independent director under the Company’s definition of independence. Tim Poole B Comm Appointed: 17 December 2013 (Non-Executive Director), 28 October 2015 – 20 October 2020 (Chair) Positions: Non-Executive Director, Member of the Audit, Risk and Compliance Committee, Member of the People, Culture and Remuneration Committee, Member of the Nomination Committee Mr Poole is currently Chair of Aurizon Holdings Limited and a Non-Executive Director of Reece Limited. Mr Poole was previously an executive of the unlisted infrastructure and private equity manager, Hastings Funds Management (1995 to 2007), including being the Managing Director from 2005. He was formerly the Non-Executive Chair of Lifestyle Communities 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. Bruce Akhurst B Ec (Hons), LLB, FAICD Appointed: 1 April 2021 Positions: Non-Executive Director, Chair of the People, Culture and Remuneration Committee, Member of the Audit, Risk and Compliance Committee, Member of the Nomination Committee Mr Akhurst is currently Non-Executive Director, Chair of the Risk and Compliance Committee and a member of the People and Remuneration Committee and Technology Committee at Tabcorp Holdings Limited. Mr Akhurst is also Chair of the Peter McCallum Cancer Foundation and Council Member of RMIT University chairing the Technology and Infrastructure Committee. Mr Akhurst was previously Non-Executive Director and a member of the People, Culture and Remuneration Committee of Vocus Group Limited, CEO of Sensis, Group MD and General Counsel of Telstra and a Partner of Mallesons Stephen Jaques. M M S A N N U A L R E P O R T 2 0 2 1 16 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 a number of successful Australian companies. He owns businesses in varied industries including technology and finance. Mr Bennetts is a Non-Executive Director of Sacred Heart Mission. He was a founder of Cellestis Limited and private equity investment firm, Mooroolbark Investments Pty Limited (M-Group). He has also provided corporate advisory services to a range of companies in Australia and Asia. Prior to the establishment of M-Group, he was a senior executive of pioneering Australian multinational IT company, Datacraft Limited and also practised as a commercial lawyer. Ross Chessari LLB, M Tax Appointed: 1 December 2003 Positions: Non-Executive Director 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. Kathy Parsons B Comm Appointed: 22 May 2020 Positions: Non-Executive Director, Chair of the Audit, Risk and Compliance Committee, Member of the Remuneration and Nomination Committee, Member of the People, Culture and Remuneration Committee Ms Parsons is a former audit partner at Ernst & Young where she spent time as a partner in the firm’s US, UK and Australian practices. In addition to her audit client responsibilities she was part of the firm’s Oceania Assurance Leadership team as the Professional Practice Director with responsibility for assurance quality and risk management in the region. Ms Parsons is considered an independent Director under the Company’s definition of independence. Ashley Conn B Comm, CA, MBA Appointed: 5 October 2020 Positions: Chief Financial Officer and Company Secretary Mr Conn joined MMS in October 2020 as CFO and has over 20 years of financial services experience. Previously Mr. Conn was the CFO of CSG Ltd and prior to that had been an investment banker working in Australia and New York predominantly for Goldman Sachs and Morgan Stanley. M M S A N N U A L R E P O R T 2 0 2 1 17 Remuneration Report (audited) Letter from the Chair of the People, Culture and Remuneration Committee Dear Shareholders, On behalf of the People, Culture and Remuneration Committee (PCRC) and Board of McMillan Shakespeare Limited (the Company), I am pleased to present the Financial Year 2021 (FY21) Remuneration Report (Report). During the year, the Remuneration and Nomination Committee was replaced by the People, Culture and Remuneration Committee and the Nomination Committee. The role of the PCRC is to review and have oversight of people, culture and remuneration matters and make recommendations to the Board. At MMS, we are committed to achieving long-term, sustainable returns for our shareholders by leveraging scale, introducing new technology and pursuing value accretive, strategic growth opportunities in a rapidly changing landscape. In achieving this, we don’t provide short-term incentives to Executives but instead operate a Long-Term Incentive Plan (LTIP) which includes performance hurdles comprising both financial and strategic targets. Overview of Company performance In FY21 an improved profit performance for the Group was achieved in a highly challenging operating environment, still impacted by the ongoing COVID-19 pandemic. Group UNPATA grew by 14.8% to $79.2 million, with revenue up 10.2% to $544.5m. A fully franked dividend of 61.3 cents per share was delivered for the year. The result reflected the on-going impacts of COVID-19 on the businesses such as the global automotive supply constraints, as well as the benefits from execution of key strategic priorities including restructure of the United Kingdom business, Plan Partners growth and improved customer engagement through an ongoing shift toward digital distribution. Development of a securitisation and funding warehouse for the business progressed well in FY21 and remains on track, with the first volumes expected to be delivered during FY22. FY21 remuneration outcomes While Group earnings out-performed against plan and PCP, the Earnings per Share and Return on Capital Employed targets for the FY19 and FY20 LTIP grants relating to FY21 performance hurdles were not achieved and thus did not vest. However, the FY20 LTIP ROCE performance hurdle relating to FY22 and the FY21 LTIP grant are estimated to have a possibility of vesting. Strategic targets accounted for 30% of FY21 LTIP, 20% of the plan has qualified for vesting. Further details are provided in Section 5(b). Impact to remuneration as a result of COVID-19 The Board and management are focused on the sustainability and financial health of the Company for the longer term. As a result of COVID-19, measures were put in place to protect its long-term future and to put affected business units in a position to stand back up as quickly as possible when circumstances permit, by retaining our talented workforce. As announced previously in FY20, effective from 13 April 2020 to 6 July 2020, the Company moved into a partial or full stand down of the workforce in most parts of the business where there had been a material change in workload. We matched our workforce to the activity in each of our business units and to support our customers. The Company received JobKeeper for the period from April to September 2020 and this subsidy enabled the retention of all staff. JobKeeper has been included in the setting and calculation of the achievement of the financial performance hurdles under the LTIP. There were no increases in fixed remuneration in FY21. Remuneration framework changes in FY21 and FY22 To maintain the alignment to the long-term strategy of MMS, changes to the LTI scheme were implemented in FY21 which were disclosed within the FY20 remuneration report. These changes are further detailed in section 4(c). From FY22, strategic targets are to account for 40% of the LTIP with the remaining 60% to continue to represent financial targets. Changes in KMP / MMSG leadership Mark Blackburn, CFO and Company Secretary, stepped down from his position on 1 December 2020 after nine years in the role and with the Company. Mr Ashley Conn assumed the role of Chief Financial Officer and Company Secretary on 5 October 2020. Geoffrey Kruyt, Chief Operating Officer, resigned on 10 June 2021 with an effective termination date of 10 December 2021. No rights or options under the LTI vested during the year and all unvested rights will be forfeited when his employment formally terminates on 10 December 2021. Ian Elliot resigned as an independent Non-Executive Director of the Company and the Chair of the Remuneration and Nomination Committee effective 1 April 2021. I was announced as an independent Non-Executive Director of the Company and assumed the role of Chair of the People, Culture and Remuneration Committee effective from 1 April 2021. We thank you for your support and welcome your feedback. Bruce Akhurst Non-Executive Chair of the People, Culture and Remuneration Committee M M S A N N U A L R E P O R T 2 0 2 1 18 1. Contents Section Key Management Personnel FY21 Remuneration Snapshot Executive Remuneration Framework and Policy – Overview FY21 Outcomes and the Link to Performance Remuneration Governance Executive Remuneration Tables Non-Executive Director Remuneration Reference Section 2 Page 19 Section 3 Page 20 Section 4 Page 21 Section 5 Page 27 Section 6 Page 29 Section 7 Page 31 Section 8 Page 35 2. Key Management Personnel This Report has been prepared in accordance with Section 300A of the Corporations Act 2001 and outlines the remuneration arrangements in place for the Key Management Personnel (KMP) of the Company. This comprises all Non-Executive Directors and those senior employees who have authority and responsibility for planning, directing and controlling the activities of the Company. The table below sets out the Company’s Executive KMP and Non-Executive Directors during the 2021 Financial Year. Executive KMP Name Position Mr M Salisbury Chief Executive Officer (CEO) and Managing Director Mr M Blackburn Group Chief Financial Officer (CFO) and Company Secretary Term as KMP in 2021 Full year Part year 1 Mr A Conn Group Chief Financial Officer (CFO) and Company Secretary Part year 2 Mr G Kruyt Chief Operating Officer (COO) Full year 3 Non-Executive Directors Name Position Term as NED in 2021 Ms H. Kurincic Non-Executive Chair 4 Full year Mr T. Poole Non-Executive Director 4 Full year Mr B Akhurst Non-Executive Director Part year 5 Mr J. Bennetts Non-Executive Director Full year Mr R. Chessari Non-Executive Director Full year Mr I. Elliot Non-Executive Director Part year 6 Ms K. Parsons Non-Executive Director Full year 1 Resigned 1 December 2020 2 Appointed 5 October 2020 3 Resigned on 10 June 2021 with an effective termination date of 10 December 2021 4 Ms H. Kurincic was appointed Chair on 20 October 2020 at the conclusion of the Annual General Meeting replacing Mr T. Poole 5 Appointed 1 April 2021 6 Resigned 1 April 2021 19 MMS ANNUAL REPORT 2021 Remuneration Report (audited) 3. FY21 Remuneration Snapshot Company Performance The Company continued to be impacted by COVID-19 during FY21. The GRS and Asset Management ANZ businesses experienced a faster than anticipated recovery in novated lease sales and strong returns in remarketing values on used vehicles. Plan Partners continued to grow its market share and customer base while ongoing investment in technology continues to deliver productivity and efficiency gains. In the UK, CLM continued to be negatively impacted by the lockdowns with reduced activity within the fleet control and rental businesses. However, the UK asset finance businesses were able to increase net amounts financed (NAF) through the origination of the UK Government CBILS (Coronavirus Business Interruption Loan Scheme) loans. The Board set strategic goals as part of the FY21 LTIP. The completion of the capital light strategy in the UK, delivery of core business growth through enhanced digital capability, novated leasing conversion rate improvement and the acceleration of customer growth in Plan Partners were all achieved. KMP Remuneration Fixed pay Long-term incentive Fixed pay adjustments are made to reflect general market conditions and remuneration offered to comparable roles within related industries. The Company does not pay short-term incentives to its KMP and instead operate a LTIP based on financial and strategic performance hurdles. As outlined in the 2020 report, with COVID-19 and the current economic environment, the Managing Director and Group Executives reduced their remuneration by approximately 24% from the 13 April 2020 to 6 July 2020. Reflecting the link between organisation performance and executive reward, MMS performance hurdles have not been satisfied and no performance options or rights will vest in respect of the FY19 three year or FY20 two year LTIP. No fixed remuneration increases were applied in respect of FY21. Furthermore, the earnings per share performance hurdles for the FY22 and FY23 performance periods are unlikely to be achieved. However, the return on capital employed performance hurdles in respect of the FY22 and FY23 performance periods are considered likely to be achieved. In relation to the strategic targets in the FY21 LTIP, 20% of the plan has qualified for vesting. As announced in the 2020 report, several changes have been made for the LTIP for FY21 to further align the Company with market practice and stakeholder expectations (refer Note 4(c)). Non-Executive Director Fees Non-Executive Director fees were not increased during FY21. 20 MMS ANNUAL REPORT 20214. Executive Remuneration Framework and Policy – Overview (a) FY21 Strategic Pillars and Design Principles Our Strategic Pillars Winning in the Core Brave New World One Business Telling Our Story – New business wins and retention – Industry leading product and service delivery – Improved productivity – Acquisitions – New markets – New customer segments – Group-wide business collaboration – Business synergies – Integration of new business – Aligned strategies – Internal staff communications strategy – Branding and marketing – B2B client development events Customer Centricity Our People Technology Platforms Our Executive Remuneration Strategy and Policy Design Principles MMS’ executive remuneration strategy and policies support our strategic pillars. Our executive remuneration policy is designed to align the interests of executives and shareholders while attracting and retaining key executive talent who are critical to the growth and success of the Company. – Attraction and retention of key talent through fair and market competitive fixed remuneration for the role. – Aligning reward with the creation of sustainable, long-term value for the Company’s shareholders. Our executives do not receive short-term incentives (only LTIPs) and a minimum shareholding requirement has been introduced. – Incentivise high performance through stretch LTIP performance measures aligned with the Company’s strategy. – Retention of key talent. Vesting of our long-term incentives are subject to executives’ continued employment with the Company. 21 MMS ANNUAL REPORT 2021 Remuneration Report (audited) (b) Remuneration framework cycle In relation to the FY21 framework, fixed remuneration was provided in addition to a long-term incentive granted 100% as Performance Rights, based on 70% financial measures and 30% as strategic objectives. Our Executive Remuneration Framework (Snapshot) 35% EPS & ROCE 35% EPS & ROCE Performance qualified rights but not settled for 1 year 30% Strategic Measures Performance qualified rights but not settled for 2 years Fixed remuneration (Cash salary + Superannuation) n o i t r o p d r a w a d n a t n e m e E l e v i t n e c n i m r e t - g n o L y r a a S l Years 1 2 3 22 MMS ANNUAL REPORT 2021 (c) Executive remuneration framework The PCRC and Board of the Company are committed to ensuring our executive remuneration framework remains fit-for-purpose going forward. The below table describes each element of pay within the framework and the strategic link. Our Executive Remuneration Framework Element Strategic Link Fixed remuneration Fixed remuneration comprises base salary and superannuation (and, in some cases, non-cash benefits such as motor vehicle lease payments and car parking benefits) Fixed remuneration of the Executive KMP is set to attract and retain the calibre of talent required to drive outcomes for the Company’s shareholders and deliver on the Company’s strategy. The PCRC reviews fixed remuneration annually (or on promotion) to ensure fixed remuneration levels remain fair, appropriate and market competitive. Long-term incentive Incentives are delivered through indeterminate rights in a LTIP, with Performance Rights measured over a 3 year period and subject to performance measures. By delivering variable reward wholly as a long-term incentive, our framework encourages sustainable decision making and a focus on the long-term health of the business (including the interests of customers), to drive long term value for shareholders. Vesting of the LTIP is subject to the achievement of performance hurdles to drive a high-performance culture amongst our Executive Team. The ROCE and EPS hurdles are aligned with our strategic pillars and our focus on both earnings and capital optimisation. Non-financial measures align to shorter term business objectives, measured through a combination of better capital management, increased productivity and growth. Short-term incentive MMS does not offer short term incentives and only provides fixed remuneration and long-term incentives. Each element of remuneration is outlined in more detail below: Fixed annual remuneration in FY21 Fixed remuneration of the Executive KMP is reviewed by the PCRC annually (or on promotion) to determine whether changes are appropriate in order to maintain market competitiveness and attract and retain the talent required to drive outcomes for the Company’s shareholders. Fixed remuneration is determined on an individual basis having regard to: – The individual’s role, duties and responsibilities and performance levels; – General market conditions; and – Remuneration offered to comparable roles within related industries. In considering fixed remuneration changes, the PCRC has regard to external benchmarking and generally positions the fixed remuneration at the market median of comparable roles within comparator companies (taking into account revenue, employee numbers and market capitalisation). Due to the economic environment and impact of COVID-19, no fixed annual remuneration increases were made to the Executive KMP in respect of FY21. 23 MMS ANNUAL REPORT 2021 Remuneration Report (audited) LTIP awarded in FY21 In FY21, the Executive KMP were granted Performance Rights in four equal parts of 17.5% each aggregating to 70.0% where each part was measured against financial targets and the remaining 30.0% measured against strategic targets. Rolling annual grants will be made under the Company’s LTIP going forward (as against larger amounts which vest every three years) to align with market practice. LTIP changes in FY21 As part of the review of the LTIP program and as announced in the 2020 report, we have made the following changes in the LTIP effective in FY21: LTIP FY21 changes Transition from fair value to face value allocation methodology To align with market practice among other ASX listed organisations, the Board has decided to issue Rights under the LTIP on a face value (market value of a share) basis from FY21. The move from a fair value methodology to a face value methodology also aligns with shareholders and advisors’ preference for LTIP awards to be calculated using the face value of the underlying shares, rather than the fair value of the Right. The move from a fair value to face value methodology required a one-off conversion of the stated ‘Target’ LTIP opportunity. It is noted that there is no change to the overall remuneration package. Move to an indeterminate right as the LTI instrument The shift to indeterminate rights provides the Company with flexibility to settle LTIP grants in either shares or cash payment depending on the Company’s circumstance and preference at the time of exercise/escrow lifting. Rights are however generally expected to be settled in shares. Awards to generally remain on- foot for ‘good’ leavers Good Leavers are generally able to retain their awards on a pro rata basis whilst Bad Leavers forfeit all unvested awards at the time they cease employment. The Board retains discretion to determine a different treatment taking into consideration the circumstances of the departure, which may include an appropriate deferral period. Specific details on the Performance Rights granted to Executive KMP during FY21 are provided in section 7(b) of the report, and the table below outlines the terms of the grants: 24 MMS ANNUAL REPORT 2021 Detailed summary – FY21 LTIP grant Element Description Opportunity levels (% of fixed remuneration) The opportunity levels offered to the Executive KMP in FY21 were: − 98% of fixed remuneration for the CEO; − 98% of fixed remuneration for the CFO; and − 98% of fixed remuneration for the COO. Opportunity levels increased in FY21 from 75% to 98% to recognise the change from a fair value to face value methodology. Allocation methodology Performance Rights: Rights are allocated on a face value basis from FY21. Performance period Two and three years in respect of meeting financial targets. One year in relation to strategic targets. The vesting of any LTIP is subject to continued employment with the Company on the date that the Company’s financial report is lodged with the ASX for the year ending 30 June 2023. Performance hurdles Subject to the Executive remaining employed for the performance period, vesting of the Performance Rights is subject to the achievement of two performance hurdles: a) Financial targets − The Company’s CAGR in underlying EPS which applies to 35.0% of the Performance Rights; and − Absolute average ROCE over the performance period which applies to 35.0% of the Performance Rights. The following vesting schedules apply to Performance Rights (with vesting on a straight-line basis between each level of performance). Underlying EPS CAGR Performance Period Level of performance (%) Percentage of awards vesting Allocation of total grant FY21 and FY22 FY21, FY22 and FY23 <11.5% - 11.5% –15.5% 50%–100% <9.5% - 9.5% –13.5% 50%–100% - 17.5% - 17.5% Average ROCE Performance Period Level of performance (%) Percentage of awards vesting Allocation of total grant FY21 and FY22 FY21, FY22 and FY23 <29.5% - 29.5% – 32.5% 50%–100% <31.5% - 31.5% – 34.5% 50%–100% - 17.5% - 17.5% Calculation of Underlying EPS (CAGR) shall be based on comparing the underlying EPS results in the final year of the performance period to the Underlying EPS results for FY20 as the base year (excluding any impairment losses recognised in the base year). The ROCE performance condition is based on the Company’s average ROCE over the performance period. 