Cash Converters International Limited
ABN 39 069 141 546
Half-Year Report
For the half-year ended 31 December 2020
Directors’ report For the half-year ended 31 December 2020
The directors of Cash Converters International Limited (the Company) submit the following report of the Company and its subsidiaries (the Group) for the half-year ended 31 December 2020. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:
Directors
The following persons held office as directors of the Company during or since the end of the half-year:
Mr Jason Kulas Non-Executive Chairman (appointed 28 August 2020) Mr Peter Cumins Executive Deputy Chairman Mr Sam Budiselik Managing Director (appointed 18 December 2020) Ms Julie Elliott Non-Executive Director Mr Lachlan Given Non-Executive Director Mr Robert Hines Non-Executive Director Mr Kevin Dundo Non-Executive Director (retired 23 November 2020) Mr Stuart Grimshaw Non-Executive Chairman (resigned 28 August 2020)
Dividends
Amount per Franked Record date Payable date security percentage 2021 interim dividend 1.00 cent 100% 25 March 2021 14 April 2021 (declared, not provided at 31 December 2021)
On 28 August 2020 the directors of the Company announced that there would be no final dividend in respect of the financial year ended 30 June 2020.
There is no provision for the interim dividend in respect of the half-year ended 31 December 2020. Provisions for dividends to be paid by the Company are recognised in the Consolidated Balance Sheet as a liability and a reduction in retained earnings when the dividend has been declared.
A Dividend Reinvestment Plan (DRP) was in operation as from the final dividend for 2016 and applies for all subsequent dividends unless notice is given for its suspension or termination. The last date for receipt of an election notice for participation in the Interim 2021 ordinary DRP is 26 March 2021.
Review of operations
The Cash Converters International Limited Group is diverse, generating revenues from franchising, consumer retail store operations, personal finance and vehicle finance and is supported by a corporate head office in Perth, Western Australia. The Company operates in Australia and the United Kingdom and has an equity interest of 25% in Cash Converters New Zealand. There is a franchise presence in a further 13 countries around the world.
Impact of COVID-19
As noted in the 30 June 2020 Annual Report, the Group has continued to focus on the health and wellbeing of its employees and customers. The ability to service customers while doing so and remain profitable demonstrates resilience and an ability to operate effectively during periods of significant uncertainty and change.
The impact of COVID-19 on operations was experienced from mid-March 2020 when the closure of non-essential businesses and the implementation of stay-at-home requirements began. During the year ended 30 June 2020 (FY 2020) all Australian Corporate stores remained open for business while observing the necessary hygiene and social distancing measures.
Cash Converters International Limited 2 Half-year report for the half-year ended 31 December 2020 Directors’ report For the half-year ended 31 December 2020
During the half-year under review the Group experienced lock-down protocols most significantly in Victoria where store closures extended well over 100 days of the half-year period. Shorter but nonetheless disruptive store closure periods have been experienced in South Australia during the half-year reporting period. Our franchise operation in the United Kingdom has been significantly affected by national lockdowns, implemented in a bid by the government to eradicate the virus, which has resulted in our stores operating under restrictive measures. These restrictions have resulted in franchise fees being discounted and waived to support stores being able to reopen fully at a future date.
It is worth noting that the Group has not been eligible for and has made no direct claims under the JobKeeper Payment scheme allowances. Economic support packages provided to affected workers, businesses and the broader community had a noticeable impact on business.
A reduction in credit demand due to COVID-related Government stimulus and early superannuation access, resulted in the Group’s loan book values decreasing throughout the second half of FY 2020, a trend that continued into the first quarter of FY 2021 but has since reversed. Whilst all loan books are rebuilding, the impact softened performance in the first half of FY 2021, when compared to the previous corresponding period.
Despite the progress made domestically and abroad towards limiting the spread of COVID-19, significant uncertainty remains. There is prevailing uncertainty with respect to forward-looking statements and there has been a focus on presenting appropriate disclosure with respect to business impacts, risks and uncertainties and key assumptions.