25 MMS ANNUAL REPORT 2021Remuneration Report (audited) Element Description Performance hurdles (continued) Process for assessing performance conditions b) Strategic objectives Strategic objectives are set by the Board across key strategic areas in FY21 as follows: − Capital management (including, amongst other things, a focus on the delivery and operation of the Company’s warehouse funding initiative during FY21 and the rate at which the Company can move to capital light funding in the UK); − Productivity (including, amongst other things, delivery of productivity benefits and core business growth through the Company’s enhanced digital capability); and − Growth (including, amongst other things, a focus on acceleration of growth initiatives with an emphasis on accelerating customer growth in Plan Partners and the delivery of organic extensions). To determine the full extent to which the performance hurdles are satisfied, the PCRC relies on the audited financial results and vesting is determined in accordance with the LTIP Rules. The PCRC believes this method of assessment provides an appropriate and objective assessment of performance. The PCRC adjusts for impairments recognised in year while the impact and timing of any capital raisings and acquisitions are adjusted for to ensure metrics are correctly adjusted to take into account these changes. In the event that the Executive takes approved unpaid leave for a period exceeding three months during FY21, FY22 or FY23, the vesting criteria outlined above with respect to the performance hurdles and the executive’s continued employment will be deemed on a pro-rata basis to reflect the period of continuous service during the relevant financial year, unless the Board determines otherwise. Voting and dividend entitlements No voting rights or dividend entitlements attach to the Performance Rights. Malus (i.e. forfeiture of awards) If the Board determines that an act of fraud, defalcation or gross misconduct has occurred in relation to the affairs of the Group, the Participant will forfeit any right or interest in the Shares, Rights or Options or other entitlements under the Plan. Treatment upon cessation of employment If the Executive leaves employment with the Company prior to the date specified in the Invitation Letter, the Rights will lapse without any payment to the employee (subject to the discretion of the Board). Change of control On a change of control, the Board has discretion to waive the performance conditions attached to the Performance Rights. Hedging No Executive can enter a transaction that is designed or intended to hedge the Executive’s exposure to any unvested option or right. Executives are required to provide declarations to the Board on their compliance with this policy from time to time. M M S A N N U A L R E P O R T 2 0 2 1 26 (d) Pay mix Reward Mix We set out below the mix between fixed remuneration and LTIP at maximum for current Executive KMP. The Board believes this is an appropriate mix to ensure that Executives are focused on generating value for shareholders over the long term (based on targeted financial metrics). Fixed remuneration Long-term incentive Chief Executive Officer Chief Financial Officer Chief Operating Officer 50.5% 49.5% 50.5% 49.5% 50.5% 49.5% 5. FY21 Outcomes and the Link to Performance (a) MMS financial performance FY19 to FY21 The table below sets out the Company’s performance over the past three years in respect of key financial and non-financial indicators. Indices FY21 FY20 FY19 Net profit attributable to Company members $61,065,330 $1,269,264 $63,672,478 Underlying net profit after income tax (UNPATA)1 $79,212,985 $69,028,191 $88,696,719 NPAT growth UNPATA growth Dividends paid Dividend payout ratio2 Share price as at 30 June Market capitalisation (A$m) Earnings per share (cents) Underlying earnings per share (cents)3 ROCE4 >100% 14.8% (98.0%) (22.2%) 26.6% (5.1%) $23,369,094 $59,591,464 $61,173,277 66.0% $12.95 $1,002.1 78.9 102.4 33% 42.4% $9.08 $702.6 1.6 87.4 20% 69.0% $12.21 $1,016.0 77.0 107.3 21% 1 UNPATA is calculated as net profit after-tax but before the after-tax impact of acquisition related items and non-business operational items (as outlined within Note 2.1 of the Financial Report). 2 Dividend payout ratio is calculated as total dividends declared for the financial year divided by UNPATA for the financial year. FY21 payout ratio is calculated on UNPATA excluding JobKeeper of $7.3m (net of tax) (FY20: $7.0m net of tax). 3 Underlying earnings per share is based on UNPATA. 4 Return on capital employed (ROCE) is adjusted to reflect twelve months’ trading for acquisitions made in the financial year based on underlying earnings before interest and tax (EBIT). Underlying EBIT is before the pre-tax impact of acquisition related and non-business operational items (as outlined within Note 2.1 of the Financial Report). Capital employed (excluding lease liabilities) used in the calculations includes the add back of impairment of acquired intangible asset charges incurred in the respective financial period. M M S A N N U A L R E P O R T 2 0 2 1 27 Remuneration Report (audited) (b) Company performance outcomes linked to the LTIP The following table outlines the performance against the LTIP financial performance measures that have been used across the KMP in FY21. Alignment between Performance and Remuneration FY19 Grants – 3 Year Performance LTIP Metric FY181 FY19 FY202 FY21 Metric Achieved ROCE 2,3 N/A 17.7% 10.4% 29.5% 19.2% Underlying EPS growth (cps)2 113.2 80.8 24.8 81.0 (10.5%) Vesting Target Range 22.25% - 24.25% 6.0% - 14% Vesting Target Met No No FY20 Grant – 2 & 3 Year Performance LTIP Metrics FY191 FY202 FY21 Metric Achieved Period Vesting Target Range Vesting Target Met ROCE 2,3 N/A 10.4% 29.5% 20.0% Underlying EPS growth (cps)2 107.3 24.8 81.0 (13.1%) 2 year 21.5% - 23.0% No 3 year 21.5% - 24.0% Expected 2 year 6.0% - 10.5% No 3 year 6.0% - 10.5% Not expected FY21 Grant – 2 & 3 Year Performance LTIP Metrics FY201,2 FY21 Metric Achieved Period Vesting Target Range Vesting Target Met ROCE 2,3 N/A 29.5% 29.5% Underlying EPS growth (cps)2 87.4 81.0 (7.3%) FY21 Grant – Tranches for strategic targets Successful development and implementation of funding warehouse Execute capital light strategy in the UK Delivery of core business growth through the Group’s enhanced digital capability Novated leasing conversion rate improvement Accelerating customer growth in Plan Partners Delivery of organic extensions in GRS or Plan Partners Total 1 Base year for underlying EPS. 2 year 29.5% - 32.5% Expected 3 year 31.5% - 34.5% Expected 2 year 11.5% - 15.5% Not expected 3 year 9.5% - 13.5% Not expected Allocation of Grant Vesting Target Met Vesting Allocation 5% 5% 5% 5% 5% 5% 30% - Yes Yes Yes Yes - - - 5% 5% 5% 5% - 20% 2 ROCE and EPS metrics include impairment charges and UK restructuring costs as well as one-off UK contract loss in the UK in FY19. 3 ROCE is based on the average in the performance period. The Rights that have qualified and are subject to meeting the relevant employment conditions in the table above will result in 45,571 ordinary MMS shares being provided to Mr M. Salisbury, Mr G. Kruyt and Mr A. Conn and will be issued by the MMS Employee Share Trust. M M S A N N U A L R E P O R T 2 0 2 1 28 6. Remuneration Governance (a) Responsibility for setting remuneration Responsibility for setting a remuneration policy and determining Executive and Non-Executive Director remuneration rests with the Board. The Board has established the PCRC and its objectives are to oversee the formulation and implementation of the remuneration policy and make recommendations to the Board on remuneration policies and packages applicable to the Directors and Executive KMP. For further details on the composition and responsibilities of the PCRC, please refer to the Corporate Governance Statement on our website www.mmsg.com.au/overview/#governance. The following chart outlines key stakeholders in the governance of remuneration at MMS. Remuneration Consultants Board Provide independent advice information and recommendations relevant to remuneration decisions. Responsibility for setting a remuneration policy and determining Executive and Non- Executive Director remuneration rests with the Board. Shareholder and Advisory Bodies Includes consultation, investor and proxy meetings and engagement at the Annual General Meeting. People, Culture and Remuneration Committee and Nomination Committee Assist the Board to achieve its objective by making recommendations to the Board in relation to its composition and recruitment, retention, remuneration and succession planning for Directors and Senior Executives. Audit, Risk and Compliance Committee Support the People, Culture and Remuneration Committee by providing relevant information as required for incentive awards. (b) Use of independent remuneration consultant The PCRC obtains external independent advice from remuneration consultants when required, and will use it to guide and inform their decision-making. During FY21, no remuneration recommendations (as defined in the Corporations Act 2001 (Cth)) were received. (c) Board discretion The Board has adopted a set of guiding principles when it considers adjustments to performance outcomes under the LTIP. The process for adjustments and principles applied are: 1. Transparency: for any adjustments made, MMS will provide clear disclosure and rationale. Where possible, disclosures will be made in advance that may result in necessary adjustments ensuring early communication to shareholders. 2. Timing of adjustments: adjustments will be made only to reward outcomes at the time of vesting, applying to both positive and negative adjustments. 3. Shareholders and management alignment: adjustments will be made in the interests of balancing the shareholder and management alignment ensuring consistency in Company objectives. M M S A N N U A L R E P O R T 2 0 2 1 29 Remuneration Report (audited) (d) Details of executive service agreements The table below sets out key information in respect of the service agreements of the CEO and other Executive KMP. Element Duration Notice period 1 Description Ongoing − CEO: 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. − Executive KMP: 6 month’s 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 in respect of the above notice periods. No contracted retirement benefits are in place with any of the Company’s Executives. Restraint of trade A restraint period not exceeding 6 months. 1 It is noted that Mr G. Kruyt, COO, announced his resignation on 10 June 2021 with an effective termination date of 10 December 2021. (e) Minimum shareholding requirements The Company has minimum shareholding requirements for its Executive KMP and Non-Executive Directors to facilitate share ownership and encourage an ‘ownership’ mindset. Refer section 7(f) for further details on current senior executive KMP and director share ownership. The table below sets out key information in respect of this Policy. Please refer to the ‘Share Ownership and Retention Policy’ on the Company’s website for further detail www.mmsg.com.au/overview/#governance. Directors and officers Description Requirement Executive KMP 50% of one year’s fixed remuneration The later of: − 5 years from September 2017; or − 5 years from date of commencement as Executive KMP Non-Executive Directors1 100% of one year’s base director fees The later of: − 5 years from September 2017; or − 5 years from date of commencement as Non-Executive Director 1 Share Ownership and Retention Policy reviewed and updated 26 June 2020. 30 MMS ANNUAL REPORT 20217 Executive Remuneration Tables (a) Executive remuneration The following table sets out the executive remuneration for FY21 in accordance with the requirements of the Accounting Standards and Corporations Act 2001 (Cth). Cash salary/ fees 9 $ Annual Leave Entitle- ments Other Benefits 1 Super- annuation Long Service Leave Options and Rights 2,3 Total remuneration Percentage of remuneration as options and rights Value of remuneration received 3,4 Value of options exercised and sold 8 $ $ $ $ $ $ % $ FY21 876,309 21,175 30,892 25,000 15,282 300,294 1,268,952 24% 932,201 FY20 844,502 (14,395) 33,530 25,479 19,456 (81,110) 827,462 FY21 658,732 15,248 - 21,694 11,056 (33,751) 672,979 FY20 647,743 (10,688) 311,130 47,705 36,802 (74,202) 958,490 n/a n/a n/a 903,511 930,331 680,426 - 1,006,577 664,522 FY21 562,897 (144,675) - 10,013 (96,863) 80,215 411,587 19% 572,910 - FY20 633,220 28,552 6,382 22,747 13,203 25,937 730,041 4% 662,349 788,973 FY21 407,218 12,514 FY20 - - - - 15,853 6,996 60,222 502,803 12% 423,071 - - - - n/a - FY21 2,505,156 (95,738) 30,892 72,560 (63,529) 406,980 2,856,321 14% 2,608,608 - - - FY20 2,125,465 3,469 351,042 95,931 69,461 (129,375) 2,515,993 - 2,572,437 2,383,826 $ - Executive KMP Mr M. Salisbury (CEO and Managing Director) Mr G. Kruyt 7 (COO) Mr M. Blackburn 5,6 (Group CFO and Company Secretary) Mr A. Conn 5 (Group CFO and Company Secretary) Total Remuneration 1 Other benefits reflect motor vehicle packaging payments, travel benefits, housing allowance and car parking benefits. 2 The equity value comprises the value of Performance Options and Rights issued. No shares were issued to any Non-Executive Director (and no Performance Options or Rights were granted to any Non-Executive Director) during the financial years ended 30 June 2020 and 30 June 2021. The value of Performance Options and Rights issued to Executive KMP (as disclosed above) are the assessed fair values (less any payments for the options) at the date that the Performance Options and Rights 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 pricing model that takes into account the exercise price, the expected term of the option or right, 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 or right. 3 The expense in FY21 comprises the fair value expense of Performance Rights granted in FY20 and FY21 based on the number of Rights estimated to vest based on the Company’s performance against the EPS and ROCE performance targets (subject to continuing employment) with vesting periods in FY22 and FY23. 4 Value of remuneration received comprises salary, benefits and superannuation salary packaged, annual and long service leave used and bonuses paid in the year (excludes the value of Options or Rights). 5 Mr M. Blackburn resigned and ended service on 1 December 2020 while Mr A. Conn was appointed and commenced service on 5 October 2020. 6 The value of Options and Rights of Mr M. Blackburn in FY20 is based on vesting entitlement of Rights granted in FY20 that is measured against strategic targets less the reversal of Performance Options and Rights granted in FY18 and FY19. 7 Mr G. Kruyt resigned on 10 June 2021 with an effective termination date of 10 December 2021 with the Options and Rights expense representing the reversal of Performance Rights granted in FY20. 8 The value of options in 2020 relates to Performance Options granted in FY15 and were exercised and sold in FY20. These options were subject to a 12 month holding lock from vesting date in August 2017 that was effectively extended to April 2019 when the Company terminated its proposed merger with Eclipx Ltd. The value is based on the amount realised on disposal less the exercise price (excludes value of remuneration received). 9 Cash salary/fees are lower in FY20 due to KMP taking pay reductions during the period 13 April 2020 to 6 July 2020. 31 MMS ANNUAL REPORT 2021 Remuneration Report (audited) (b) Detail of LTIP securities The terms and conditions of each grant of Performance Options and Performance Rights to Executive KMP affecting their remuneration in FY21 and each relevant future financial year are set out below. Grant Date Type of LTI securities Expiry Date Share price at valuation date Exercise Price Value per option at grant date 1 Date Exercisable 02/07/18 3 Year Performance Options 12 months following the 3 Year Lodgement Date $16.14 $16.64 $2.54 3 Year Lodgement Date (expected to be September 2021) 02/07/18 3 Year Performance Rights Date that the FY21 financial statements are lodged $16.14 - $14.12 3 Year Lodgement Date (expected to be September 2021) 23/10/182 3 Year Performance Options 12 months following the 3 Year Lodgement Date $15.90 $16.64 $2.25 3 Year Lodgement Date (expected to be September 2021) 23/10/182 3 Year Performance Rights 01/07/19 3 Year Performance Rights 22/10/193 3 Year Performance Rights Date that the FY21 financial statements are lodged Date that the FY22 financial statements are lodged Date that the FY22 financial statements are lodged $15.90 $12.37 $14.85 18/12/19 1 Year Performance Rights 31 October 2020 $12.90 20/10/204 3 Year Performance Rights 30/10/20 3 Year Performance Rights Date that the FY23 financial statements are lodged Date that the FY23 financial statements are lodged $9.46 $9.34 - - - - - - $13.95 3 Year Lodgement Date (expected to be September 2021) $10.18 3 Year Lodgement Date (expected to be September 2022) $12.83 3 Year Lodgement Date (expected to be September 2022) $12.27 31 October 2020 $8.51 3 Year Lodgement Date (expected to be September 2023) $8.40 3 Year Lodgement Date (expected to be September 2023) 1 Reflects the fair value at grant date for options or rights granted as part of remuneration, calculated in accordance with AASB2 Share-based Payment. 2 The issue to Mr Mike Salisbury occurred on 23 October 2018, after shareholder approval at the Company’s AGM. 3 The issue to Mr Mike Salisbury occurred on 22 October 2019, after shareholder approval at the Company’s AGM. 4 The issue to Mr Mike Salisbury occurred on 20 October 2020, after shareholder approval at the Company’s AGM. 32 MMS ANNUAL REPORT 2021Details of the LTIP securities over ordinary shares in the Company provided as remuneration to each Executive KMP are set out below. Name Date of grant Type of LTIP securities Value of securities granted during the year $ Number of securities vested during year Number of securities granted Vested % Number of securities forfeited/ lapsed during the year Year in which securities may vest Maximum value of securities yet to vest 1 $ Forfeited or lapsed % 23/10/18 3 Year Performance Options 105,272 23/10/18 3 Year Performance Rights 18,937 22/10/19 3 Year Performance Rights 69,178 - - - 20/10/20 3 Year Performance Rights 103,763 $8.51 02/07/18 3 Year Performance Options 78,201 02/07/18 3 Year Performance Rights 14,067 01/07/19 3 Year Performance Rights 50,491 - - - 30/10/20 3 Year Performance Rights 75,733 $8.40 - - - - - - - - - - - - - - - - (105,272) 100% FY22 (18,937) 100% FY22 - - (31,131) 45% FY23 290,766 (10,376) 10% FY24 663,909 (78,201) 100% FY22 (14,067) 100% FY22 - - (22,721) 45% FY23 282,783 (7,573) 10% FY24 572,610 18/12/19 1 Year Performance Rights 16,899 - (16,899) 100% - - FY21 - 30/10/20 3 Year Performance Rights 48,362 $8.40 - - (4,836) 10% FY24 305,438 M r M . S a l i s b u r y M r G . K r u y t 2 M r M . l B a c k b u r n M r A C o n n 1 There is no minimum value attached to the securities at the vesting date. Maximum value is defined as the fair value at grant less amount expensed. 2 All rights granted to Mr G. Kruyt will be forfeited on his effective termination date of 10 December 2021. (c) Movement of LTIP securities granted The table below reconciles the Performance Options and Performance Rights held by each Executive KMP from the beginning to the end of FY21. Name LTI Securities Balance at the start of the year Number Granted during year 1 Vested during the year Exercised during the year Forfeited during year Other changes during the year Vested and exercisable at the end of the year Unvested at the end of the year Mr M. Salisbury Mr G. Kruyt2 Performance Options 105,272 - Performance Rights 88,115 103,763 Performance Options 78,201 - Performance Rights 64,558 75,733 - - - - - - - - (105,272) (60,444) (78,201) (44,361) Mr M. Blackburn Performance Rights 16,899 - (16,899) (16,899) - Mr A. Conn Performance Rights - 48,362 - - (4,836) - - - - - - - - - - - - - 131,434 - 95,930 - 43,526 1 Granted pursuant the Company’s LTIP 2 All rights granted to Mr G. Kruyt will be forfeited on his effective termination date of 10 December 2021. 33 MMS ANNUAL REPORT 2021 Remuneration Report (audited) (d) Shares issued on Performance Options No ordinary shares in the Company were issued following the exercise of Performance Options by Executive KMP during FY21. Any shares issued on exercise of options were acquired on market under the terms of the Company’s Share Trust Plan. (e) Other transactions and balances with KMP There were no loans made during the year, or remaining unsettled at 30 June 2021, between the Company and its KMP and/or their related parties. (f) Executive KMP and director share ownership The following table sets out the number of shares held directly, indirectly or beneficially by Directors and Executive KMP (including their related parties). Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance at the end of the year Value of Shares1 $ Minimum Shareholding Requirement2 $ Non-Executive Directors Ms H. Kurincic Mr T. Poole Mr B. Akhurst 20,000 30,000 - Mr J. Bennetts 3,343,025 Mr R. Chessari 6,050,941 Mr I. Elliot Ms K. Parsons Executive KMP 1,254 1,400 Mr M. Salisbury 16,526 Mr G. Kruyt Mr M. Blackburn Mr A. Conn 7,000 3,000 - - - - - - - - - - - - - - 25,000 20,000 30,000 25,000 259,000 210,125 388,500 137,500 323,750 147,500 (275,000) 3,068,025 39,730,924 127,500 - - 6,600 - - - - 6,050,941 78,359,686 125,000 1,254 8,000 16,239 N/A3 103,600 150,000 16,526 214,012 469,629 7,000 3,000 - 90,650 38,850 N/A4 N/A5 - 297,000 1 Calculated as the number of shares multiplied by the share price as at 30 June 2021 of $12.95. 2 Minimum shareholding required as outlined under section 6(e). 3 Mr I. Elliot resigned as a Non-Executive Director of the Company with effect from 1 April 2021. 4 Mr G. Kruyt resigned on 10 June 2021 with an effective termination date of 10 December 2021. 5 Mr M. Blackburn resigned and ended service on 1 December 2020. 34 MMS ANNUAL REPORT 2021 8. Non-Executive Director remuneration (a) Remuneration policy and arrangements The Board sets the fees for the Chair and the other Non-Executive Directors. The Board’s policy is to remunerate the Chair and Non-Executive Directors: − at market competitive rates, having regard to the fees paid for comparable companies, the need to attract Directors of the requisite calibre and expertise and their workloads (taking into account the size and complexity of the Company’s operations and their responsibility for the stewardship of the Company); and − in a matter which preserves and safeguards their independence. Neither the Chair nor the other Non-Executive Directors are entitled to any performance-related pay. The primary focus of the Board is on the long-term strategic direction of the Company. 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). (b) Fees and other benefits The table below sets out the annual fees payable (inclusive of superannuation) to the directors of MMS. The fee schedule has been determined having regard to fees paid to comparable roles within MMS’ peers. Fees are inclusive of superannuation, contributions required under legislation are made by the Company on behalf of Non-Executive Directors. There is no scheme for the payment of retirement benefits or termination payments (other than payments relating to accrued superannuation entitlements). Role Chair Non-executive Directors Audit, Risk and Compliance Committee People, Culture and Remuneration Committee Nomination Committee Chair Membership Chair Membership Chair Membership FY21 Fee $210,125 $115,000 $25,000 $12,500 $20,000 $10,000 $Nil $Nil 35 MMS ANNUAL REPORT 2021Remuneration Report (audited) (c) Non-Executive Director remuneration – statutory disclosure The fees paid or payable to the directors of the Company in respect of the 2021 financial year are set out below. Cash salary/fees 1 Other Benefits 2 Superannuation Total value of remuneration received Total remuneration Non-Executive Directors Ms H. Kurincic (Non-Executive Chair) Mr T. Poole (Non-Executive Director) Mr B. Akhurst3 (Non-Executive Director) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr I. Elliot4 (Non-Executive Director) Ms K. Parsons5 (Non-Executive Director) Total Remuneration FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 $ 171,797 119,292 145,669 143,921 33,676 - 116,438 87,329 114,155 84,471 92,466 117,123 133,630 10,763 807,831 562,899 $ - - - - - - - - - 1,146 - - 1,454 - 1,454 1,146 $ 16,321 11,333 13,839 13,673 3,199 - 11,062 8,296 10,845 8,134 8,784 11,127 12,833 1,023 76,883 53,586 $ 188,118 130,625 159,508 157,594 36,875 - 127,500 95,625 125,000 93,751 101,250 128,250 147,917 11,786 886,168 617,631 $ 188,118 130,625 159,508 157,594 36,875 - 127,500 95,625 125,000 93,751 101,250 128,250 147,917 11,786 886,168 617,631 1 Cash salary/fees are lower in FY20 due to Directors taking pay reductions during the period 13 April 2020 to 6 July 2020. 2 Other benefits comprise salary packaging. 3 Mr B. Akhurst was appointed as a Non-Executive Director of the Company with effect from 1 April 2021. 4 Mr I. Elliot resigned as a Non-Executive Director of the Company with effect from 1 April 2021. 5 Ms K. Parsons was appointed as a Non-Executive Director of the Company with effect from 22 May 2020. Signed in accordance with a resolution of the Directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the Directors. Bruce Akhurst Non-Executive Chair of the PCRC Helen Kurincic Non-Executive Chair of the Board End of the audited Remuneration Report 36 MMS ANNUAL REPORT 2021 Directors’ Report Unissued shares At the date of this Annual Report, unissued ordinary shares of the Company under option are: Option class No. of unissued ordinary shares Exercise price Expiry date Voluntary Options 12,500 $13.45 30 September 2021 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 Securities Exchange Limited (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth), is as follows: Director Ms H. Kurincic (Chair) Mr. T. Poole Mr M. Salisbury (Managing Director) Mr B. Akhurst Mr J. Bennetts Mr R. Chessari Ms K. Parsons Rights Options Ordinary shares - - 131,434 - - - - - - - - - - - 20,000 30,000 16,526 25,000 3,068,025 6,050,941 8,000 No Director during FY21, 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 other than for payment of $27,468 for the provision of IT services on arms’ length terms by Mailguard Pty Ltd, of which John Bennetts has an economic interest. M M S A N N U A L R E P O R T 2 0 2 1 37 Directors’ Report 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 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 entered into a Deed of Access, Indemnity and Insurance (Deed) with each Director and each Company Secretary, 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. 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 FY21, are disclosed in Note 8.6 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 (ARCC) has approved that work in advance, as appropriate. The ARCC has reviewed the services other than the statutory audit provided by Grant Thornton Audit Pty Ltd during the financial year ended 30 June 2021. The other services related to non-statutory audit services and other assurance services which are 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). Corporate governance practices Our full corporate governance statement is available on our website at www.mmsg.com.au/overview/#governance M M S A N N U A L R E P O R T 2 0 2 1 38 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 103 of this Annual Report. 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. Helen Kurincic Chair 24 August 2021 Melbourne, Australia Mike Salisbury Managing Director & Chief Executive Officer M M S A N N U A L R E P O R T 2 0 2 1 39 Directors’ Report Five year summary Five-Year Summary 2017 – 2021 20219 20209 2019 2018 2017 Financial Performance Group Revenue ($m) NPAT ($m) UNPATA ($m) 1 Group Remuneration Services segment Segment revenue ($m) Segment NPAT ($m) Segment UNPATA ($m) 3 Asset Management segment Segment revenue ($m) 2 Segment NPAT ($m) Segment UNPATA ($m) 3 Retail Financial Services segment Segment revenue ($m) Segment NPAT ($m) Segment UNPATA ($m) 3 Shareholder Value Dividends per share (cps) Dividend payout ratio (%) 4 Basic earnings per share (cps) Return on Equity (%)5 Underlying earnings per share (cps) 6 Return on capital employed (%) 5 Other Employees (FTE) 7 Employee engagement score (%) 8 544.5 61.1 79.2 228.8 61.2 61.2 256.3 (0.6) 17.0 59.2 2.0 2.6 61.3 66 78.9 31 102.4 33 1286 85 494.0 1.3 69.0 214.8 60.9 60.9 229.3 (9.9) 6.0 49.5 (47.3) 3.0 34.0 42 1.6 21 87.4 20 1295 868 549.7 63.7 88.7 221.9 66.1 66.1 245.8 12.4 17.2 80.7 (14.0) 6.4 74.0 69 77.0 23 107.3 21 545.4 50.3 93.5 207.7 64.1 64.1 243.7 25.5 21.6 92.5 (38.5) 8.6 73.0 65 60.9 4 113.2 20 1334 79 1,283 No survey 523.4 67.9 87.2 189.7 58.3 58.3 226.1 16.6 17.5 106.0 (5.0) 12.4 66.0 63 81.6 24 104.8 20 1,195 76 1 FY21 UNPATA excludes UK restructuring costs of $14.6m and impairment of CLM goodwill for $2.0m. FY20 UNPATA excludes one-off adjustments for Deferred Income and DAC of $9.8m (post tax), class action settlement and legal costs of $5.1m (post tax) and share buyback costs $0.4m (post tax). 2 Revenue in 2017 has been re-stated to recognise the proceeds from the sale of motor vehicles as revenue to replace profit from the sale of motor vehicles. 3 Segment UNPATA does not include unallocated public company costs and interest from Group treasury funds. 4 FY21 payout ratio is calculated on UNPATA excluding JobKeeper of $7.3m (net of tax) (FY20: $7.0m net of tax). 5 Prior period comparatives have been restated to measure ROE and ROCE, which are based on UNPATA and underlying EBIT respectively to exclude the after-tax impact of acquisition related items and non-business operational items. Equity and capital employed used in the calculations includes the add-back of impairment of acquired intangible asset charges incurred in the respective financial period. 6 Underlying earnings per share is based on UNPATA. 7 As at 30 June. 8 Employee engagement survey conducted biennially with Pulse Survey’s conducted in intervening periods. The 2020 result represents the May 2020 Pulse Survey Sustainability Engagement score. 9 Includes JobKeeper benefit of $7.3m (net of tax) for FY21 (FY20: $7.0m net of tax) which has been recognised as an offset against employee benefit expenses. M M S A N N U A L R E P O R T 2 0 2 1 40 Financial Report FOR THE YEAR ENDED 30 JUNE 2021 41 Statements of Profit or Loss and Other Comprehensive Income FOR THE YEAR ENDED 30 JUNE 2021 Consolidated Group Parent Entity Note 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Revenue Revenue from contracts with customers 2.2 544,222 493,116 Interest income Dividends received Revenue from continuing operations Fair value on previously held equity interest Expenses Employee benefit expenses Leasing and vehicle management expenses Brokerage commissions and incentives Depreciation and amortisation expenses Net claims incurred Other operating expenses Finance costs 2.3 6.1 2.4 2.4 229 - 846 - 544,451 493,962 1,805 - (130,690) (141,189) (27,489) (67,113) (12,264) (46,473) (8,386) (128,879) (103,312) (30,892) (83,290) (13,591) (47,794) (8,786) Operational expenses excluding impairment & other non-operational items (433,604) (416,544) (13,541) (2,270) 305 - - (15,506) (50,139) (3,822) - - 1,459 (52,502) (449,110) (469,046) 24,916 (22,585) Impairment of intangible assets Impairment of financial assets Gain on loss of control of subsidiary Related party loan forgiveness Contingent consideration fair valuation Impairment & other non-operational items Total expenses Profit / (loss) before income tax Income tax (expense) / benefit Net profit / (loss) for the year Net profit / (loss) attributable to: Owners of the Company Non-controlling interest 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 Reclassification of exchange differences on disposal of foreign operation Income tax on other comprehensive income Other comprehensive income / (loss) for the year Total comprehensive income / (loss) for the year Total comprehensive income / (loss) for the year is attributable to: Owners of the Company Non-controlling interest Total comprehensive income / (loss) for the year Basic earnings per share (cents) Diluted earnings per share (cents) 2.4 2.4 2.5 2.6 2.6 97,146 (36,081) 61,065 61,065 - 61,065 1,514 652 34 (454) 1,746 62,811 62,811 - 62,811 78.9 78.4 - 106 128,109 128,215 - - 154 59,591 59,745 - (1,006) (905) - - - - (1,196) (161) (2,363) - - - - - (2,048) (512) (3,465) - (5,541) (77,969) - 52,640 - 47,099 44,736 172,951 687 - - - (77,969) (81,434) (21,689) 643 2,331 173,638 (21,046) 1,269 1,062 2,331 (524) 542 - 114 132 173,638 (21,046) - - 173,638 (21,046) - - - - - (89) - - 27 (62) 2,463 173,638 (21,108) 173,638 (21,108) - - 173,638 (21,108) 1,401 1,062 2,463 1.6 1.6 42 The above Statements of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. MMS ANNUAL REPORT 2021 Statements of Financial Position AS AT 30 JUNE 2021 Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Assets under operating lease Inventories Prepayments Deferred acquisition costs Total current assets Non-current assets Finance lease receivables Assets under operating lease Right-of-use assets Property, plant and equipment Intangible assets Deferred tax assets Deferred acquisition costs Other financial assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Contract liabilities Other liabilities Provisions Unearned premium liability Current tax liability Borrowings Lease liabilities Derivative financial instruments Total current liabilities Non-current liabilities Unearned premium liability Provisions Borrowings Lease liabilities Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY Consolidated Group Parent Entity Note 2021 $’000 2020 $’000 2021 $’000 2020 $’000 4.1 3.2 3.3 3.4 3.6 3.7 3.3 3.4 3.5 3.1 2.5 3.7 6.2 3.8 3.9 3.9 3.10 3.7 4.2 3.5 3.7 3.10 4.2 3.5 2.5 4.5 157,997 40,975 21,478 62,877 15,312 4,660 5,218 308,517 29,770 147,441 40,511 4,174 134,852 13,753 6,912 - 377,413 685,930 102,085 7,181 8,090 13,722 19,142 4,148 23,886 1,602 213 180,069 22,748 1,484 152,444 47,273 12,717 236,666 416,735 269,195 76,257 (9,510) 202,448 269,195 91,408 70,502 43,936 62,272 7,715 3,299 5,206 284,338 69,150 153,670 15,953 5,269 140,413 10,122 6,641 - 401,218 685,556 94,859 8,098 2,341 14,521 18,083 5,274 11,706 6,523 1,678 163,083 20,483 1,608 251,914 17,913 1,669 293,587 456,670 228,886 76,419 (12,078) 164,545 228,886 74 481 - - - 19 - 574 - - - - - - - 253,303 253,303 253,877 12,372 - - - - 2,824 5,761 - - 20,957 - - 3,991 - 942 4,933 25,890 227,987 76,257 1,254 150,476 227,987 220 12,863 - - - 20 - 13,103 - - - - - - - 211,123 211,123 224,226 128,324 - - - - 3,433 5,761 - - 137,518 - - 9,115 - 814 9,929 147,447 76,779 76,419 360 - 76,779 The above Statements of Financial Position should be read in conjunction with the accompanying notes. 43 MMS ANNUAL REPORT 2021 Statements of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2021 2021 Equity as at beginning of year Net profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based expense Treasury shares Reclassification of share-based payment reserve Adjustment to acquisition reserve Dividends paid Note 4.5 5.1 4.5 4.6 Consolidated Group Issued capital $’000 Retained earnings $’000 Share-based payment reserve $’000 Cash flow hedge reserve $’000 Foreign currency translation reserve $’000 Acquisition reserve $’000 Total $’000 76,419 164,545 360 (1,288) (4,018) (7,132) 228,886 - - - - (162) - - - 61,065 - 61,065 - - 207 - (23,369) - - - - 1,060 1,060 1,101 - (207) - - 1,254 - - - - - - 686 686 - - - - - - - - - - - (72) - 61,065 1,746 62,811 1,101 (162) - (72) (23,369) Equity as at 30 June 2021 76,257 202,448 (228) (3,332) (7,204) 269,195 2020 Issued capital $’000 Retained earnings $’000 Note Consolidated Group Share- based payment reserve $’000 Cash flow hedge reserve $’000 Foreign currency translation reserve $’000 Equity as at beginning of year 4.5 135,868 237,956 872 (878) (4,560) Net profit for the year Other comprehensive income / (loss) for the year Total comprehensive income / (loss) for the year Transactions with owners in their capacity as owners: Share buyback Share-based expense Dividends paid Exercise of employee options Acquisition of Outside Equity Interest Capital reduction - - - 1,269 - 1,269 - - - - (410) (410) - 542 542 4.5 5.1 4.6 4.5 (10,366) (69,650) - - - (59,591) 5,478 - 8.1(d) 4.5 - (54,561) - 54,561 - (512) - - - - - - - - - - - - - - - - Outside equity interest $’000 (194) 1,062 - 1,062 - - - - Acquisition reserve $’000 - - - - - - - - Total $’000 369,064 2,331 132 2,463 (80,016) (512) (59,591) 5,478 (868) - (7,132) - (8,000) - Equity as at 30 June 2020 76,419 164,545 360 (1,288) (4,018) - (7,132) 228,886 44 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. MMS ANNUAL REPORT 2021 Statements of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2021 Issued capital $’000 76,419 - - - - (162) - - 76,257 Issued capital $’000 135,868 - - - 2021 Equity as at beginning of year Profit attributable to owners of the Company Other comprehensive income for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based expense Treasury shares Reclassification of share-based payment reserve Dividends paid Equity as at 30 June 2021 2020 Equity as at beginning of year Loss attributable to owners of the Company Other comprehensive loss for the year Total comprehensive loss for the year Transactions with owners in their capacity as owners: Share buyback Share-based expense Dividends paid Exercise of employee options Capital reduction Equity as at 30 June 2020 Note 4.5 5.1 4.6 Note 4.5 4.5 5.1 4.6 4.5 4.5 Parent Retained earnings $’000 Share-based payment reserve $’000 Cash flow hedge reserve $’000 - 360 173,638 - 173,638 - - 207 (23,369) 150,476 Retained earnings $’000 95,726 (21,046) - (21,046) - - - 1,101 - (207) - 1,254 - - - - - - - - - Parent Share-based payment reserve $’000 Cash flow hedge reserve $’000 872 - - - - (512) - - - 360 62 - (62) (62) - - - - - - Total $’000 76,779 173,638 - 173,638 1,101 (162) - (23,369) 227,987 Total $’000 232,528 (21,046) (62) (21,108) (80,016) (512) (59,591) 5,478 - 76,779 (10,366) (69,650) - - 5,478 (54,561) 76,419 - (59,591) - 54,561 - The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. 45 MMS ANNUAL REPORT 2021 Statements of Cash Flows FOR THE YEAR ENDED 30 JUNE 2021 Consolidated Group Parent Entity Note 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from sale of assets previously under lease Proceeds from sale of lease portfolio Payments for assets under lease Government subsidies Interest received Interest paid Dividends received Income taxes paid 551,400 (371,002) 81,758 34,909 (76,942) 14,809 229 (9,938) - (30,258) 554,699 (293,697) 67,878 111,474 (232,357) 7,696 846 (9,168) - (18,911) Net cash from operating activities 4.1 194,965 188,460 Cash flows from investing activities Payments for capitalised software Payments for plant and equipment Payment to acquire Outside Equity Interest Payments for joint venture subordinated loans Cash lost from disposal of subsidiary, net of cash consideration received Cash acquired from business combination, net of cash consideration paid Net cash used in investing activities Cash flows from financing activities Dividends paid by parent entity Proceeds from borrowings Repayments of borrowings Payments for lease liabilities Payments for borrowing costs Payments for share buyback Payments for share expenses Proceeds from exercise of employee options Payment for treasury shares Proceeds from loans from controlled entities 3.1 8.1(d) 6.2 6.1 4.6 4.1 4.1 4.5 4.5 4.5 (7,572) (2,367) - (3,520) (565) 5,963 (8,061) (23,369) 124,792 (215,070) (6,726) - - - - (162) - (13,494) (1,212) (8,000) (4,596) - - (27,302) (59,591) 107,949 (171,086) (7,923) (1,828) (80,016) (548) 5,478 - - - (514) - - - - 106 (161) 23,369 - 22,800 - - - - - - - (23,369) - (5,124) - - - - - (162) 5,709 - (4,556) - - - - 154 (501) 59,591 - 54,688 - - - - - - - (59,591) - (4,481) - - (80,016) (548) 5,478 - 75,646 Net cash used in financing activities (120,535) (207,565) (22,946) (63,512) Effect of exchange changes on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 220 66,589 91,408 53 (46,354) 137,762 Cash and cash equivalents at end of year 4.1 157,997 91,408 - - (146) (8,824) 220 74 9,044 220 46 The above Statements of Cash Flows should be read in conjunction with the accompanying notes. MMS ANNUAL REPORT 2021 1 Introduction to the Report The financial report of McMillan Shakespeare Limited (Company or parent entity) in respect of the Company and the entities it controlled at the reporting date or during the year ended 30 June 2021 (Group or Consolidated Group) was authorised in accordance with a resolution of the Directors on 24 August 2021. Reporting entity The Company is a for-profit company limited by shares which is incorporated and domiciled in Australia and listed on the Australian Securities Exchange (ASX). Basis of preparation and accounting policies The financial report is a general purpose financial report which has been prepared in accordance with the Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001 (Cth). The financial report also complies with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Except for cash flow information, the financial statements have been prepared on an accrual and historical cost basis except for certain financial instruments measured at fair value as explained in the notes to the financial statements (the Notes). The accounting policies adopted are consistent with those of the previous financial year unless stated otherwise. The financial report presents reclassified comparative information where required for consistency with current year’s presentation. Key judgements, estimates and assumptions The preparation of the financial statements requires judgement and the use of estimates and assumptions in applying the Group’s accounting policies, which affects amounts reported for assets, liabilities, income and expenses. Judgements, estimates and assumptions are continuously evaluated and are based on: > historical experience > current market conditions > reasonable expectations of future events Actual results may differ and uncertainty about these judgements, estimates and assumptions could result in a material adjustment to the carrying amount of assets or liabilities in future periods. Significant judgement was required to derive reasonable estimates of the significant uncertainties including COVID-19 on future business plans, operating capability and cash flow projections. The key areas involving judgement or significant estimates and assumptions are set out below: Note Item 3.1 Intangible assets Judgements, Estimates and Assumptions Assessment of recoverable amount 3.4 3.7 Assets under operating lease Lease assets residual value Unearned premium liability and deferred acquisition costs Pattern of incidence of risk 4.3(b) Trade and other receivables and finance lease receivables Impairment of financial assets Detailed information about each of these judgements, estimates and assumptions are included in the Notes together with information about the basis of calculation for each affected line item in the financial statements. 47 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021The Notes The Notes include information which is required to understand the financial statements and is material and relevant to the operations, financial performance and position of the Group. Information is considered material and relevant where: > the amount in question is significant because of its size or nature; > it is important for understanding the results of the Group; or > it helps explain the impact of significant changes in the Group’s business. The Notes are organised into the following sections: 2. Performance Information on the performance of the Group, including segment results, earnings per share (EPS) and income tax. 3. Assets and Liabilities Details the assets used in the Group’s operations and the liabilities incurred as a result. 4. Capital Management Information relating to the Group’s capital structure and financing as well as the Group’s exposure to various financial risks. 5. Employee Remuneration and Benefits Information relating to remuneration and benefits provided to employees and key management personnel. 6. Group Structure Information relating to subsidiaries and other material investments of the Group. 7. Unrecognised Items Information about items that are not recognised in the financial statements but could potentially have a significant impact on the Group’s financial performance or position in the future. 8. Other Disclosures Other disclosures required by Australian Accounting Standards that are considered relevant to understanding the Group’s financial performance or position. Basis of consolidation Subsidiaries are consolidated from the date the Group gains control until the date on which control ceases. 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. The Group’s share of results of its equity accounted investments is included in the consolidated financial statements from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. The Group’s share of all intercompany balances, transactions and unrealised profits are eliminated. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Foreign currency The consolidated financial statements of the Group are presented in Australian dollars which is the 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”). 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 the profit or loss. Non-monetary items are not retranslated at reporting date and are measured at historical cost (being the exchange rates at the dates of the initial transaction), except for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. Group companies On consolidation of the financial results and affairs of foreign operations, assets and liabilities are translated to the presentation currency at prevailing exchange rates at reporting date and income and expenses for the year at average exchange rates. The resulting exchange differences on consolidation are recognised in other comprehensive income (OCI) and accumulated in equity. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognised in profit or loss. Accounting policies Accounting policies that summarise the classification, recognition and measurement basis of financial statement line items and that are relevant to the understanding of the consolidated financial statements are provided throughout the notes. Current versus non-current classification Assets and liabilities are presented 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 no 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. Rounding of amounts The amounts contained in the financial report have been rounded to the nearest thousand dollars (unless specifically stated to be otherwise) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. 48 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 2 Performance 2.1 SEGMENT REPORTING Description of segments The Group has identified its operating segments based on the internal reports reviewed and used by the Group’s Chief Operating 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, type of customer and distribution methods. The Group’s reportable segments are set out below: Reportable Segment Services provided Group Remuneration Services (GRS) Administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers but does not provide financing Ancillary services associated with motor vehicle novated lease products Plan management and support coordination services to participants in the National Disability Insurance Scheme (NDIS) Asset Management (AM) Financing and ancillary management services associated with motor vehicles, commercial vehicles and equipment Retail Financial Services (RFS) Retail brokerage services, aggregation of finance originations and extended warranty cover, but does not provide financing Underlying net profit after-tax and amortisation (UNPATA), being net profit after-tax but before the after-tax impact of acquisition related and non-business operational items (as outlined in the following tables), is the key measure by which management monitors the performance of the Segments. Segment revenue and expenses are reported as attributable to the shareholders of the Company and excludes outside equity interests share. 49 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 20212.1 SEGMENT REPORTING (CONTINUED) 2021 GRS $’000 AM $’000 RFS $’000 Unallocated1 $’000 Consolidated $’000 Revenue from contracts with customers 228,780 256,240 59,202 Interest revenue Segment revenue Timing of revenue recognition: – At a point in time – Over time Segment revenue from contracts with customers UNPATA Reconciliation to statutory net profit after-tax attributable to members of the parent entity Amortisation of intangible assets acquired on business combination United Kingdom (UK) restructuring expenses – cash UK restructuring expenses – non-cash Impairment of CLM goodwill Acquisition costs Income tax UNPATA adjustments after-tax Statutory net profit / (loss) after-tax attributable to members of the parent entity Assets and liabilities Segment assets Segment liabilities Additions to segment non-current assets Segment depreciation and amortisation2 - 79 - 228,780 256,319 59,202 128,476 100,304 228,780 61,161 - - - - - - - 161,442 94,798 256,240 16,992 (1,299) (1,805) (12,755) (1,962) - 246 (17,575) 35,703 23,499 59,202 2,551 (750) - - - - 225 (525) - 150 150 - - - (1,491) - - - - (69) 21 (48) 544,222 229 544,451 325,621 218,601 544,222 79,213 (2,049) (1,805) (12,755) (1,962) (69) 492 (18,148) 61,161 (583) 2,026 (1,539) 61,065 138,165 106,207 40,415 14,798 384,474 248,916 76,445 64,558 56,202 48,904 20 1,298 107,089 12,708 - - 685,930 416,735 116,880 80,654 1 Unallocated assets include cash and bank balances of segments other than AM, maintained as part of the centralised treasury and funding function of the Group. 2 Depreciation and amortisation includes impairment of goodwill and other intangibles of $13.5 million (2020: $50.1 million). 