Key financial performance highlights
The Group recorded a net profit after tax for the half-year ended 31 December 2020 of $7.693 million (half-year ended 31 December 2019 net loss after tax: $19.397 million).
A summary of consolidated revenues and results by significant segment is set out below:
Operating basis 1 As reported basis Segment revenues Segment EBITDA 2 Segment EBITDA 2 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 31 Dec 20 31 Dec 19 $’000 $’000 $’000 $’000 $’000 $’000 Personal finance 34,405 58,433 17,684 19,093 17,684 19,093 Vehicle financing 8,232 10,572 6,411 3,134 6,411 3,134 Store operations 48,141 63,580 7,341 13,298 7,341 13,298 Franchise operations 7,523 9,924 5,214 6,953 5,214 6,953 Totals before head office costs 98,301 142,509 36,650 42,478 36,650 42,478 Head office (12,017) (12,125) (12,017) (55,042) Totals after head office costs 24,633 30,353 24,633 (12,564) Depreciation, amortisation and (8,282) (8,652) impairment Finance costs (5,882) (6,529) Profit / (loss) before tax 10,469 (27,745) Tax (expense) / benefit (2,776) 8,348 Profit / (loss) for the half-year 7,693 (19,397)
1 The operating results are presented net of the significant expense items incurred in the previous corresponding period and reconciled below that were directly associated with the settlement of class action litigation claims, to aid the comparability and usefulness of the financial information reflecting the underlying performance of the business. This information should be considered in addition to, but not instead of or superior to, our financial statements prepared in accordance with IFRS. The operating results presented may be determined or calculated differently by other companies, limiting the usefulness of those measures for external comparative purposes. 2 The Company reports EBIT calculated as earnings before interest expense and tax and EBITDA calculated as EBIT before depreciation and amortisation. EBIT and EBITDA are non-IFRS measures and are alternative performance measures reported in addition to but not as a substitute for the performance measures reported in accordance with IFRS. These measures focus directly on operating earnings and enhance comparability between periods.
Cash Converters International Limited 3 Half-year report for the half-year ended 31 December 2020 Directors’ report For the half-year ended 31 December 2020
31 Dec 2020 31 Dec 2019 $’000 $’000 Operating cash inflow / (outflow) 8,598 (15,549) Basic earnings / (loss) per share (cents) 1.25 cents (3.15 cents)
To provide a meaningful comparison to the prior period, the table below highlights the effect of costs relating to the Class Action settlement and other costs of a non-recurring nature during the previous corresponding period to show the underlying operational performance of the Company.
31 Dec 2020 31 Dec 2019 $’000 $’000 Net profit / (loss) after tax from continuing operations 7,693 (19,397)
Normalisation adjustments: Class action settlement - 42,500 Class action legal fees - 416 Tax effect of adjustments - (12,875) Operating profit 7,693 10,644
Management has noted previously the impact of reduced credit demand due to COVID-related Government stimulus and early superannuation access. Loan book values decreased significantly throughout the second half of FY 2020, a trend that continued into the first quarter of FY 2021. The second quarter has seen a return to growth in the loan books albeit a net negative period to period comparison as reported against 30 June 2020.
31 Dec 20 30 Jun 20 Change $'000 $'000 Gross Loan Books 151,057 159,997 -5.6% Comprising: Personal finance 103,553 101,690 1.8% Vehicle finance 47,503 58,284 -18.5%
Vehicle finance customer accounts represent longer tenured loan agreements and have not recovered at the same pace as personal finance with a continued trend of early loan settlements due to customer refinancing patterns.
Interest and fees earned on personal and vehicle finance has declined markedly against the previous corresponding period with the significant step change in loan book volume. The impact to EBITDA is mitigated by the significant reduction in net bad debt expense. While some of this is a volume driven dynamic in the expected credit loss provision, it is also the case that credit origination has been disciplined during this loan book recovery period reflecting our ongoing investment in data analytics, credit risk modelling and assessor training.