50 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 2.1 SEGMENT REPORTING (CONTINUED) 2020 GRS $’000 AM $’000 RFS $’000 Unallocated1 $’000 Consolidated $’000 Revenue from contracts with customers 214,822 228,755 49,539 Interest revenue Segment revenue Timing of revenue recognition: – At a point in time – Over time Segment revenue from contracts with customers UNPATA Reconciliation to statutory net profit after-tax attributable to members of the parent entity Amortisation of intangible assets acquired on business combination Impairment of goodwill and other intangible assets Other, including class action legal costs and settlement provision (refer to Note 7.2) Deferred revenue and acquisition costs valuation Share buyback expenses Other, including due diligence and restructuring expenses Fair valuation of deferred consideration and finance charge Income tax UNPATA adjustments after-tax Statutory net profit / (loss) after-tax attributable to members of the parent entity Assets and liabilities Segment assets Segment liabilities Additions to segment non-current assets Segment depreciation and amortisation2 - 533 - 214,822 229,288 49,539 121,589 93,233 214,822 60,946 - - - - - - - - - 130,815 97,940 228,755 6,038 (1,753) (16,174) - - - (123) 1,459 673 41,238 8,301 49,539 3,005 (2,141) (33,965) (7,255) (13,930) - - - 6,998 - 313 313 - - - (961) - - - - (548) 493,116 846 493,962 293,642 199,474 493,116 69,028 (3,894) (50,139) (7,255) (13,930) (548) (1,165) (1,288) - 165 1,459 7,836 (15,918) (50,293) (1,548) (67,759) 60,946 (9,880) (47,288) (2,509) 1,269 199,491 79,978 13,217 15,872 466,168 308,419 69,164 80,183 77,537 49,015 5 37,374 (57,640) 19,258 - - 685,556 456,670 82,386 133,429 1 Unallocated assets include cash and bank balances of segments other than AM, maintained as part of the centralised treasury and funding function of the Group. 2 Depreciation and amortisation includes impairment of goodwill and other intangibles of $13.5 million (2020: $50.1 million). 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 including Director’s fees and finance costs relating to borrowings not specifically sourced for segment operations, costs directly incurred in relation to acquisitions and divestments or interest revenue not directly attributable to a segment. Included in Segment revenue for GRS are revenues of $64,200,316 (2020: $57,026,000) from the Group’s largest contract. This is the only customer representing greater than 10% of total segment revenue. 51 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Other segment information Assets are allocated based on the operations of the segment. The parent entity’s borrowings are not considered to be segment liabilities. Geographical segment information Revenue from continuing operations by location of operations and assets are detailed below. Australia United Kingdom New Zealand Revenue from external customers Non-current assets1 2021 $’000 425,169 102,776 16,356 544,301 2020 $’000 2021 $’000 2020 $’000 425,343 280,415 259,669 55,861 12,445 56,303 26,942 92,638 38,789 493,649 363,660 391,096 1 Non-current assets do not include deferred tax assets. 2.2 REVENUE FROM CONTRACTS WITH CUSTOMERS Consolidated Group Parent Entity Remuneration services Lease rental services Sale of leased and other assets Brokerage commissions and financial services Other 2021 $’000 228,781 102,131 123,394 89,518 398 2020 $’000 214,765 111,226 86,234 80,612 279 Total revenue from contracts with customers 544,222 493,116 2021 $’000 2020 $’000 - - - - - - - - - - - - 52 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Revenue Description Remuneration services Lease rental services Sale of leased and other assets Brokerage commissions and financial services Administration fees for the provision of salary packaging and ancillary services including novated leasing and finance procurement, motor vehicle administration and other services, but not the provision of financing. Fees are recognised at the point in time that the services are rendered, net of any rebates payable to the employer organisation. Fee rates are contractually agreed with each client employer and the provision of administration services are considered to have been satisfied for each period completed. Interest is received for managing funds held in trust for clients pursuant to the contractual agreement and is recognised when received (refer Note 4.1). Fees derived from the origination of financing and insurance products are recognised at a point in time when the customer has executed the lease finance or activated the insurance cover and the Group has no outstanding obligations. The Group acts as an agent and does not include the premium on policies as revenue. Volume based rebates from providers are estimated and recognised based on the period of entitlement. Fees for the provision of support coordination services are recognised at the point in time of providing the service. Fees for the provision of plan management services are recognised over time based on individual plans. Rental income received for operating lease assets is recognised on a straight line basis over the term of the lease. Interest from finance leases is recognised over the term of the lease for a constant periodic return on the amount invested in the lease asset. Fees for tyre and maintenance services are recognised to the extent that services are completed based on the percentage of costs incurred relative to total expected costs. Fleet administration fees are recognised in the period that services are provided. The Group assumes control of motor vehicles at the termination of lease contracts and disposes of the asset as principal. The net proceeds are recognised when settlement is completed and ownership of the motor vehicle passes to the purchaser. Fees from the sale of wholesale warranty discretionary products are recognised over time based on the risk and earning pattern analysis measured using the historical profile of claims to estimate probable future performance obligations net of premium clawbacks. Underwriting premium revenue is subject to clawback for policy terminations and is estimated based on a historical profile of termination rates. Volume based incentives (VBI) are received based on the volume of financial products introduced by the network of dealers and brokers with financiers using contracted rates. VBI’s are recognised in the period the financier activates the finance originations net of rebates provided to dealers and brokers in the network. Commission income is received from brokerage services for the procurement of lease finance to motor vehicle fleet operators and other customers as agent under a principal and agency arrangement (P&A) with financiers. Income is recognised when the financing arrangements are funded free from any service deliverables net of estimated clawback of commissions from future terminations. Under a P&A arrangement the Group acts as agent for the procurement of lease asset financing and does not possess credit risk or carry on risks of ownership of the underlying finance or asset with the customer. 53 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 20212.3 DIVIDENDS RECEIVED Dividends are recognised when the Company’s right to receive payment is established. 2.4 PROFIT AND LOSS INFORMATION (a) Impairment of intangible assets Impairment of goodwill Impairment of other intangible assets Consolidated Group Parent Entity 2021 $’000 12,537 1,004 13,541 2020 $’000 48,475 1,664 50,139 2021 $’000 2020 $’000 - - - - - - Impairment of goodwill and other intangible assets in financial year 2021 includes the impairment of CLM Fleet Management plc (CLM) and Maxxia Limited (ML) goodwill which was recognised in the half-year ended 31 December 2020 as outlined within Note 3.1. The Group’s impairment of goodwill and other intangible assets in 2020 relate to the RFS Aggregation segment and the business in the UK. The UK operations projected lower future cash flows affected by a weaker economic environment including the effects of COVID-19 affecting the products and markets that the businesses trade in. RFS Aggregation in the comparative period experienced increasing competitive pressures during the year affecting finance originations and yields in addition to the impact of COVID-19. Refer Note 3.1 for the assumptions used in the assessments. (b) Impairment of financial assets Impairment of subordinated loan Trade debtors specific and expected credit loss allowance / (gain) Finance receivables specific loss allowance gain Finance lease receivable expected credit loss allowance gain Impairment of investment in subsidiaries Related entities loan impairment Consolidated Group Parent Entity 2021 $’000 3,520 (833) (80) (337) - - 2020 $’000 4,596 1,248 (1,844) (178) - - 2,270 3,822 2021 $’000 2020 $’000 - - - - 5,541 - 5,541 - - - - 74,348 3,621 77,969 Group The subordinated loan loss allowance of $3,520,000 (2020: $4,596,000) relates to the net investment in ML in the UK to which the Group had a joint venture arrangement prior to obtaining control on 31 December 2020 (refer to Note 6.1 for further details). Finance lease receivables Expected Credit Loss (ECL) allowance gain of $337,000 is affected largely by the reduction of the carrying value of Finance Lease receivables of $61,838,000 from $113,086,000 in 2020. The Group uses the assessment criteria from its credit management system and adds forward looking indicators to reflect macro-economic factors to estimate ECL including the downgrade of the credit rating of some clients due to their industry COVID-19 risk. Finance receivables specific loss allowance gain of $80,000 relates to the discharge of a provision for lease assets recovered from distressed clients. Parent entity The carrying value of investments in controlled entities were assessed for recoverable value that resulted in an impairment of $5,541,000 (2020: $74,348,000) (refer Note 6.2). 54 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021(c) Other operating expenses Consulting1 Marketing Property and other corporate costs Technology and communication Other Consolidated Group Parent Entity 2021 $’000 7,161 8,601 8,637 16,692 5,382 46,473 2020 $’000 11,678 7,735 7,703 13,197 7,481 47,794 2021 $’000 245 - 431 - 520 2020 $’000 1,616 - 432 - - 1,196 2,048 1 Consulting expenses in 2020 include legal expenses of $6.5m mostly related to the class action proceedings and $2m for the provision of the class action settlement (refer Note 7.2). (d) Other expense items Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Depreciation and amortisation expenses Depreciation of assets under operating lease Amortisation of software development Depreciation of plant and equipment Amortisation of intangible assets Depreciation of right-of-use (ROU) assets Superannuation 47,445 8,181 2,843 2,050 6,594 58,980 11,700 3,191 3,893 5,526 67,113 83,290 Superannuation contribution expense 9,010 8,863 (e) Government subsidies JobKeeper Payment Coronavirus Job Retention Scheme 10,450 700 11,150 10,029 1,237 11,266 - - - - - - - - - - - - - - - - - - - - The Group received the Federal Government economic response subsidy, JobKeeper Payment, for the period from April to September 2020. The UK entities received the Coronavirus Job Retention Scheme, a temporary relief to provide financial support to assist in the retention of employees who may otherwise be laid off during the COVID-19 pandemic. The JobKeeper Payment subsidy assisted the Group to retain its employees and reduce stand downs. In the UK, the subsidy was a pass through for those employees that were furloughed. The subsidies have been accounted for as a reduction to employee benefit expenses in the Consolidated Statement of Profit or Loss. 55 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 (f) Impact of change in estimates The unearned portion of revenue from warranty contract premiums is deferred based on projected future claim obligations. Direct acquisition costs associated with the unexpired portion of contracts are also deferred. During the 2020 financial year, the estimated value of future claims obligations was independently assessed using the methodology consistent with prior years and applying current risk factors and a refreshed claims profile. The claims profile reflected a slower earning pattern and the extension of validity of claims both as a consequence of changes to products and operations. The resulting effect was to defer a larger portion to meet future claims. The impact of the transition to the new estimates in 2020 decreased revenue from contracts with customers by $20,704,000 and decreased brokerage commissions and incentives by $6,774,000 in the Consolidated Statement of Profit or Loss. 2.5 INCOME TAX Components of tax expense / (benefit) Current tax expense / (benefit) Adjustments for current tax of prior years Deferred tax expense / (benefit) Income tax expense / (benefit) Consolidated Group Parent Entity 2021 $’000 29,305 (38) 6,814 36,081 2020 $’000 28,839 (1,369) (4,885) 22,585 2021 $’000 (781) (34) 128 (687) 2020 $’000 (537) - (106) (643) The tax expense included in the Statements of Profit or Loss consist of current and deferred income tax. Current income tax is: Deferred income tax is: > the expected tax payable on the current period’s taxable income > recognised using the liability method > calculated using tax rates for each jurisdiction enacted or substantively enacted at the end of the reporting period in the countries where the entities in the Group operate and generate > based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases taxable income > inclusive of any adjustment to income tax payable or recoverable of prior years > calculated using the tax rates that are expected to apply when the assets are recovered or liabilities settled, based on those rates which are enacted or substantially enacted > not recognised if they arise from the initial recognition of goodwill Current and deferred income tax is recognised in the Statements of Profit or Loss. However, when it relates to items charged directly to the Statements of Other Comprehensive Income or Statements of Changes in Equity, the tax is recognised in OCI or equity respectively. 56 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 The prima facie tax payable on profit / (loss) before income tax is reconciled to the income tax expense / (benefit) as follows: Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Profit / (loss) before income tax 97,146 24,916 172,951 (21,689) Prima facie tax payable on profit before income tax at 30% (2020: 30%) Add tax effect of: 29,144 7,475 51,885 (6,507) 12,946 1,662 23,391 – Non-deductible impairment expense – Non-deductible subordinated loan – Non-deductible costs – Contingent consideration fair valuation – Share-based payments – Overseas tax rate differential of subsidiaries – Other – Impairment of deferred tax asset – Over-provision of tax from prior year Less tax effect of: – Dividends received – Non-assessable fair value on previously held equity interest – Non-assessable loan forgiveness Income tax expense / (benefit) 2,382 669 604 - - 1,477 25 2,161 (38) 36,424 - (343) - 836 774 (277) (154) 2,354 - - (1,369) 22,585 - - - 36,081 22,585 - 25 - - - - - (34) 53,538 - 350 - - - - - - 17,234 (38,433) (17,877) - (15,792) (687) - - (643) 57 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Deferred tax asset / (liability) The balance comprises temporary differences attributed for: Amounts recognised in profit or loss Doubtful debts Provisions Property, plant and equipment Accrued expenses Finance and other receivables / prepayments Other Losses Deferred acquisition expenses Intangible assets Unearned income Amounts recognised in equity Derivatives recognised directly in equity Share-based payments reserve Closing balance at 30 June Recognised as: Deferred tax asset (DTA) Deferred tax liability (DTL) Movements in deferred tax asset / (liability) Opening balance at 1 July Charged to profit or loss Charged to other comprehensive income Adjustment to acquisition of Outside Equity Interest Foreign exchange translation Closing balance at 30 June Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 487 6,760 (13,783) 5,756 3,245 131 646 271 (4,386) 1,583 710 (46) 372 1,036 13,753 (12,717) 1,036 8,453 (6,814) (454) (72) (77) 1,036 717 7,043 (6,269) 7,582 2,992 131 123 285 (5,814) 1,379 8,169 284 - 8,453 10,122 (1,669) 8,453 3,331 4,885 111 - 126 - - - 64 - - - 79 (1,051) 45 (1,051) 131 - - - - - - - - (942) (841) - - (942) - (942) (942) (814) (128) - - - 27 - (814) - (814) (814) (947) 106 27 - - 8,453 (942) (814) The carrying value of DTA’s are reduced to the extent that it is probable future taxable profits will be available to utilise these temporary differences. DTA’s and DTL’s are offset only if certain criteria are met with respect to legal enforceability and within the same tax jurisdiction. DTA’s and DTL’s 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 reversal and it is probable that the differences will not reverse in the foreseeable future. 58 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021Unrecognised temporary differences Temporary differences that have not been tax effected: Unused tax losses and deferred tax assets Foreign currency translation reserve for investment in subsidiaries Consolidated Group Parent Entity 2021 $’000 31,406 3,332 34,738 2020 $’000 1,251 4,018 5,269 2021 $’000 2020 $’000 - - - - - - Unused tax losses relate to subsidiaries that are dormant and/or are unlikely to generate sufficient taxable income to use these losses. Foreign exchange translation differences in overseas investments will only be realised when the investments are disposed of in the foreseeable future. Tax consolidation The Company and its wholly-owned Australian resident entities are members of a tax consolidated group under Australian taxation law. The Company is the head entity in the tax consolidated group. Entities within the tax consolidated group have entered into a tax funding agreement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, the Company and each of the entities in the tax consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the head entity. 2.6 EARNINGS PER SHARE Basic EPS – cents per share Diluted EPS – cents per share Earnings used to calculate basic and diluted EPS ($’000) Net profit after-tax ($’000) Weighted average number of ordinary shares used in the calculation of basic EPS (‘000) Weighted average number of options and rights on issue outstanding (’000) Weighted average number of ordinary shares used in the calculation of diluted EPS (‘000) Consolidated Group 2021 $’000 78.9 78.4 2020 $’000 1.6 1.6 $61,065 $1,269 77,381 555 77,936 78,945 869 79,814 Basic EPS 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. Diluted EPS is calculated from earnings and the weighted average number of shares used in calculating basic EPS adjusted for the dilutive effect of all potential ordinary shares from the employee incentive plan. 59 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 3 Assets and Liabilities 3.1 INTANGIBLE ASSETS The Group’s intangible assets comprise brands, dealer relationships, customer lists and relationships, software development costs, contract rights and goodwill. 2021 Useful life (range) Goodwill $’000 Not applicable Consolidated Group Brands – indefinite life $’000 Indefinite Brands – finite life $’000 Dealer relationships $’000 Customer lists and relationships $’000 Software development costs $’000 Contract rights $’000 Total $’000 6 years 6-13 years 5-13 years 3-5 years Contract life Cost 208,164 22,443 Accumulated depreciation - - 6,598 (6,598) 26,183 (13,087) 6,874 (5,909) 71,355 13,139 (40,708) (13,139) 354,756 (79,441) Accumulated impairment loss (120,302) (13,171) - (6,990) - - - (140,463) Net carrying value 87,862 9,272 Reconciliation of written down values Balance beginning of year 89,326 9,272 Additions Additions from business combinations (refer Note 6.1) Disposal of subsidiary Impairment - 10,575 - (12,537) - - - - - - - - - - 6,106 965 30,647 32,894 7,572 - (682) (958) 7,348 1,573 - - - - - - - - (666) 58 965 Amortisation Changes in foreign currency - 498 - - - - (1,384) 142 Closing balance 87,862 9,272 - 6,106 (8,181) 2 - - 30,647 - 134,852 2020 Useful life (range) Cost Accumulated depreciation Goodwill $’000 Not applicable 198,122 - Consolidated Group Brands – indefinite life $’000 Indefinite Brands – finite life $’000 Dealer relationships $’000 Customer lists and relationships $’000 Software development costs $’000 Contract rights $’000 Total $’000 6 years 6-13 years 5-13 years 3-5 years Contract life 22,443 - 6,598 (6,598) 28,637 (14,299) (6,990) 6,679 (5,106) - 65,842 13,269 (32,948) (13,269) - 7,348 1,573 32,894 Accumulated impairment loss (108,796) (13,171) Net carrying value 89,326 9,272 Reconciliation of written down values Balance beginning of year 137,427 9,272 Additions Impairment Amortisation Other Changes in foreign currency - (48,475) - - 374 - - - - - Closing balance 89,326 9,272 - - 878 - (878) - - - 60 11,088 2,276 - (1,664) (2,270) - 194 30,387 13,494 - - - (745) (11,700) - 42 713 - 7,348 1,573 32,894 - - - - - - - - - - - - - - - 134,852 140,413 7,572 10,575 (682) (13,495) (10,231) 700 341,590 (72,220) (128,957) 140,413 191,328 13,494 (50,139) (15,593) 713 610 140,413 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 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 of the acquired entity. Goodwill is measured at cost less any accumulated impairment losses and is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. 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. Identifiable intangible assets acquired from business combination Brands, dealer relationships and customer lists and relationships acquired in a business combination are recognised at their fair value at the date of acquisition. Following initial recognition, these assets are carried at their initial value less any accumulated amortisation and accumulated impairment. Identifiable intangible assets with finite lives are amortised over their estimated useful lives on a straight-line basis and assessed for impairment annually. Brand names that have indefinite useful lives are not amortised but are subject to annual impairment assessments. Brands are assessed for impairment as part of the relevant CGU. Brand names that have an indefinite life are pursuant to the Group’s plan for its continued use into the foreseeable future are expected to continue to generate cash flows indefinitely. The useful life assessment is reviewed annually. Capitalised software development costs Software development costs which are not acquired from a business combination are initially measured at cost and subsequently re- measured at cost less amortisation and impairment. Costs are capitalised when it is probable that future economic benefits will flow to the entity through revenue generation and/ or cost reduction. Costs include external direct costs for services, materials and internal labour related costs directly involved in the development of the software and 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. Contract rights Contract costs not acquired from a business combination are initially measured at cost being the amounts paid plus any expenditure directly attributable to the transactions and subsequently measured at cost less amortisation and impairment. Contracts are amortised over the life of the contract and reviewed annually for indicators of impairment. Impairment test of goodwill An impairment loss is recognised in profit or loss for the amount that the asset’s carrying value exceeds the recoverable amount. Recoverable amount is determined as the higher of the asset’s fair value less costs to sell and value-in-use (VIU). For the purpose of assessing fair value, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of cash inflows from other assets (cash- generating units). Where the asset does not generate independent cash flows, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The carrying amount of goodwill is allocated to the Group’s cash- generating units (CGUs) below based on the organisation and management of its businesses. Key judgement: Assessment of recoverable amount Recoverable amounts of cash generating units have been determined using the value-in-use methodology. The variables used require the use of assumptions that affect earnings projections and the estimation of a discount rate that uses a cost of capital and risk premium specific to the cash generating unit amongst other factors. Cash projections used in the financial models to assess the recoverable amount of goodwill and indefinite life intangible assets required significant estimates in uncertain economic and business environments. These are discussed in more detail below. 