Store trading retail gross profit margins have continued to trend strongly, evidencing discipline in inventory management. While Victoria lagged the performance trend, the balance sheet reflects the growth in inventory with a return to normal trading conditions across the balance of Australia. The pawnbroking loan book recovered significantly during the half-year despite the lag evidenced in Victoria with the extended lock down and this contributed strongly to the store operation result.
Delivery on our strategic objectives has been evidenced with the acquisition of our Morley (Western Australia) and Melbourne City (Victoria) franchise stores which are included in our period end balance sheet based on a provisional assessment of the fair value and goodwill arising on acquisition. The stores have traded positively from date of acquisition.
Cash Converters International Limited 4 Half-year report for the half-year ended 31 December 2020 Directors’ report For the half-year ended 31 December 2020
Within the Australian franchise stores the experience has mirrored that of our store operations with the impact of COVID-19 closures impacting Victoria most severely. Franchise fee income has in turn been impacted albeit earnings impact has been mitigated by the international distribution of franchises and relatively low concentration risk to any geography.
The wholly owned master franchise operation in the United Kingdom operated under restrictive COVID-19 government mandated measures resulting in significantly reduced franchise fees generated relative to the previous corresponding period. Rationalisation in operational efficiency in the prior year has meant cost savings achieved mitigated the EBITDA impact of the revenue reduction.
It was noted in the 2020 Annual Report that the New Zealand operations had responded during FY 2020 to changes in consumer credit legislation with the introduction of an alternative complying personal loan product. Results achieved to date are below the previous corresponding period partly due to COVID-19 restrictions and partly expected with the legislative changes highlighted. The master franchise has reported a promising emerging result from the new personal loan product.
Financial position
Summarised financial position 31 Dec 2020 30 Jun 2020 $’000 $’000 Cash and cash equivalents 91,256 106,548 Net loan receivables 125,536 129,616 Trade and other receivables 9,802 11,630 Inventories 19,018 15,221 Intangible assets 128,840 128,338 Other assets 93,837 88,481 Total assets 468,289 479,834
Borrowings 69,054 87,792 Other liabilities 84,775 85,671 Total liabilities 153,829 173,463
Total equity 314,460 306,371
Gearing (net debt/equity) -6.7% -5.6%
The Group closed the half-year with a strong balance sheet. Cash and cash equivalents of $91.256 million result from net cash movement of $15.180 million (2019: $22.371 million) with:
• operational cash flow generated of $8.598 million (2019: $15.549 million used) • net repayment of borrowings of $19.000 million (2019: $2.000 million net drawn) • cash flows used in investing activities of $1.378 million (2019: $1.479 million)
Operational cash flow generated in the current period includes the settlements on loan books and decreased outgoings experienced, particularly in the first quarter.
Undrawn and available securitisation facility funding remains of $79.750 million to fund SACC, MACC and GLA receivables. The facility maturity date is 18 December 2022 meaning the Group remains well funded for the foreseeable future and is well positioned for the ongoing recovery in lending activity.
Net loan receivables reflect reduced demand experienced during the first quarter of the financial year with a recovery trend in the second quarter.
Cash Converters International Limited 5 Half-year report for the half-year ended 31 December 2020 Directors’ report For the half-year ended 31 December 2020
Although the overall expected credit loss provision as a percentage of the gross loan book has decreased from the 30 June 2020 balance date from 19% to 16.9%, the Group has continued to be cautious in the assessment of expected credit loss. A specific provision has been included for accounts reported as being in hardship to reflect the uncertainty and increased credit risk for this customer cohort. The Group recorded an increase in customers experiencing financial hardship through the peak of the COVID-19 impact period in Australia and management remain cautious with respect to the current outlook for these accounts in the absence of clear evidence of improvement. The provision assessment has required the application of judgement as the underlying data trend seen is potentially impacted by government stimulus which is not anticipated to endure beyond March 2021. The outlook in forecast unemployment has improved significantly since the June year-end although management remain concerned with the potential for continued short-term volatility given the rapid change in outlook in only a few months. Noting the uncharacteristic macro-economic environment in which originations have occurred during the reporting period the assessment has been informed by stress testing alternative scenarios and assessing model outcomes arising from extended data windows. The aged tenure of the accounts held at reporting date is lower than prior periods given the rebuild in the book and the Company has focused on improving credit quality as outlined above.
Inventories increased since 30 June 2020 with a return to longer term trend retail trade activity and includes an appropriate assessment of obsolescence provision.
Consistent with previous financial years, the carrying value of intangible assets has been assessed for and recorded net of any required impairment charge. Included in the assessment of the carrying value of goodwill is the application of judgement with respect the likelihood of scope and form as well as timing of future possible regulatory changes on which there remains uncertainty, as well as the potential impact of COVID-19. At the half- year end reporting period, management have included in the impairment testing assumptions a higher probability of regulatory change than was assumed at the 30 June 2020 year end. As a result there has been a significant reduction in the “headroom” between the value in use assessed carrying value and the reported book value although no impairment provision is required. Additional disclosure has been provided to illustrate sensitivity impacts to this headroom.
Included in other assets is a right-of-use asset generated with the introduction of AASB 16 Leases, with recognition of a corresponding lease liability, and the carrying value of the investment in the New Zealand operation inclusive of the provision impairment. The increase in the half-year period reflects changes in leases including from franchise store acquisitions.
Outlook
Cash Converters’ business model and integrated, multi-channel store and online network is unique in its sector and provides the Group with a significant competitive advantage. A robust pipeline of potential store acquisition and development opportunities, supported by a strong balance sheet and cash flow, provide the Group with a clear runway to grow its business in a measured and disciplined way, in markets that it knows and with customers it understands.
With headroom and tenure in its securitisation facility and strong levels of available cash, the Group is well positioned to benefit from the anticipated increase in consumer spending and general economic recovery.
Subsequent events
There has not been any other matter or circumstance other than that referred to in the financial statements or notes thereto, that has arisen since the end of the half-year, that has significantly affected or may significantly affect the operations of the Group.
Auditor’s independence declaration
The auditor’s independence declaration is included on page 25 of the half-year financial report.
Cash Converters International Limited 6 Half-year report for the half-year ended 31 December 2020 Directors’ report For the half-year ended 31 December 2020
This directors’ report is signed in accordance with a resolution of directors made pursuant to s306(3) of the Corporations Act 2001.
On behalf of the directors
Sam Budiselik Director
Perth, Western Australia 24 February 2021
Cash Converters International Limited 7 Half-year report for the half-year ended 31 December 2020 Condensed consolidated statement of profit or loss and other comprehensive income For the half-year ended 31 December 2020
Notes 31 December 31 December 2020 2019 $’000 $’000 Franchise fee revenue 5,971 7,968 Financial services interest revenue 2 56,758 90,163 Sale of goods 2 34,032 42,972 Other revenues 2 1,667 1,611 Total revenue 98,428 142,714
Financial services cost of sales (9,115) (32,799) Cost of goods sold (17,698) (24,098) Other cost of sales (745) (1,007) Total cost of sales (27,558) (57,904)
Gross profit 70,870 84,810
Employee expenses 3 (31,536) (37,628) Administrative expenses (3,354) (4,780) Advertising expenses (3,600) (5,069) Occupancy expenses 3 (2,065) (2,275) Class Action settlement expense 3 - (42,500) Depreciation and amortisation expense 3 (8,282) (8,652) Other expenses (6,779) (6,966) Finance costs 3 (5,882) (6,529) Share of net profit of equity accounted investments 1,097 1,844 Profit / (loss) before income tax 10,469 (27,745) Income tax (expense) / benefit (2,776) 8,348 Profit / (loss) for the period 7,693 (19,397)
Other comprehensive income Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign operations (139) 916 Other comprehensive income / (loss) for the period (139) 916 Total comprehensive profit / (loss) for the period 7,554 (18,481)
Earnings / (loss) per share Basic (cents per share) 1.25 (3.15) Diluted (cents per share) 1.20 (3.15)
The accompanying notes form an integral part of the condensed consolidated statement of profit or loss and other comprehensive income.