61 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Maxxia Pty Limited (Maxxia) Remuneration Services (Qld) Pty Limited (RemServ) CLM Fleet Management plc (CLM) Anglo Scottish Asset Finance Limited (ASF) Retail Financial Services Segment Aggregation Business (RFS Aggregation) Capex Asset Finance Limited (CAPEX) Other Goodwill Intangibles 2021 $’000 2021 $’000 24,190 25,211 9,102 5,959 16,717 31,894 - - 87,862 4,047 - 4,693 11,956 - 1,083 46,990 Consolidated Group Total 2021 $’000 49,401 13,149 5,959 21,410 43,850 - 1,083 Goodwill Intangibles 2020 $’000 2020 $’000 24,190 23,820 9,102 7,799 13,139 31,894 3,202 - 6,288 311 2,710 12,828 2,791 2,339 Total 2020 $’000 48,010 15,390 8,110 15,849 44,722 5,993 2,339 134,852 89,326 51,087 140,413 Key assumptions used for VIU calculations Cash flow projections Cash flow projections are based on the financial year 2022 (FY2022) budgets. Growth assumptions used for subsequent years reflect strategic business plans and forecast growth rates. Financial projections take into account any risk exposures in changes to the trading, market and regulatory environments. COVID-19 has resulted in significant uncertainty in the economic environment affecting the Group’s businesses in particular the CLM CGU. The scale of the restrictions, changing economic and social environment and pace of recovery has created inherent uncertainty to the projection of cash flows assumed in the financial models. The VIU assessment models have adopted a probability weighted outcome of various scenarios in the cash flow projections. The after-tax discounted cash flow (DCF) models were based on after-tax cash flows discounted by an after-tax discount rate. Cash flows beyond five years are extrapolated using conservative growth rates of 2.0% (in-line with long term CPI) as well as using 1.0% in forming the probability weighted assessment for the CLM CGU. GRS CGUs The Maxxia and RemServ CGUs that form the GRS segment operate largely in the same business environment and are exposed to similar risks. The equivalent pre-tax discount rate of 16% (2020: 15%) was applied in the VIU calculation. Cash flow projections for GRS in FY2022 are substantially higher than the carrying value of goodwill and any reasonable changes to the key assumptions would not cause an impairment. A key assumption in the GRS segment is that there is no significant change to Australian tax legislation that could affect the salary packaging and novated lease businesses. RemServ generates a substantial portion of its salary packaging and novated leasing business from the provision of services to employees of the Queensland Government pursuant to contractual arrangements to November 2021 and March 2022 respectively. AM CGUs Impairment assessment model for AM CGUs The base case scenario used the business plans that formed the FY2022 budget and the growth assumptions for the subsequent years as disclosed for each CGU below. The at-risk scenarios assumed the base case plus the impact of a further COVID-19 wave imposing a lockdown (where applicable) as well as a projection risk for the possibility of under-performing the future budget and forecast results. CAPEX and ASF During the year, the UK business re-organised its operations within the CAPEX and ASF business groups. CAPEX and ASF operate largely in the same business sector and are exposed to relatively similar types of risks. Following the internal re- organisation of the UK asset finance businesses under a common leadership structure with sharing of resources, the business of CAPEX was transferred to ASF creating one new combined ASF CGU replacing the CAPEX and ASF CGUs identified in prior periods. Goodwill and other intangible assets of CAPEX were re-allocated to the ASF CGU accordingly. ASF experienced a recovery during FY2021 from the initial fall in volumes during the initial period of lockdowns due to COVID-19 that occurred in April and May 2020. Probability weighting assumptions were applied to each year in the scenarios between 25% and 50%. If the probability weightings were changed by 10% the impact to the assessed VIU of ASF is $0.7m. A 0.25% increase to the discount rate indicated a reduction in VIU of $1.4m and a 5% decrease to revenue indicated a reduction in VIU of $6.4m. The equivalent pre-tax discount rate of 13.2% (2020: 12.2%) was applied in the VIU calculation. 62 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Revenue growth rate assumptions ASF FY2022 FY2023 FY2024 FY2025 –FY2026 Base scenario 11% 7% 14% 2% Business activity is expected to continue to improve as a result of improving economic conditions as lockdowns are eased and the roll-out of the vaccine program creates more favourable trading conditions for businesses. At-risk scenario #1 At-risk scenario #2 5% 0% 7% 7% 14% 14% 2% 2% Discount applied to future cash flows as a projection risk for under-performing against planned targets and any adverse impacts due to COVID-19. CLM Impairment recognised for the period ended 31 December 2020 On 24 February 2021, the Group announced an impairment of CLM goodwill. CLM’s business is driven by transactional activities related to the delivery, service, maintenance, repair and disposal of motor vehicles, the COVID-19 lockdown periods had a greater than anticipated impact on these sectors causing a substantial loss to CLM’s maintenance management and outsourced fleet management services. A recovery is anticipated on the back of pent-up demand for required services but inherent uncertainty remained affecting the level and pace of recovery. As a result, the CGU was assessed for impairment as at 31 December 2020. An impairment of $1,962,000 was determined from the weighted probability of the cash flow scenarios modelled for CLM. Impairment testing for the year ended 30 June 2021 No further impairment has been recognised based on the VIU assessment conducted as at 30 June 2021. Cash flows beyond the five year period are extrapolated using terminal growth rates of 2.0% (in-line with long term CPI) as well as using 1.0% in forming the probability weighted assessment. Probability weighting assumptions were applied with an equal probability applied to each of the scenarios. If the probability weightings for the at-risk scenarios were increased by 20% (collectively), the reduction to the assessed VIU of CLM is $0.1m. From other sensitivity tests applied, a 0.25% increase to the discount rate indicated a reduction in VIU of $0.1m and a 5% decrease to revenue indicated a reduction in VIU of $0.5m. The equivalent pre-tax discount rate of 13.2% (2020: 12.2%) was applied in the VIU calculation. Revenue growth rate assumptions CLM FY2022 FY2023 FY2024 FY2025 –FY2026 Base scenario 13.0% 3.9% 2.7% 2.0% At-risk scenario #1 (38.8%) 55.5% At-risk scenario #2 (38.8%) 45.7% 2.7% 2.7% 2.0% 2.0% The easing of lockdown restrictions allows a gradual recovery in CLM’s business activities during FY2022 to FY2024 as withheld required services are re-instated. Beyond FY2024, growth is in-line with estimated CPI. As CLM’s business is heavily impacted by COVID-19, FY2022 includes the risk of additional lockdowns that will potentially have a negative impact to its business in FY2022. An upturn in business is assumed in the subsequent period for the pent-up demand for required motor vehicle services. A projection risk for under-performing planned targets based on prior year experience is also factored in. 63 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 Maxxia Limited The ML joint venture was acquired on 31 December 2020 as outlined within Note 6.1 as a result of a contractual arrangement to acquire the remaining 50% equity interest. The acquisition cost of $1,805,000 for the remaining JV interest was based on an historic incentive arrangement to retain prior management. ML has reported historical accumulated losses and the estimated recoverable amount based on future earnings did not support the carrying amount of the goodwill recognised of $10,575,000 and therefore this was impaired to zero. RFS Aggregation CGU The motor vehicle market was stronger than anticipated in FY2021 with origination volumes recovering from the initial decline experienced toward the end of FY2020 due to COVID-19. However, uncertainty remains over future cash flows due to reduced yields due to increased competition and the lender mix. Given that significant uncertainty remains with the economic environment and impact of COVID-19, the sustainability and level of recovery from COVID-19 and as RFS Aggregation seeks to hold and recover its market position, the impairment assessment has been modelled on the weighted probability of three outcomes. The base scenario uses the plan for FY2022, a second scenario factors a projection risk for COVID-19 and other factors and a third scenario as a growth model that seeks to recover market share and yields (“Growth”). An equivalent pre-tax discount rate of 16.0% (2020: 15.0%) has been used for the pre-tax value-in-use calculations. Scenarios have been applied using probability weighting assumptions of 60%, 30% and 10% for the base, at-risk and growth scenarios respectively. If the probability weighting of the at-risk scenario was increased by 10% and the probability weighting of the growth scenario was reduced by 10% with no change to the base scenario, the reduction to the assessed carrying value is $2.4m. From other sensitivity tests applied, a 0.25% increase to the discount rate indicated a reduction in carrying value of $0.2m and a 5% decrease to revenue indicated a reduction in carrying value of $4.5m. No impairment has been brought to account based on the weighted probability of the three outcomes. Revenue growth rates RFS Aggregation Base scenario FY2022 FY2023 FY2024 –FY2026 11% 0% 2% At-risk scenario Growth scenario (1%) 9% 2% 6% 2% 2% The volume of finance originations is assumed to increase in FY2022 however lower net yields are expected to continue to remain as the business faces increased competition and a change in financier mix. Discount applied to future cash flows as a projection risk for under-performing against planned targets. The growth model assumes recovery to pre-COVID-19 net yields as the business changes its financier mix and recovers market share. 64 MMS ANNUAL REPORT 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 3.2 TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables Amounts receivable from wholly owned entities Consolidated Group Parent Entity 2021 $’000 34,016 6,959 - 2020 $’000 32,356 38,146 - 40,975 70,502 2021 $’000 - - 481 481 2020 $’000 - - 12,863 12,863 Trade receivables Trade receivables are amounts due from customers for services performed in the ordinary course of business and held with the objective of collecting cash flows. They are generally settled within 30 days and the carrying amount includes a loss allowance of $924,000 (FY20: $967,000) and specific doubtful debts allowance of $284,000 (2020: $1,074,000). The carrying amount is generally considered to equal their fair value. Other receivables Other receivables include transactions accruing and customer related funds that are to be recovered. The 2020 balance includes $25,560,000 from the sale of a portfolio of operating leases at written down. None of the other receivables are impaired or past due. 3.3 FINANCE LEASE RECEIVABLES Current finance lease receivables Non-current finance lease receivables Consolidated Group Parent Entity 2021 $’000 21,478 29,770 51,248 2020 $’000 43,936 69,150 113,086 2021 $’000 2020 $’000 - - - - - - AM finance lease contracts entered into are recognised as finance lease receivables and classified as financial assets measured at amortised cost as the contract transfers substantially all the risks and rewards of ownership of an underlying asset. The net investment in the lease 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. Amounts receivable under finance lease receivables Within one year Later than one but not more than five years Later than five years Less: unearned finance income Present value of minimum lease payments Fair value of finance lease receivables Consolidated Group Minimum lease payments 2021 $’000 Present value of lease payments 2021 $’000 Minimum lease payments 2020 $’000 Present value of lease payments 2020 $’000 23,608 32,287 234 56,129 (4,881) 51,248 21,478 29,551 219 51,248 - 51,248 50,657 47,296 72,233 1,138 120,667 (7,581) 113,086 43,936 68,062 1,088 113,086 - 113,086 113,496 The fair value of finance lease receivables due within one year are considered to approximate their carrying amount. Fair values were calculated based on cash flows discounted using an average of current lending rates appropriate for the geographical markets the leases operate of 4.03% (2020: 3.62%). They are classified as level 3 fair values in the fair values hierarchy due to the inclusion of unobservable inputs. 65 MMS ANNUAL REPORT 2021 3.4 ASSETS UNDER OPERATING LEASE Assets under operating lease terminating within the next 12 months – current Assets under operating lease terminating after more than 12 months – non current Assets under operating lease – total Depreciation rate (range) At cost Accumulated depreciation Movements during the year Balance at the beginning of year Additions Reclassification from finance lease receivables1 Disposals / transfers to assets held for sale Depreciation expense Addition from business combinations (refer Note 6.1) Residual value adjustment Change in foreign currency Balance at 30 June Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 62,877 62,272 147,441 153,670 210,318 215,942 - - - - - - Consolidated Group 2021 $’000 2020 $’000 20% – 33% 20% – 33% 339,842 (129,524) 360,876 (144,934) 210,318 215,942 215,942 64,949 13,601 (36,457) (47,445) (2,178) 1,840 66 280,705 67,679 - (72,496) (58,980) - (551) (415) 210,318 215,942 1 Reclassification resulting from the acquisition of Maxxia Ltd (refer Note 6.1) where leases previously recognised as finance leases were reclassified as substantially all the risk and rewards of ownership now remain with the Group. Accumulated provision for impairment loss at reporting date is $5,071,000 (2020: $4,733,000). Assets held under operating leases are for contracts with customers other than finance leases. The 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 depreciated as an expense on a straight line basis over the term of the lease based on the cost less residual value of the lease. Provision for residual value The provision estimates the probable diminution in value of operating lease and rental assets at the end of lease contract dates. The estimate is based on the deficit in estimated recoverable value from contracted cash flows. A residual value provision is also recognised for the estimated loss in recoverable value of lease assets which are transferred to the Group at the end of the lease term pursuant to some P&A arrangements with financiers and other residual value guarantees. The asset from the financier is acquired at its residual value on termination of the lease which creates an exposure of the carrying value to the expected market price for which the potential impact is assessed at reporting and the shortfall provided for. 66 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Key judgement: Lease assets residual value Operating leases carry an inherent risk for the residual value of the asset. Estimates of significance are used in determining the residual values of operating lease and rental assets at the end of the contract date. The assessment includes forecasts of the future value of the asset lease portfolio at the time of sale and considers the potential impact of economic and vehicle market conditions and dynamics. Under the P&A financing arrangement with external financiers, the Group acquires the lease assets on the termination of the lease contract and is thereby exposed to the residual value of the underlying asset. A provision is recognised and this assessment similarly includes an assessment of the future value of these P&A funded assets. If the estimated residual values reduced by 5%, this would result in an increase in the provision by $3.4m. 3.5 RIGHT-OF-USE ASSETS AND LEASE LIABILITIES This note discloses the Group as lessee for operating lease arrangements for the use of property and equipment. Right-of-use assets (ROU assets) At cost Accumulated depreciation Balance at beginning of year New assets leased in the period Depreciation included in profit or loss Impairment included in profit or loss Disposal of subsidiary Change in foreign currency Balance at 30 June Lease liabilities Balance at beginning of year New assets leased in the period Finance charge included in profit or loss Disposal of subsidiary Lease payments Change in foreign currency Balance at 30 June Carrying value of lease liabilities Current Non-current Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 78,770 47,481 (38,259) (31,528) - - - - - - - - - - - - - - - - 15,953 20,990 489 (5,526) - - - - - 40,511 15,953 31,418 (6,594) (89) (243) 66 40,511 15,953 - - Consolidated Group Parent Entity 2021 $’000 24,436 31,418 2,357 (324) (9,083) 2020 $’000 31,868 489 1,031 - (8,952) 71 - 48,875 24,436 1,602 47,273 48,875 6,523 17,913 24,436 2021 $’000 2020 $’000 - - - - - - - - - - - - - - - - - - - - 67 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 During the financial year the Group brought to account a non-cancellable property lease under AASB 16 Leases for a lease variation to extend the existing lease arrangement as well as a new lease agreement for the same property (that is expected to commence in December 2022). The lease variation and new lease agreements have been treated as a lease modification at the effective date of the lease variation. The lease liability has been remeasured for the entire modified agreement based on the modified lease’s consideration and term. Recognition and measurement of lease assets and liabilities ROU assets and the lease liability are initially measured on a present value basis. Leases brought to account are for the value of the property and exclude non-lease components. Lease liabilities include the net present value of fixed rental payments less any lease incentives receivable plus any rental adjustments where the extensions available under the lease will probably be exercised. Lease payments are discounted using the Group’s incremental borrowing rate. ROU asset is measured at cost comprising the amount of the initial measurement of the lease liability, any initial direct costs and any provision for make-good or restoration. ROU asset is depreciated over the shorter of the asset’s useful life and lease term on a straight line basis. Short-term leases of less than 12 months and low-value leases are expensed on a straight line basis to the profit or loss. The principal portion of payments is included in financing activities in the Statements of Cash Flows and the finance charges is included in operating activities. 3.6 INVENTORIES Motor vehicles are stated at the lower of cost and net realisable value. Following termination of a 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. 3.7 UNEARNED PREMIUM LIABILITY, DEFERRED ACQUISITION COSTS (DAC) AND OUTSTANDING CLAIMS LIABILITY Unearned premium liability The Group assesses the risk attached to unexpired wholesale warranty discretionary products based on the risk and earning pattern analysis to ascertain whether the unearned premium liability (contract liability) is sufficient to cover all expected future claims against current warranty contracts. Underwriting premium revenue that is not recognised in the period is deferred as an unearned premium liability. Deferred acquisition costs Acquisition costs incurred in deriving warranty income are deferred and recognised as contract assets where they can be reliably measured and where it is probable that the associated warranty contract will give rise to warranty revenue in subsequent reporting periods. DAC 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. Outstanding claims liability A liability is recognised for claims authorised but unpaid and claims reported which are not authorised for payment but are assessed for a probability of payment at reporting date. Claims incurred is the expense recognised in the settlement of extended warranty claims net of amounts recovered from third parties. Key judgement: Pattern of incidence of risk Underwriting premium revenue is measured based upon the expected future pattern of incidence of risk in relation to warranty contracts. The pattern of incidence of risk is estimated using a variety of techniques 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. During the year, external actuarial services were engaged to assess the deferred income and acquisition costs of active contracts that may give rise to future claims. Whilst the underlying methodology had not changed, the critical variable in the claims profile were refreshed to assume the pattern and timing of claims affected by more recent history of claims as well as the impact of recent regulatory changes and product changes. 68 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 3.8 TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables GST payable Accrued expenses Sundry creditors Amounts payable to wholly owned entities Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 30,458 5,003 45,134 21,490 - 24,577 4,594 50,573 15,115 - 102,085 94,859 - - - 481 11,891 12,372 - - - 103 128,221 128,324 Trade and other payables from normal business activities are non-interest bearing and are short term in nature. They are recognised initially at fair value and subsequently at amortised cost. 3.9. CUSTOMER RECEIPTS IN ADVANCE Other liabilities Other liabilities relate to customer receipts in advance which represent payments for future vehicle sales not yet delivered. Contract liabilities Maintenance fees received in advance Rebates and cancellations Consolidated Group Parent Entity 2021 $’000 5,146 2,035 7,181 2020 $’000 4,051 4,047 8,098 2021 $’000 2020 $’000 - - - - - - Maintenance fees received in advance Maintenance fees received in advance is income from maintenance service contracts that are unearned based on the historical profile of costs incurred to date over the expected total cost. Profit attributed over the life of the contract and losses that are provided in full in the period that the loss-making contract is first determined, is adjusted in the amount of revenue recognised. Rebates and cancellations Brokerage commissions from the provision of financial services allow that rebates paid to its dealer/broker network and commissions received from the origination business may be clawed back by the financial service providers. The potential for rebates and clawback are calculated based on the historical profile of rebates and commissions. 69 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 20213.10 PROVISIONS Current Employee benefit liabilities Provision for class action Other provisions Non-current Employee benefit liabilities Balance at start of the year Employee benefits earned and accrued in the year Payments in the year Provision made in the year Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 13,281 - 441 13,722 1,484 1,484 11,800 2,000 721 14,521 1,608 1,608 - - - - - - - - - - Employee benefit liabilities Other provisions Provision for class action 2021 $’000 13,408 8,034 (6,677) - 2020 $’000 2021 $’000 11,704 721 8,901 (7,197) - (436) - 156 2020 $’000 519 - (100) 302 721 2021 $’000 2,000 - (2,000) - - 2020 $’000 - - - 2,000 2,000 Balance at the end of the year 14,765 13,408 441 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. Employee benefits Employee entitlements to annual and long service leave have been provided for based on amounts expected to be paid when the leave entitlements are used. Annual leave and long service leave that are not expected to be settled wholly within twelve months have been measured at the present value of the estimated future cash outflows. 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 liabilities other than annual leave and long service leave are included in other payables. Provision for class action The provision for class action of $2,000,000 in 2020 was based on the possible settlement of the class action dispute which was settled during financial year 2021 (refer Note 7.2). 70 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 20214 Capital Management This section provides information relating to the Group’s capital structure and its exposure to financial risks, how they affect the Group’s financial position and performance, and how the risks are managed. The Group’s capital management strategy aims 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 dividends 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 and key banking covenants. The capital structure of the Group is reviewed on an ongoing basis and considers the allocation and type of capital and the associated risks and returns. 4.1 CASH AND CASH EQUIVALENTS Cash on hand Bank balances Short-term deposits Consolidated Group Parent Entity 2021 $’000 5 157,750 242 157,997 2020 $’000 5 90,178 1,225 91,408 2021 $’000 - 74 - 74 2020 $’000 - 220 - 220 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 subject to an insignificant risk of changes in value. Cash and cash equivalents is controlled by the Group and the contractual rights transfer to the Company substantially all of the benefits and risks of ownership. Cash at bank and short term deposits earn interest at floating rates with the floating interest rates for the year for cash at bank between 0.01% and 0.55% (2020: 0.59% and 1.22%). Short-term deposits have an average maturity of 90 days (2020: 90 days) and are highly liquid. Cash and cash equivalents held in trust and not recognised in the Statement of Financial Position Pursuant to contractual arrangements with clients, GRS administers cash flows on behalf of clients as part of the remuneration benefits administration service. Cash held in trust for clients are therefore not available for use in the Group’s operations. For some clients, cash is held in bank accounts specified in their name and other client monies are held in bank accounts specially designated as monies in trust for clients. All client monies are segregated from the Group’s own cash and not included in the Consolidated Statement of Financial Position. At reporting date, the balance of monies held in bank accounts in trust for clients representing all client contributions to operate their accounts were as follows: Client monies in trust, interest accruing to the Group Client monies in trust, interest accruing to clients Consolidated Group Consolidated Group 2021 Average interest rate % 0.51% 0.49% $’000 435,376 23,828 459,204 2020 Average interest rate % 1.46% 1.29% $’000 408,676 23,092 431,768 The parent entity does not hold any client monies. Pursuant to contractual agreement with clients, the Group received the following interest for managing client monies and as part of the administration service fees at an average interest rate of 0.51% (2020: 1.46%). Interest received is recognised within Remuneration Services revenue from contracts with customers. Interest received on client monies in trust Consolidated Group 2021 $’000 2,283 2020 $’000 5,976 71 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Cash Flow Information Reconciliation of cash flow from operations with profit / (loss) from operating activities after-tax Profit / (loss) for the year Non cash flows in profit / (loss) from operating activities Amortisation ROU assets depreciation Impairment Gain on previously held equity interest Gain on disposal of subsidiary Depreciation Loss allowance / (gain) Share-based expense Fair valuation of contingent consideration Share buyback expenses Other Changes in assets and liabilities, net of the effects of purchase of subsidiaries Decrease / (increase) in trade receivables and other assets Decrease in finance lease receivables principle repayments and disposals Increase in assets under lease Decrease in written down value of assets sold (Decrease) / increase in trade payables and accruals (Decrease) / increase in income taxes payable Decrease / (increase) in deferred taxes Increase in unearned revenue Decrease in provisions Consolidated Group Parent Entity 2021 $’000 61,065 10,231 6,594 16,790 (1,805) (305) 50,289 (417) 1,101 - - (833) 2020 $’000 2,331 15,593 5,526 54,735 - - 62,171 583 (512) (1,462) 548 1,390 22,165 25,668 (16,549) 172,141 (76,942) (232,459) 70,419 (3,658) (1,428) 7,332 9,639 (940) 76,573 26,391 8,810 (5,214) 21,119 (3,255) 2021 $’000 2020 $’000 173,638 (21,046) - - - - 5,541 77,969 - - - - - - - - 1,101 (512) - - (52,640) (104,736) - - - 377 (609) 128 - - - - - (4) - - - (270) (1,316) (133) - - Net cash from operating activities 194,965 188,460 22,800 54,688 Cash from operating activities Cash flows other than investing or financing are classified as cash from operating activities. As the AM segment provides operating and finance leases for motor vehicles and equipment, the cash outflows to acquire the lease assets as well as interest received and interest paid are classified as operating cash outflows. Net debt reconciliation A summary of the movement in borrowings (excluding capitalised borrowing costs) affecting financing cash flows during the year is provided below: Financing cash flow from liabilities Borrowings (excluding capitalised borrowing costs) Payable due to wholly owned entities Consolidated Group Parent Entity 2021 $’000 2020 $’000 176,808 265,381 - - 2021 $’000 9,752 11,410 2020 $’000 14,876 115,358 Financing liabilities 176,808 265,381 21,162 130,234 72 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Financing cash flow from liabilities (continued) Movements during the year Liabilities at the start of the period Cash flows relating to borrowings Cash flows relating to payables due to wholly owned entities Non-cash settlement of payables due to wholly owned entities Related party loan forgiveness Foreign exchange adjustments Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 265,381 (90,278) 328,430 (63,137) - - - 1,705 - - - 88 130,234 (5,124) 7,022 (58,330) (52,640) - 55,421 (4,481) 79,294 - - - Liabilities at the end of the period 176,808 265,381 21,162 130,234 4.2 BORROWINGS Current Bank loans – at amortised cost Non-current Bank loans – at amortised cost Total bank loans Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 23,886 11,706 5,761 5,761 152,444 251,914 176,330 263,620 3,991 9,752 9,115 14,876 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. 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. Security and financial covenants The parent entity guarantees all bank loans of subsidiaries in the Group, totalling $167,056,000 (2020: $250,498,000). Fixed and floating charges are provided by the Group in respect to financing facilities provided by its syndicate of financiers. The assets identified in Note 3.4 form part of the security. Loans are also secured by the following financial undertakings from all entities in the Group: > Negative pledge that imposes certain covenants including a restriction to provide other security over its assets, cap on its maximum finance debt, acquire assets which are non-core business to the Group, not to dispose of a substantial part of its business and reduction of its capital; > Maintenance of certain financial thresholds for shareholders’ equity, gearing ratio and fleet asset portfolio performance; and > Various business parameters of the Interleasing Group and Maxxia Finance Ltd. The Group operated with significant headroom against all of its borrowing covenants at all times. The Groups’ gearing ratio was 20% (2020: 46%) calculated as net debt of $67,208,000 (2020: $196,648,000) divided by total debt and equity of $336,403,000 (2020: $425,534,000). 73 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 4.3 FINANCIAL RISK MANAGEMENT We proactively manage the risks facing the business, this includes the early identification and assessment of risks, the implementation of controls and the active monitoring and reporting of risks. Our approach to risk management, underpinned by the Group’s risk management policy and framework, and overseen by the Audit, Risk and Compliance Committee, is embedded in our culture and reflected in our decision making. Senior Executives identify and/or review key risks as part of our normal business activities, and formally at least quarterly. The results of these reviews are recorded in the MMS risks register, which is used by the Management Risk and Compliance Committee and key risks within the risk register are reported to the Board Audit, Risk and Compliance Committee (ARCC) for monitoring. Financial risks of the Group are monitored by the Board through: > ARCC obtains management confirmation of adherence with the Risk Management Policy and Framework; > regular reporting of compliance with, and/or breaches of, the Risk Appetite Statement; > monthly board meetings which include financial and operational reports from senior management; > regular reports from the ARCC; and > discussions with senior management. Other monitoring occurs through: > dedicated Group Risk Manager responsible for overall monitoring and reporting of financial risks; > a risk report is presented to the ARCC at least four times per year; and > Credit and Interest Committees which oversee Group credit risk, liquidity risk and interest rate risk with reporting provided to the Board. In the normal course of business, the Group is exposed to various risks as set out below: Risk Exposure Response Liquidity risk Credit risk Risk that the Group will not be able to meet its financial obligations as they fall due. The AM businesses borrowings exposes the Group to potential mismatches between the refinancing of its assets and liabilities. Maintain continuity and flexibility of funding through the use of committed revolving bank club facilities based on common terms, asset subordination and surplus cash to match asset and liability requirements. Ensure there is sufficient liquidity through access to committed available funds to meet at least twelve months of average net asset funding requirements augmented with uncommitted P&A facilities. This level is expected to cover any short-term financial market constraint for funds. The Group monitors daily operating cash flows and forecast cash flows for a 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. Risk of financial loss if a customer or counter-party to a financial instrument fails to meet its contractual obligations. Exposure to credit risk is through the receivables’ balances, customer leasing commitments, deposits with banks 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. Leasing credit risk is managed pursuant to the Board approved Credit Policy. The policy is reviewed annually and prescribes minimum criteria in the credit assessment process that includes the credit risk rating of the customer, concentration risk parameters, type and intended use of the asset 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 manufacturers. Credit risk concentration is spread through 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, the credit quality is assessed 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 obtained where appropriate, to mitigate the risk of financial loss from defaults. Debtor ageing and the provision for impairment is reviewed monthly by the Board. 74 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Risk Exposure Strategy Market risk Interest rate risk Foreign currency risk Asset risk Movements in interest rates could directly affect the margins from existing contracts and the pricing of new contracts for assets leased and income earned from surplus cash. Borrowings issued at variable rates expose the Group to repricing interest rate risk. Foreign currency risk arises from holding 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. Asset risk is mainly from the residual value of assets under lease and the tyre and maintenance 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. The estimate 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 recognised. Risk relating to tyre and maintenance services arises where the costs to meet customer claims over the contracted period exceed estimates made at inception. Treasury and pricing 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. The Group has entered into interest rate swaps with counterparties rated as AA- by Standard & Poor’s to exchange, at specified periods, the difference between fixed and variable rate interest amounts calculated on contracted notional principal amounts. 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. 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 these entities are part of longer term investments and consequently, their sensitivity to foreign currency movements are not measured. The Group’s transactions are predominantly denominated in Australian dollars which is the predominant functional currency and the presentation currency of the Group. Continuous review of 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. (a) Liquidity risk Financing arrangements Committed borrowing facilities for the AM segment to finance its fleet management portfolio and other borrowing requirements not used to finance the fleet management portfolio are as follows: Borrowing facilities in local currency (AUD ‘000) 2021 2020 Facility Used Unused Facility Used Unused AM borrowing facilities 251,834 160,761 91,073 322,115 240,648 81,467 Other borrowing facilities 16,047 16,047 - 24,726 24,726 - Total Borrowings 1 267,881 176,808 91,073 346,841 265,374 81,467 1 Borrowings do not include capitalised borrowing costs of $478,000 (2020: $1,761,000). 75 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021Details of the fleet management portfolio facilities in local currency are as follows: AM secured bank borrowings (excluding borrowing costs) Maturity dates 2021 2020 Facility Used Unused Facility Used Unused AUD’0001 AUD’0001 AUD’0001 AUD’0001 AUD’0001 AUD’0001 NZD’0001 NZD’0001 NZD’0001 NZD’0001 GBP’0001 GBP’0002 GBP’0001 1 Revolving facility 2 Amortising facility 31/03/2023 31/03/2024 31/03/2025 31/03/2022 31/03/2023 31/03/2024 31/03/2023 31/03/2024 31/03/2022 31/03/2023 31/03/2023 31/03/2023 31/10/2021 75,000 58,000 20,000 - - - 45,800 48,000 5,300 - - - 29,200 10,000 14,700 - - - - - - - - - 130,670 112,800 45,000 20,000 25,000 4,000 11,000 29,000 6,600 23,100 - - 15,000 18,500 - - - - 18,500 - 4,400 5,900 - - 15,000 - - - - - - 30,000 15,000 27,200 7,100 - - - - - - - 17,870 20,000 16,000 - - 2,800 7,900 - - 47,000 37,200 9,800 Revolving facilities above have been provided by a financing club of three major Australian banks operating under common terms and conditions. Borrowings are denominated in the local currency of the principal geographical markets to remove associated foreign currency cash flow exposure. The borrowing facilities are further augmented by P&A facilities of $194 million ($100 million utilised) and residual value facilities totalling $123 million ($69 million utilised). The Group carries a residual value exposure in relation to some P&A facilities that revert the lease asset to the Group at the termination of the lease. The residual value was assessed at the lower of book value and estimated disposal value resulting in a provision for loss in value of $2.0 million for assets identified to be possibly below book value. The Group believes that the balanced arrangement of internal funded fleet assets and the use of P&A facilities improves liquidity, provides funding diversification and helps to optimise capital management. Loan maturities were extended for most facilities with the Club of financiers during the year. Revolving facilities for Australian operations of $196 million due to mature on 31 March 2022 were reduced to $153 million and extended for another 1 to 3 years at significantly improved margins. Committed bank facilities for UK operations reduced by GBP13.5 million in aggregate as the mix of internal funding and the employment of P&A in the provision of lease financing continue to evolve. Facilities were extended, at improved margins, to match the maturity profile of the underlying lease receivables. Unused facilities will provide funding to meet immediate requirements together with the headroom from the uncommitted P&A facilities and residual value facility. This, together with contractual lease receivable cash flows, will provide the necessary funding requirements for the next twelve months of forecast new lease additions. The other facilities are borrowed in local currency as follows: Secured bank borrowings (excluding borrowing costs) Maturity dates 2021 2020 Facility Used Unused Facility Used Unused AUD’000 AUD’000 GBP’000 GBP’000 GBP’000 31/12/2022 29/09/2022 31/01/2021 30/06/2023 31/03/2022 5,739 4,013 - 3,422 - 5,739 4,013 - 3,422 - - - - - - 7,650 7,224 1,540 - 3,950 7,650 7,224 1,540 - 3,950 - - - - - 76 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021Maturities of financial liabilities The table below summarises the maturity profile of the Group and the parent entity’s financial liabilities based on undiscounted contractual payments at the expected settlement dates. Contracted payments are based on amounts brought to account on the Statement of Financial Position and property lease commitments not brought to account. Consolidated Group – at 30 June 2021: Contractual maturities of financial liabilities Trade payables Other creditors and liabilities Lease liabilities Borrowings Consolidated Group – at 30 June 2020: Contractual maturities of financial liabilities Trade payables Other creditors and liabilities Lease liabilities Borrowings Less than 6 months $’000 30,458 78,709 4,488 14,002 127,657 Less than 6 months $’000 24,577 78,903 4,341 8,197 6–12 months $’000 - 6,640 4,185 14,231 25,056 6–12 months $’000 - 5,900 3,344 8,923 116,018 18,167 1–2 years $’000 2–5 years $’000 - - 7,881 77,666 85,547 - - 19,989 75,596 95,585 1–2 years $’000 2–5 years $’000 - - 4,315 219,242 223,557 - - 20,842 34,118 54,960 Parent – at 30 June 2021: 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 12,372 2,939 11,063 26,374 - - 2,919 11,312 14,231 4,009 73,657 77,666 - - Over 5 years $’000 - - 32,389 - 32,389 Over 5 years $’000 - - 52,573 - 52,573 Total contractual cash flows $’000 Carrying amount of liabilities $’000 30,458 85,349 68,932 181,495 366,234 30,458 86,833 48,875 176,808 342,974 Total contractual cash flows $’000 Carrying amount of liabilities $’000 24,577 84,803 85,415 270,480 465,275 24,577 86,411 24,436 265,374 400,798 Over 5 years $’000 Total contractual cash flows $’000 Carrying amount of liabilities $’000 - 12,372 12,372 - 9,867 75,596 - 171,628 9,752 - 75,596 - 193,867 22,124 Parent – at 30 June 2020: 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 of liabilities $’000 Amounts payable to wholly owned entities and other payables Borrowings Financial guarantee contracts 128,324 - - - 4,267 3,930 136,521 2,955 5,968 8,923 5,837 213,405 219,242 2,086 32,032 34,118 - - - - 128,324 128,324 15,145 255,335 14,876 - 398,804 143,200 77 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 (b) Credit risk The following carrying amount of financial assets represent the maximum credit exposure at reporting date. Trade and other receivables Deposits with banks Finance lease receivables Operating lease assets Consolidated Group Parent Entity 2021 $’000 40,975 157,997 51,248 210,318 460,538 2020 $’000 70,502 91,408 113,086 215,942 490,938 2021 $’000 2020 $’000 481 74 - - 555 - 220 - - 220 Operating lease assets represent future lease rentals not yet invoiced which are secured against underlying assets. Impairment of trade receivables and finance lease receivables Key judgement: Impairment of financial assets Finance lease, trade and other receivables are assessed for impairment at the end of each reporting period on an expected credit loss (ECL) basis. The Group applies the AASB 9 simplified model of recognising lifetime expected credit losses for all receivables as these items do not have a significant financing component. In measuring the expected credit losses, the trade receivables and finance lease receivables have been grouped based on substantially shared credit risk characteristics. ECL for finance lease receivables includes the inherent risk attached to the credit assessment of each customer, estimate of customer default risk, environment and inventory risk and other factors affecting recoverability. COVID-19 affected the credit quality of many customers at varying levels. The continuing impact of COVID-19 on the future credit quality of finance lease customers has resulted in the ECL being adjusted to include a downgrade to the credit rating of all customers where their industry is more exposed to the effects of COVID-19. Recoverability of trade receivables is reviewed on an ongoing basis. The expected loss rate for trade receivables is based on the credit loss history on sales over the previous 36 months and adjusted for forward looking factors. Impairment of financial assets is most sensitive to the failure of a significant customer. Trade receivables The loss allowance for trade receivables have been estimated as follows: Consolidated Group Parent Entity 2021 $’000 2.62% 35,224 924 284 1,208 2020 $’000 2.81% 34,397 967 1,074 2,041 2021 $’000 2020 $’000 - - - - - - - - - - Expected loss rate Gross carrying amount Loss allowance Specific loss allowance Total loss allowance 78 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Ageing and expected credit loss of trade receivables Not past due Past due 30 days Past due 31-60 days Past due 61-90 days Past due >90 days 2021 Loss allowance $’000 (803) (48) (33) (15) (309) (1,208) Total $’000 29,060 2,806 1,324 403 1,631 35,224 Amount not impaired $’000 28,257 2,758 1,291 388 1,322 2020 Loss allowance $’000 (821) (55) (221) (341) (603) Amount not impaired $’000 27,281 2,387 1,153 333 1,202 Total $’000 28,102 2,442 1,374 674 1,805 34,016 34,397 (2,041) 32,356 The Group’s maximum exposure to credit risk at reporting date by geographic region is predominantly in Australia, New Zealand and the UK based on the location of originating transactions and economic activity. Finance lease receivables The finance lease receivables loss provision and movements during the year is set out below: Consolidated Group Parent Entity Balance at start of year Specific loss allowance Expected loss allowance Loss allowance discharged Changes in foreign currency Balance at end of year Expected credit loss provision Specific provision 2021 $’000 1,139 - (337) (80) 25 747 629 118 747 2020 $’000 3,149 177 (178) (2,021) 12 1,139 950 189 1,139 2021 $’000 2020 $’000 - - - - - - - - - - - - - - - - - The expected credit loss rate is calculated using the credit management system’s default rate assigned for each customer adjusted by the expected recoverable rate plus deflators for duration and other economic or business environmental factors. Expected credit loss rate Gross carrying amount Loss allowance Consolidated Group Parent Entity 2021 $’000 1.18% 53,323 629 2020 $’000 0.86% 110,782 950 2021 $’000 2020 $’000 - - - - - - 79 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 (c) Market risk Interest rate risk At reporting date, the Group had the following variable rate borrowings under long-term facilities attributable to the AM business and other loan facilities drawn on. AUD’000 NZD’000 GBP’000 Total AUD ‘000 2021 2020 Weighted average interest rate % 1.20% 1.57% 1.46% 1.31% Borrowings $’000 108,852 29,700 21,922 176,808 Weighted average interest rate % 1.60% 1.79% 1.87% 1.68% Borrowings $’000 156,676 34,300 42,693 265,374 The weighted average interest rate on borrowings is used as an input to asset repricing decisions for geographical markets operated in. Analysis of maturities is provided in Note 4.3(a). Borrowings for the AM business of $125,668,000 (2020: $168,479,000) were covered by interest rate swaps at a fixed rate of interest of 1.72% (2020: 2.72%). Interest rate risk also arises from cash at bank and deposits, which are at floating interest rates. At reporting date, the Group had the following variable rate financial assets and liabilities outstanding: Cash and deposits Bank loans 1 Interest rate swaps (notional amounts) Net exposure to cash flow interest rate risk 2021 $’000 157,997 (176,808) 125,668 106,857 2020 $’000 91,408 (265,374) 168,479 (5,487) 1 Excluding capitalised borrowing costs of $478,000 (2020: $1,761,000) for AM. Sensitivity analysis – floating interest rates: 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 $947,000 (2020: $721,000) higher or lower and the parent entity $17,000 (2020: $26,000) higher or lower, depending on which way the interest rates moved based on the balances at reporting date. (d) Asset risk The portfolio of motor vehicles under operating lease and the residual value of assets under P&A and other facilities of 327,180,000 (2020: $290,675,000) included a residual value provision of $5,071,000 (2020: $4,733,000). Refer to Note 3.4 for further details. 80 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 4.4 FINANCIAL INSTRUMENTS Fair value measurement The fair value of financial assets and financial liabilities is estimated for recognition and measurement for disclosure purposes. The below table is an analysis of financial instruments that are measured at fair value on a recurring basis subsequent to initial recognition, grouped into the following three levels based on the degree to which the fair value is observable. Level 1 Level 2 Derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. 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). Financial asset/ (financial liability) Fair value at 2021 $’000 2020 $’000 Fair value hierarchy Valuation technique and key input Interest rate swaps (213) (1,678) 2 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 above and in Note 3.3, the carrying amounts of financial assets and financial liabilities recognised 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. Derivative financial instruments In accordance with the Group’s treasury policy, derivative interest rate products 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. Hedge accounting Where the Group undertakes a hedge transaction it documents at inception of the transaction the type of hedge, the relationship between the hedging instruments and hedged items and its risk management objective and strategy. The documentation also demonstrates, both at hedge inception and on an ongoing basis that the hedge has been, and is expected to continue to be, highly effective. The Group uses derivative financial instruments for cash flow hedging purposes and designates them as such. Cash flow hedge Derivatives or other financial instruments that hedge the exposure to variability in cash flows from external borrowings that are priced using variable interest rates. Cash flows hedges are used to manage interest rate exposure to interest rate volatility and its impact on leasing product margins. This process seeks to have more control in balancing the spread between interest rates charged on lease contracts and interest rates and the level of borrowings assumed in its financing as required. Recognition date Measurement Changes in fair value Inception Fair value Any gains or losses arising from changes in the fair value of the hedge contracts are taken to other comprehensive income (OCI) to the extent of the effective portion of the cash flow hedge and the ineffective portion recognised in the Statement of Profit or Loss. These gains or losses in OCI are accumulated in a component in equity and are re-classified to the Statement of Profit or Loss to match the timing and relationship with the amount that the derivative instruments was intended to hedge. 81 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 4.5 ISSUED CAPITAL Share capital The following relates to the Group and Parent entity: Number of shares Issue price Shares issued at 1 July 2020 Treasury shares acquired on-market Shares held by external shareholders at the beginning of the year Treasury shares distributed in the year on the exercise of employee rights Shares held by external shareholders at 30 June 2021 77,381,107 (16,899) 77,364,208 16,899 77,381,107 Shares issued at 1 July 2019 Treasury shares acquired on-market Shares held by external shareholders at the beginning of the year Share buyback Treasury shares distributed in the year on the exercise of employee options Capital reduction Shares held by external shareholders at 30 June 2020 Number of shares Issue price 83,204,720 (538,129) 82,666,591 (5,823,613) 538,129 - 77,381,107 $1.78 $10.18 Ordinary shares $’000 76,419 (162) 76,257 - 76,257 Ordinary shares $’000 135,868 - 135,868 (10,366) 5,478 (54,561) 76,419 Ordinary shares and premiums received on issue of options are classified as issued capital. Costs attributable to the issue of new shares or options are deducted from the equity proceeds, net of any income tax benefit, except with the acquisition of a business which are included as part of the business combination. Shares purchased by the Company or any entity in the Group are classified as treasury shares and the incremental cost of acquiring those shares are deducted from share capital. 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. Capital reduction The net assets of the parent were affected by the loss in value of its investments in and receivable balances from its subsidiaries amounting to $77,969,000 resulting in a deficit in retained earnings of $54,561,000 at 30 June 2020. In order to avoid the limitation on the Company’s capacity to pay a dividend, the deficit in retained earnings was applied as a reduction against share capital for the value that is no longer represented in assets in accordance with S.258F of the Corporations Act. The loss in value of assets in 2020 is summarised as follows: Investment in subsidiaries Loan receivables from subsidiaries Loss in value of assets 82 2021 $’000 - - - 2020 $’000 74,348 3,621 77,969 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021The loss in value of the investment in subsidiaries resulted from the impairment of intangibles assets of the RFS Aggregation and the AM subsidiaries in the UK (refer Note 3.1) and the recoverable value of another subsidiary investment in 2020. The parent entity’s assessment of the recoverability of loans receivable from its subsidiaries resulted in an impairment of $3,621,000. The capital reduction is non-cash and the impairment of the parent’s investment in its subsidiaries and loan receivables did not impact the consolidated financial statements and did not affect net assets of the parent or the Group. Share buyback In October 2019, the Company completed an off-market share buyback of 5,823,613 fully paid ordinary shares at $13.74 per share that was funded from cash of $80,016,443. The share buyback comprised a capital component of $1.78 which reduced share capital by $10,366,031 and a fully franked dividend per share of $11.96 that was paid out of retained earnings of $69,650,412. Treasury shares 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 Long Term Incentive Plan (LTIP). The EST is controlled by McMillan Shakespeare Limited and forms part of the Group. Treasury shares are shares in McMillan Shakespeare Limited that are held by the EST for the purpose of issuing shares under the McMillan Shakespeare Limited LTIP. Treasury shares are deducted from issued shares to show the number of issued shares held by external shareholders. Options At 30 June 2021, there were 12,500 (2020: 8,979) unissued ordinary shares for which options were outstanding and exercisable at an average price of $13.45 (2020: $13.45). Details relating to options issued, exercised and lapsed during the year and options outstanding at the end of the year is set out in Note 5.1. 4.6 DIVIDENDS Final fully franked ordinary dividend for the year ended 30 June 2020 of $Nil (2019: $0.40) per share franked at the tax rate of Nil (2019: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2021 of $0.302 (2020: $0.34) per share franked at the tax rate of 30% (2020: 30%) Franking credits available for subsequent financial years based on a tax rate of 30% (2020 – 30%) Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 - 33,281 - 33,281 23,369 23,369 26,310 59,591 23,369 23,369 26,310 59,591 112,284 91,455 112,284 91,455 Dividends are brought to account when declared and appropriately authorised before the end of the financial year but not distributed at 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. 83 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Performance Rights A Performance Right is an entitlement to acquire a fully paid ordinary share in the Company for Nil consideration at grant for conversion to a share, subject to the achievement of performance hurdles and service conditions being satisfied. Performance Rights carry no dividend or voting rights. Performance hurdles and vesting entitlements Refer page 23 for details of the terms and conditions for Performance Rights issued in the year. Recognition and measurement The Performance Options and Rights are accounted for as equity- settled share-based payments and recognised at the fair value at grant date as an employee benefit expense over the period from issue date to vesting date with a corresponding increase in equity (share-based payment reserve). Fair value is determined using a binomial option pricing model and incorporates market conditions and does not include any option conditions that are not market based. The cumulative expense recognised is adjusted to reflect the Directors’ best estimate of the number of options or rights that will ultimately vest based on the vesting conditions attached to the options and rights, such as the employees having to remain with the Group until vesting date, or such that employees are required to meet financial targets. No expense is recognised for options or rights that do not ultimately vest. 5 Employee Remuneration and Benefits 5.1 SHARE-BASED PAYMENTS The Company operates a LTIP for certain executives and employees under the McMillan Shakespeare Limited Employee Share Plan. The Company issues Performance Rights annually with a three year vesting period. The issuance to the Managing Director was granted on 20 October 2020 following shareholder approval on that day. No executive can enter into a transaction that is designed or intended to hedge the exposure. Executives are required to provide declarations to the Board on their compliance with this policy regularly. Performance Options Performance Options are granted for Nil consideration with no dividend or voting rights. The performance options may be exercised into ordinary shares subject to the satisfaction of specified performance hurdles and continuity of employment. On exercise, each participant will pay the exercise price and receive one fully paid ordinary share in the Company. The People, Culture and Remuneration Committee recommends to the Board the number of performance options to be granted on the basis of the position, duties and responsibilities of the relevant executive. Voluntary Options Voluntary options allow the participant to acquire a fully paid ordinary share in the Company by the payment of the exercise price at the exercise date. Entitlement to exercise is not contingent upon continued employment with the Company nor are there performance hurdles. Voluntary Options are offered to certain executives for an additional opportunity to invest in the Company, who can acquire for a consideration up to a maximum of $20,000. Consideration was set at a 25% discount to the face value of the option at the date of grant. However, if the participant leaves employment before vesting date, the participant will forfeit 25% of their entitlement for $1 (the amount forfeited being equal to the 25% discount to the face value that applied to the consideration price of the option at the date of the conditional offer and acceptance). 84 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021Options Set out below are summaries of options granted under the plans: Performance Options Consolidated Group and parent entity – 2021 Grant date Expiry date Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year 3 July 2018 30 September 2022 23 October 2018 30 September 2022 $16.64 $16.64 Weighted average exercise price 466,905 105,272 572,177 $16.64 - - - - - - - - (466,905) (105,272) (572,177) $16.64 - - - - - - - - Performance Options Consolidated Group and parent entity – 2020 Grant date Expiry date Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year 19 August 2014 30 September 2019 $10.18 3 July 2017 30 September 2020 $13.45 26 September 2017 30 September 2020 $14.97 24 October 2017 30 September 2020 $13.45 538,129 332,381 17,340 71,140 3 July 2017 30 September 2021 $13.45 308,488 26 September 2017 30 September 2021 $14.97 24 October 2017 30 September 2021 $13.45 3 July 2018 30 September 2022 $16.64 23 October 2018 30 September 2022 $16.64 Weighted average exercise price 15,920 66,027 576,253 105,272 2,030,950 $13.68 - - - - - - - - - - - (538,129) - - - - - - - - - (332,381) (17,340) (71,140) (308,488) (15,920) (66,027) (109,348) - - - - - - - - 466,905 105,272 (538,129) (920,644) 572,177 $10.18 $13.88 $16.64 - - - - - - - - - - - Voluntary Options Consolidated Group and parent entity – 2021 Grant date Expiry date Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year 3 July 2017 3 July 2017 30 September 2020 $13.45 30 September 2021 $13.45 Weighted average exercise price 8,979 12,500 21,479 $13.45 - - - - - - - - (8,979) - (8,979) $13.45 - 12,500 12,500 $13.45 - 12,500 12,500 $13.45 Voluntary Options Consolidated Group and parent entity – 2020 Grant date Expiry date Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year 3 July 2017 3 July 2017 30 September 2020 $13.45 30 September 2021 $13.45 Weighted average exercise price 8,979 12,500 21,479 $13.45 - - - - - - - - - - - - 8,979 12,500 21,479 $13.45 8,979 - 8,979 $13.45 85 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Rights Set out below is a summary of Performance Rights granted under the Plan: 2021 Grant date Exercise date1 3 July 2018 30 September 2021 23 October 2018 30 September 2021 1 July 2019 30 September 2022 22 October 2019 30 September 2022 18 December 2019 31 October 2020 20 October 2020 30 September 2023 30 October 2020 30 September 2023 2020 Grant date Exercise date1 3 July 2017 30 September 2019 26 September 2017 30 September 2019 24 October 2017 30 September 2019 3 July 2017 30 September 2020 26 September 2017 30 September 2020 24 October 2017 30 September 2020 3 July 2018 30 September 2021 23 October 2018 30 September 2021 1 July 2019 30 September 2022 22 October 2019 30 September 2022 18 December 2019 31 October 2020 Balance at the start of the year Granted during the year Distributed during the year Forfeited during the year1 Balance at end of the year Exercisable at end of the year 83,978 18,937 277,513 69,178 16,899 - - - - - - - 103,763 429,633 - - - - (16,899) - - (83,978) (18,937) (142,313) (31,131) - (10,376) (42,963) - - 135,200 38,047 - 93,387 386,670 466,505 533,396 (16,899) (329,698) 653,304 - - - - - - - - Balance at the start of the year Granted during the year Distributed during the year Forfeited during the year1 Balance at end of the year Exercisable at end of the year 83,429 4,365 17,860 87,883 4,598 18,814 103,648 18,937 - - - - - - - - - - - 334,336 69,178 16,899 339,534 420,413 - - - - - - - - - - - - (83,429) (4,365) (17,860) (87,883) (4,598) (18,814) (19,670) - - - - - - - 83,978 18,937 (56,823) 277,513 - - 69,178 16,899 (293,442) 466,505 - - - - - - - - - - - - 1 The first available exercise date is the date that the Company’s financial statements for the respective years are lodged with ASX. For the purpose of this summary it is assumed to be 30 September of that year. Fair value of Performance Rights granted The fair value at grant date was estimated by discounting the Company’s share price at this date by the dividend yield of the Company as follows: Grant 20 October 2020 30 October 2020 Share price at grant date Expected life (years) Expected dividend yield $9.46 $9.34 2.9 2.9 3.6% 3.6% Fair value $8.51 $8.40 86 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Expenses arising from share-based payment transactions Performance Options issued under the LTIP Voluntary Options issued under the LTIP Performance Rights issued under the LTIP Consolidated Group Parent Entity 2021 $ 2020 $ 2021 $ 2020 $ - (432,342) 1,607 1,099,680 3,552 (83,400) 1,101,287 (512,190) - - - - - - - - 5.2 KEY MANAGEMENT PERSONNEL COMPENSATION Short-term employment benefits Post-employment benefits Long-term employment benefits Share-based payments Consolidated Group Parent Entity 2021 $ 2020 $ 2021 $ 2020 $ 3,249,595 3,044,020 2,155,883 2,095,836 149,443 (63,529) 406,980 149,517 69,461 (129,375) 111,896 (81,581) 380,509 101,812 32,659 (55,173) 3,742,489 3,133,623 2,566,707 2,175,134 5.3 OTHER EMPLOYEE BENEFITS 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 measured on an ongoing basis and is dependent on the outcomes for each participating employee. 87 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 6 Group Structure 6.1 BUSINESS COMBINATIONS Business combinations are accounted for on the date on which control is transferred to the Group. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Transaction costs, other than those associated with the issue of debt or equity instruments that the Group incurs in connection with a business combination, are expensed as incurred. Upon the loss of control, the Group de-recognises the assets and liabilities of the subsidiary, non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in the profit or loss. Non-controlling interests are measured at their proportionate share of the subsidiaries’ net assets. Acquisition of ML The Group acquired the remaining 50% equity interest of ML on 31 December 2020, a company incorporated in the UK providing asset funding solutions, vehicle fleet leasing and asset management. These products and services are delivered through a variety of channels, both direct to market through a diverse customer base containing a number of publicly quoted and private companies, government bodies including those in the education sector and public authorities. The acquisition cost of $1,805,000 for the remaining JV interest was based on an historic incentive arrangement to retain prior management. ML was previously a joint venture of the Group through the Group’s 50% equity interest and the acquisition represents the acquisition of the remaining equity in ML (refer to Note 6.3). Consideration transferred Consideration transferred for the acquisition is summarised as follows: Cash Total consideration transferred Reconciliation of consideration to cash flow Purchase consideration – cash inflow for ML acquisition Cash consideration Cash acquired Net cash inflow in period Consolidated Group 2021 $’000 1,805 1,805 Consolidated Group 2021 $’000 1,805 (7,768) (5,963) 88 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Assets acquired and liabilities assumed at the date of acquisition Consolidated Group Fair Value at acquisition date Cash and cash equivalents Trade and other receivables, and prepayments Inventory Property, plant and equipment Assets acquired Trade payables and accrued expenses Income tax provision Other liabilities Provisions Related party payables Liabilities assumed Identifiable net liabilities acquired Goodwill Fair value on previously held equity interest Consideration transferred 2021 $’000 7,768 1,836 10,278 47 19,929 15,778 337 530 2,178 8,071 26,894 (6,965) 10,575 (1,805) 1,805 Goodwill arose as the acquisition cost of $1,805,000, which was based on a historical incentive arrangement to retain prior management, exceeded the net assets at acquisition following historical accumulated losses. None of the goodwill is expected to be tax deductible. Refer to Note 3.1 regarding the carrying value of the goodwill recognised. Acquisition-related expenses of $100,000 have been incurred and expensed on consolidation and included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the period within ‘Other operating expenses’. Trade receivables of ML at acquisition resulted from trade sales with customers and have been fair valued at $1,000,000. Their collection and conversion to cash are expected in full pursuant to customer terms. Impact of acquisition on the results of the Group The Consolidated Statement of Profit or Loss for the period includes revenue of $34,292,000 and net loss after-tax of $1,200,000 attributed to ML. Had the acquisition occurred effective 1 July 2020, revenue of ML to the Group would have been $57,057,000 and net loss after-tax adjusted for differences in the accounting policies between the Group and ML would have been $2,504,000. 6.2 OTHER FINANCIAL ASSETS Investment in subsidiaries Shares in subsidiaries at cost Consolidated Group Parent Entity 2021 $’000 - 2020 $’000 2021 $’000 2020 $’000 - 253,303 211,123 The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in the relevant notes above. 89 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Name Parent entity McMillan Shakespeare Limited Subsidiaries in Group Maxxia Pty Limited 1 Remuneration Services (Qld) Pty Limited 1 Easilease Pty Ltd Onboard Finance Pty Ltd MaxxiMe Pty Ltd 2 Interleasing (Australia) Ltd 1 TVPR Pty Ltd 1 Carila Pty Ltd 1 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 National Dealer Services Pty Ltd Motorsure Pty Ltd Presidian Management Services Pty Ltd ADU Investments Pty Ltd United Financial Services Pty Ltd United Financial Services Network Pty Ltd United Financial Services (QLD) Pty Ltd Plan Management Partners Pty Ltd Maxxia (UK) Limited Maxxia Finance Limited CLM Fleet Management plc Anglo Scottish Asset Finance Limited European Vehicle Contracts Limited 3 Capex Asset Finance Limited Maxxia Ltd 4 The Car House Milton Keynes Limited Corporate Vehicle Rentals Limited Total Vehicle Mgt Limited Maxxia Limited Maxxia Fleet Limited Wuxi McMillan Software Co. Ltd Country of Incorporation % Owned 2021 % Owned 2020 Principal activities Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom New Zealand New Zealand Peoples Republic of China 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% 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% 50% 100% 100% 100% 100% 100% 100% Remuneration services provider Remuneration services provider Remuneration services provider Remuneration services provider Remuneration services provider Asset management and services Asset management and services Asset management and 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 Retail financial services Retail financial services Retail financial services Retail financial services Plan management services Investment holding Asset management Fleet management services Asset management Asset management Asset management Asset management Fleet management services Fleet management services Fleet management services Dormant Asset management and services Software development 1 These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 issued by the Australian Securities and Investments Commission. For further information refer to Note 6.4. 2 Formerly Just Honk Pty Ltd. 90 3 On 11 March 2021, the Group disposed of 100% of the share capital of European Vehicle Contracts Limited. 4 On 31 December 2020, the Group acquired the remaining 50% of the share capital of Maxxia Ltd (refer to Note 6.1 for details). MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Investments in subsidiaries are accounted for at cost less impairment 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. In 2021, the parent entity recognised impairments for its investments in United Financial Services Pty Ltd, United Financial Services Network Pty Ltd, United Financial Services (QLD) Pty Ltd and Presidian Holdings Pty Ltd of $5,541,000 (2020: $51,457,000) and in Maxxia (UK) Limited of $Nil (2020: $22,891,000) based on the assessment of their recoverable value. Subordinated loan receivable Consolidated Group Parent Entity Carrying value at start of the financial year New loans during year Specific credit loss allowance Carrying value at end of the financial year 2021 $’000 - 3,520 (3,520) - 2020 $’000 - 4,596 (4,596) - 2021 $’000 2020 $’000 - - - - - - - - The loan receivable is made up of advances to the joint venture with ML (“JV”, refer Note 6.3) as part of the working capital facility provided pursuant to the Group’s investment arrangement and formed part of the net investment in the JV. The loan was classified as a financial asset at amortised cost prior to the Group obtaining control on 31 December 2020 (refer to Note 6.1). During the period, the subordinated loan was assessed to be impaired and $3,520,000 (2020: $4,596,000) was expensed in the Statement of Profit and Loss. 6.3 INVESTMENT IN JOINT VENTURE Acquired Share of losses after income tax Carrying value at end of the financial year Consolidated Group Parent Entity 2021 $’000 337 (337) - 2020 $’000 337 (337) - 2021 $’000 2020 $’000 - - - - - - Until 31 December 2020, a subsidiary had a 50% interest in ML (JV), a company resident in the UK and the principal activity of which is provider of financing solutions and associated management services on motor vehicles. Under the contractual agreement, the Group together with the joint venture partner jointly controlled the economic activities and key decisions of the JV. The arrangement required unanimous consent for key strategic, financial and operating policies that affected the Group’s returns. The Group had 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 had an option to sell its interest to the Group during the same period. The interest in the JV was equity accounted in the financial statements. The Group’s share of losses exceeds its investment cost in the JV and accordingly, the excess is applied to the extent of the loan receivable from the JV that forms part of the net investment until it is reduced to zero, and thereafter 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 obtained control of the JV on 31 December 2020 (refer to Note 6.1). 91 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Information relating to the joint venture investment is set out below: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net liabilities The net liabilities of ML 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 The following are the JV’s financial results prior to obtaining control on 31 December 2020: Joint venture financial results Revenues Expenses Loss before income tax Income tax Loss after income tax Group’s share of loss after income tax Share of joint venture capital commitments Consolidated Group 2021 $’000 - - - - - - - 2020 $’000 16,155 121 16,276 23,013 11,665 34,678 (18,402) Consolidated Group 2021 $’000 - - - - 2020 $’000 (18,402) (9,201) - - Consolidated Group 2021 $’000 22,765 (24,069) (1,304) - 2020 $’000 5,186 (8,202) (3,016) - (1,304) (3,016) - - - - 92 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 6.4 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) 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 ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. 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 the financial information of the Closed Group: Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained earnings Statement of Comprehensive Income Revenue and other income Employee and director benefits expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Impairment Profit before income tax Income tax expense Profit / (losses) attributable to members of the parent entity Other comprehensive income Other comprehensive (loss) / income for the year after-tax Total comprehensive (loss) / income for the year Movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit / (loss) for the year Dividends paid Share buyback Capital reduction Lease transition Consolidated Group 2021 $’000 317,695 (94,532) (54,256) (36,986) (5,190) (7,056) (2,095) 2020 $’000 331,702 (93,827) (69,138) (43,261) (3,065) (6,781) (2,405) (13,182) (10,205) (5,623) (715) (9,695) 88,365 (29,471) 58,894 (5,005) (3,868) (74,348) 19,799 (26,504) (6,705) 438 59,332 (62) (6,767) 148,468 58,894 (23,369) - - - 232,072 (6,705) (59,591) (69,650) 54,561 (2,219) Retained earnings at the end of the financial year 183,993 148,468 93 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Assets under operating lease Inventory Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax asset Finance lease receivables Other financial assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Borrowings Lease liabilities Total current liabilities Non-current liabilities Provisions Borrowings Lease liabilities Deferred tax liability Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY 94 2021 $’000 83,457 35,567 1,534 49,761 7,767 2020 $’000 44,750 48,231 10,358 62,272 5,149 178,086 170,760 156,589 55,514 10,918 6,426 102,284 331,731 130,734 56,740 6,515 9,007 107,558 310,554 509,817 481,314 73,632 2,534 13,676 5,761 538 96,141 1,479 102,747 45,516 9,469 159,211 69,147 3,634 12,509 7,037 4,749 97,076 1,603 149,153 15,356 - 166,112 255,352 263,188 254,465 218,126 76,420 (5,948) 183,993 254,465 76,420 (6,762) 148,468 218,126 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 7 Unrecognised Items 7.1 COMMITMENTS Operating lease commitments The commitment in the 2020 period related to a non-cancellable property lease that was expected to commence in January 2023. During the 2021 period this lease was brought to account in the Statement of Financial Position as outlined within Note 3.5. Payable minimum lease payments – Not later than 12 months – Between 1 and 5 years – Greater than 5 years Current payables 7.2 CONTINGENT LIABILITIES Financial guarantees Guarantee provided for the performance of a contractual obligation not supported by term deposit Guarantees provided for obligations under P&A facilities Guarantee provided in respect of a working capital facility Guarantees provided in respect of property leases Cross company guarantees Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 - - - - - 14,770 39,604 54,374 - - - - - - - - Consolidated Group Parent Entity 2021 $’000 2020 $’000 2021 $’000 2020 $’000 11,550 14,862 11,359 4,256 473 42,500 11,550 14,088 10,768 5,603 448 42,457 - 14,255 11,036 - - - 13,908 10,768 - - 25,291 24,676 Class Action On 14 August 2018, a class action proceeding was commenced in the Federal Court against Davantage Group Pty Ltd (trading as “National Warranty Company”), a subsidiary of the Company, in relation to certain warranty products. Davantage Group Pty Ltd was acquired by the Company in February 2015 and the claim relates to certain warranties entered into between 1 July 2013 and 28 May 2015. A significant portion of the relevant period to which the claim relates is in respect of a time when the “National Warranty Company” was not owned by the MMS Group. The parties reached agreement to settle the matter with funds of $2 million paid by the Group which was fully provided for as at 30 June 2020. The settlement is without any admission of liability and was approved by the Federal Court of Australia on 5 February 2021. 95 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 8 Other Disclosures 8.1 RESERVES (a) Share-based payment reserve The reserve records amounts for the fair value of share-based payments granted and recognised as an employee benefits expense but not exercised. The balance in reserves representing share-based equity rights and options are transferred to retained earnings upon vesting. (b) Cash flow hedge reserve Revaluation - gross Deferred tax Balance at the end of the financial year Consolidated Group Parent Entity 2021 $’000 (213) (15) (228) 2020 $’000 (1,678) 390 (1,288) 2021 $’000 2020 $’000 - - - - - - The hedging reserve is used to record gains and losses on interest rate swaps that are designated and qualify as cash flow hedges. (c) Foreign currency translation reserve 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. (d) Acquisition reserve At 30 June 2020, the Company acquired Outside Equity Interest’s (OEI) remaining interest in Plan Management Partners Pty Ltd for $8,000,000. Given the Group already controlled Plan Management Partners Pty Ltd prior to acquiring the remaining equity interest, the remaining balance was accounted for as an equity transaction. The difference of $7,132,000 between the purchase price of $8,000,000 and the OEI prior to the transaction of $868,000 was recognised as an acquisition reserve. 8.2 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. INTEREST 8.3 Interest income is brought to account on an accrual basis. 8.4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost less accumulated depreciation and impairment loss provision. Cost includes expenditure directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. The useful lives and residual value of assets are reviewed and adjusted for impairment, if appropriate, at the end of the reporting period. 8.5 RELATED PARTY TRANSACTIONS Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2021 and 2020 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: Dividend revenue Aggregate amounts payable to entities within the wholly owned group at balance date: Current receivables Current payables 96 Consolidated Group Parent Entity 2021 $ 2020 $ 2021 $ 2020 $ - - - - - - 128,109,000 59,591,464 481,314 12,863,000 11,891,036 128,221,000 MMS ANNUAL REPORT 2021 8.6 AUDITOR’S REMUNERATION Remuneration of the auditor (Grant Thornton Audit Pty Ltd) of the parent entity for: Audit or review of the financial report of the entity and any other entity in the Consolidated Group Assurance related Remuneration of a network firm of the parent entity auditor: Audit or review of the financial statements (UK) Assurance related for non-statutory audit services No non-assurance related services were provided. Consolidated Group Parent Entity 2021 $ 2020 $ 2021 $ 2020 $ 306,000 301,200 264,400 157,970 183,018 8,565 179,813 10,009 - - - - - - - - 8.7 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED DURING THE YEAR The amended accounting standards and interpretations issued by the Australian Accounting Standards Board during the year that were mandatory were adopted except as outlined below. None of these amendments or interpretations adopted materially affected any of the amounts recognised or disclosures in the current or prior year. The following IFRS Interpretations Committee (IFRIC) and IFRS Interpretations Committee agenda decisions were not yet adopted during the year. IFRIC agenda decision on Software-as-a-Service (SaaS) arrangements The IFRIC has issued two final agenda decisions which impact SaaS arrangements: > Customer’s right to receive access to the supplier’s software hosted on the cloud (March 2019) – this decision considers whether a customer receives a software asset at the contract commencement date or a service over the contract term. > Configuration or customisation costs in a cloud computing arrangement (April 2021) – this decision discusses whether configuration or customisation expenditure relating to SaaS arrangements can be recognised as an intangible asset and if not, over what time period the expenditure is expensed. As at 30 June 2021, the Group has not yet completed its assessment of the impact of the IFRIC agenda decision. The Group expects to adopt this IFRIC agenda decision in its half-year financial statements ending on 31 December 2021. IFRS Interpretations Committee agenda decision on Costs necessary to sell Inventories (issued June 2021) AASB 102 Inventories does not define costs necessary to sell inventories when determining net realisable value. The agenda decision confirmed that an entity cannot limit the costs it includes to those that are only incremental in determining which of its costs are necessary to sell its inventories. As at 30 June 2021, the Group has not yet completed its assessment of the impact of the IFRS agenda decision however expects to adopt in its half-year financial statements ending on 31 December 2021. 8.8 ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE A new accounting standard AASB 17 Insurance Contracts has been issued but not mandatory for adoption in the year ended 30 June 2021. This Standard is first applicable to the Group for financial periods beginning 1 July 2023. AASB 17 requires all insurance contracts to be accounted for in a consistent manner and requires insurance obligations to be accounted for using current values. The Group is yet to undertake a detailed assessment of the impact of AASB 17 Insurance Contracts. However, based on the entity’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 2024 except for the classification of deferred acquisition costs which are likely to be reclassified against the unearned premium liability in the Statement of Financial Position. There are no other standards or interpretations that are not yet effective that are expected to have a material impact on the Group or Company. 97 MMS ANNUAL REPORT 2021Notes to the Financial StatementsFOR THE YEAR ENDED 30 JUNE 2021 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 8.9 EVENTS SUBSEQUENT TO THE REPORTING DATE Other than the below and the matters disclosed in this report, there were no material events subsequent to the reporting date. General At the date of this report, significant uncertainties remain in the economic environment and the impact of COVID-19 on the business sectors affecting the Group’s businesses. COVID-19 restrictions remain to various degrees across Australia, and in particular more stringently across some of our most populous cities, while they have eased across the UK, as at the date of this report. Accordingly, there is significant uncertainty to the condition of markets that the Group operates in that may affect the recoverable value of assets, adequacy of provisions and the financial cash flow assumptions used to assess the carrying value of non-current assets. Plan Tracker Acquisition On 1 July 2021, a wholly owned subsidiary within the Group acquired 100% of the issued capital of Plan Tracker Pty Ltd. Plan Tracker Pty Ltd provides plan management services under the National Disability Insurance Scheme (NDIS). RFS Retail Business Divestment Subsequent to 30 June 2021 on 23 August 2021, an agreement to sell Davantage Group Pty Ltd and Presidian Management Services Pty Ltd (the “Warranty business”) was entered into. The sale is expected to result in a loss on disposal of approximately $1.8m with $0.35m in estimated transaction costs. The sale will be recognised upon completion which is expected to occur in 1HFY2022. The following provides a summary of the assets and associated liabilities of the warranty business that is subject to the sale as at 30 June 2021: Current assets Cash and cash equivalents Trade and other receivables Promissory note receivable1 Prepayments Deferred acquisition costs Total current assets Non-current assets Property, plant and equipment Right-of-use asset Intangible assets Deferred acquisition costs Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Provisions Unearned premium liability Lease liabilities Total current liabilities Non-current liabilities Provisions Unearned premium liability Total non-current liabilities Total liabilities Net assets 1 Promissory note receivable from the Group. 98 Consolidated Group Note 2021 $’000 3.7 3.7 3.7 3.7 20,513 2,474 10,553 48 5,218 38,806 17 68 186 6,912 268 7,451 46,257 1,594 841 19,142 77 21,654 60 22,748 22,808 44,462 1,795 MMS ANNUAL REPORT 2021 Directors’ Declaration The Directors are of the opinion that: 1. the financial statements and notes on pages 42 to 98 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 Company and Group’s financial Note 1 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). position as at 30 June 2021 and financial performance for the financial year ended on that date; and This declaration is made in accordance with a resolution of the Directors of McMillan Shakespeare Limited. 2. there are reasonable grounds to believe that the Company and Group 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 6.4 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 6.4. Helen Kurincic Chair Mike Salisbury Managing Director & Chief Executive Officer 24 August 2021 Melbourne, Australia 99 MMS ANNUAL REPORT 2021Independent Audit Report AS AT 30 JUNE 2021 Collins Square, Tower 5 727 Collins Street Melbourne Victoria 3008 Correspondence to: GPO Box 4736 Melbourne Victoria 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report To the Members of McMillan Shakespeare Limited Report on the audit of the financial report Opinion We have audited the financial report of McMillan Shakespeare Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statements of financial position as at 30 June 2021, the consolidated statements of profit or loss and other comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its performance for the year ended on that date; and b complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. #5940900v3 100 MMS ANNUAL REPORT 2021 Independent Audit Report AS AT 30 JUNE 2021 2 Key audit matter How our audit addressed the key audit matter Impairment of goodwill and intangible asset balance (Note 3.1) At 30 June 2021, the Group has $87,862,000 of goodwill and $16,343,000 in other intangible assets (excluding software development costs) contained within separate cash generating units (CGUs). During the year the Group recognised an impairment against goodwill for the following GCU’s:  CLM Fleet Management of $1,962;000; and  Maxxia Limited of $10,575,000 (Maxxia Limited’s future earnings did not support the carrying amount of the goodwill recognised of $10,575,000 and therefore this was impaired to zero). AASB 136 Impairment of Assets requires management to perform an impairment test on goodwill and other indefinite life intangibles at least annually, as well as on intangible assets with finite useful lives if indicators of impairment are identified. We consider this a key audit matter due to the nature of the balances and the judgments required in preparing the value-in-use (VIU) models and due to the judgement in determining CGUs, impairment indicators and triggers. This involves consideration of the future results of the business, growth and the discount rates applied. Our procedures included, amongst others  assessing management’s determination of CGUs based on our understanding of how management monitors the entity’s operations and makes decisions about groups of assets that generate independent cash flows;  evaluating management’s process for the preparation and review of the impairment assessment VIU models, taking into consideration the impacts of sector specific issues;  reviewing the impairment assessment VIU models for compliance with AASB 136;  reviewing the completeness and accuracy of the underlying data used in the impairment assessment VIU models;  utilising internal valuation specialists to assess the appropriateness of the valuation methodology;  evaluating the mathematical accuracy of the VIU model calculations;  assessing the key growth rate assumptions by comparing them to historical results, economic or industry forecasts and the discount rate by reference to the cost of capital for the relevant components and the Group by comparing to historical results, and considering the Group’s historical ability to forecast accurately;  performing sensitivity analyses in relation to the cash flow projections, discount and growth rate assumptions on CGU’s with a higher risk of impairment. The impairment analysis considered the individual and collective impacts; and  assessing the adequacy of the Group’s disclosures within the financial statements. Warranty revenue and unearned premium liability (Note 3.7) The warranty area of the business derives revenues through the gross wholesale premiums obtained from dealers entering into the sale of warranty products to used vehicle consumers. Revenue is recognised over the term of the warranty in line with the profile of expected future claims. This gives rise to the unearned premium liability. At year-end this balance was a liability of $41,890,000. We consider this a key audit matter due to the inherent subjectivity over the nature of the estimations used in determining the unearned premium liability. Our procedures included, amongst others:  verifying the mathematical accuracy of the unearned premium liability and warranty revenue calculations to ensure the revenue profile assumptions have been correctly applied;  reviewing the completeness and accuracy of the underlying data used in the calculation;  assessing the reasonableness of management’s key assumptions in relation to the revenue profile, which is based on the profile of future claim costs by; o analytically reviewing the claims patterns during the year to determine the appropriateness of the percentages in the unearned premium model; and o selecting a sample of claims in the current year and agreeing their details to supporting documentation and payments;  testing the accuracy of the gross premiums used in the unearned premium calculation by selecting a sample of gross premiums and agreeing amounts and key terms to supporting contracts; and  assessing the adequacy of the Group’s disclosures within the financial statements. Information other than the financial report and auditor’s report thereon The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2021, but does not include the financial report and our auditor’s report thereon. 101 MMS ANNUAL REPORT 2021 Independent Audit Report AS AT 30 JUNE 2021 3 Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the financial report The Directors of the Group are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/auditors_responsibilites/ar1_2020.pdf. This description forms part of our auditor’s report. Report on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 18 to 36 of the Directors’ report for the year ended 30 June 2021. In our opinion, the Remuneration Report of McMillan Shakespeare Limited, for the year ended 30 June 2021 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Group are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Grant Thornton Audit Pty Ltd Chartered Accountants Darren Scammell Partner – Audit & Assurance Melbourne, 24 August 2021 M M S A N N U A L R E P O R T 2 0 2 1 102 Auditor’s Independence Declaration AS AT 30 JUNE 2021 Collins Square, Tower 5 727 Collins Street Melbourne VIC 3008 Correspondence to: GPO Box 4736 Melbourne VIC 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of McMillan Shakespeare Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of McMillan Shakespeare Limited (the Company) and its subsidiaries (the Group) for the year ended 30 June 2021, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. Grant Thornton Audit Pty Ltd Chartered Accountants Darren Scammell Partner – Audit & Assurance Melbourne, 24 August 2021 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. M M S A N N U A L R E P O R T 2 0 2 1 103 Shareholder Information Additional information required by the ASX Listing Rules and not disclosed elsewhere in this Annual Report is set out below: SUBSTANTIAL SHAREHOLDINGS As at 30 July 2021 the number of shares held by substantial shareholders and their associates is as follows: Shareholder HSBC Custody Nominees (Aust) Ltd JP Morgan Nominees Australia Limited Citicorp Nominees Limited Chessari Holdings Pty Limited2 Asia Pac Technology Pty Ltd3 Number of Ordinary Shares Percentage of Ordinary Shares 1 28,227,083 9,859,180 7,633,731 6,050,941 3,068,025 36.48 12.74 9.87 7.82 3.96 1 As at 30 July 2021, 77,381,107 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. NUMBER OF SHARE & OPTION HOLDERS As at 30 July 2021, 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 $13.45 and expiring on 30 September 2021 VOTING RIGHTS Number of Holders 4,933 2 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 30 July 2021, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options Number of Holders of Ordinary Shares & Options 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ 3,124 1,413 225 151 22 As at 30 July 2021 there were 265 shareholders who held less than a marketable parcel of 40 fully paid ordinary shares in the Company. ON-MARKET BUYBACK The Company does not have a current on-market buy-back. 104 MMS ANNUAL REPORT 2021 Shareholder Information TOP 20 SHAREHOLDERS As at 30 July 2021, the details of the top 20 shareholders in the Company are as follows: No. Name 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 JP Morgan Nominees Australia Limited Citicorp Nominees Limited Chessari Holdings Pty Limited2 Asia Pac Technology Pty Ltd3 CS Third Nominees Pty Limited UBS Nominees Pty Ltd National Nominees Limited Ann Leslie Ryan BNP Paribas Noms Pty Ltd Milton Corporate Limited BNP Paribas Nominees Pty Ltd MOHL Invest Pty Ltd AFICO Pty Ltd NWC Group Pty Ltd Mr Kenneth Joseph Hall HSBC Custody Nominees (Australia) Limited BNP Paribas Nominees Pty Ltd Mod Enterprises Pty Ltd Totals: Top 20 holders of Issued Capital Total Remaining Holders Balance Number of Ordinary Shares 28,227,083 9,859,180 7,633,731 6,050,941 3,068,025 2,457,774 2,132,982 1,943,961 1,008,418 999,993 803,532 723,575 590,000 495,625 437,781 250,000 190,375 134,341 131,169 129,619 67,268,105 10,113,002 Percentage of Ordinary Shares 1 36.48 12.74 9.87 7.82 3.96 3.18 2.76 2.51 1.30 1.29 1.04 0.94 0.76 0.64 0.57 0.32 0.25 0.17 0.17 0.17 86.94 13.06 1 As at 30 July 2021, 77,381,107 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. UNQUOTED SECURITIES 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 $13.45 and expiring on 30 September 2021 12,500 2 Options do not carry a right to vote 105 MMS ANNUAL REPORT 2021This page has intentionally been left blank. 106 MMS ANNUAL REPORT 2021McMillan Shakespeare Limited ABN 74 107 233 983 ASFL No. 299054 Level 21, 360 Elizabeth Street Melbourne Victoria 3000 www.mmsg.com.au Corporate Directory Registered Office Level 21, 360 Elizabeth Street Melbourne Victoria 3000 Tel: +61 3 9097 3000 Fax: +61 3 9097 3060 www.mmsg.com.au Company Auditor Grant Thornton Audit Pty Ltd Collins Square, Tower 5 727 Collins Street Melbourne Victoria 3008 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Tel: +61 3 9415 4000 www.mmsg.com.au 107 McMillan Shakespeare Limited ABN 74 107 233 983 ASFL No. 299054 Level 21, 360 Elizabeth Street Melbourne Victoria 3000 www.mmsg.com.au 

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