Cash Converters International Limited 8 Half-year report for the half-year ended 31 December 2020 Condensed consolidated statement of financial position As at 31 December 2020
Notes 31 December 30 June 2020 2020 $’000 $’000 Current assets Cash and cash equivalents 6 91,256 106,548 Trade and other receivables 7 6,156 6,700 Loan receivables 8 96,444 93,687 Inventories 19,018 15,221 Prepayments 6,601 4,959 Current tax receivable 2,061 1,425 Total current assets 221,536 228,540
Non-current assets Trade and other receivables 7 3,646 4,930 Loan receivables 8 29,092 35,929 Plant and equipment 4,413 4,628 Right-of-use assets 56,682 50,523 Deferred tax assets 15,678 18,181 Goodwill 9 108,849 106,967 Other intangible assets 19,991 21,371 Prepayments 1,402 2,129 Investments in associates 7,000 6,636 Total non-current assets 246,753 251,294
Total assets 468,289 479,834
Current liabilities Trade and other payables 14,351 23,316 Lease liabilities 6,916 6,922 Borrowings 10 48,392 60,618 Provisions 8,291 8,055 Total current liabilities 77,950 98,911
Non-current liabilities Lease liabilities 53,784 46,121 Borrowings 10 20,662 27,174 Provisions 1,433 1,257 Total non-current liabilities 75,879 74,552
Total liabilities 153,829 173,463
Net assets 314,460 306,371
Equity Issued capital 11 248,714 248,714 Reserves 7,464 7,068 Retained earnings 58,282 50,589 Total equity 314,460 306,371
The accompanying notes form an integral part of the condensed consolidated statement of financial position.
Cash Converters International Limited 9 Half-year report for the half-year ended 31 December 2020 Condensed consolidated statement of changes in equity For the half-year ended 31 December 2020
Issued Foreign Share- Retained Total capital currency based earnings translation payment reserve reserve $’000 $’000 $’000 $’000 $’000 Balance at 1 July 2019 248,714 6,354 884 60,900 316,852 Loss for the period - - - (19,397) (19,397) Exchange differences arising on translation of foreign operations - 916 - - 422 Total comprehensive income for the period - 916 - (19,397) (18,481) Share-based payments - - 608 - 608 Balance at 31 December 2019 248,714 7,270 1,492 41,503 298,979
Balance at 1 July 2020 248,714 6,730 338 50,589 306,371 Profit for the period - - - 7,693 7,693 Exchange differences arising on translation of foreign operations - (139) - - (139) Total comprehensive income for the period - (139) - 7,693 7,554 Share-based payments - - 535 - 535 Balance at 31 December 2020 248,714 6,591 873 58,282 314,460
The accompanying notes form an integral part of the condensed consolidated statement of changes in equity.
Cash Converters International Limited 10 Half-year report for the half-year ended 31 December 2020 Condensed consolidated statement of cash flows For the half-year ended 31 December 2020
Notes 31 December 31 December 2020 2019 $’000 $’000 Cash flows from operating activities Receipts from customers 63,379 100,534 Payments to suppliers and employees (74,442) (85,051) Payment for Class Action settlement 3 (10,000) (32,500) Interest received 209 339 Interest received from loans 31,887 37,942 Net decrease / (increase) in loans advanced 4,387 (28,126) Interest and costs of finance paid (5,873) (6,522) Income tax paid (949) (2,165) Net cash flows provided by / (used in) operating activities 8,598 (15,549)
Cash flows from investing activities Acquisition of intangible assets (650) (2,312) Proceeds on disposal of plant and equipment 31 244 Purchase of plant and equipment (539) (300) Payments for acquired businesses 12 (3,255) - Instalment credit loans repaid by franchisees 2,279 889 Return on equity investment 756 - Net cash flows (used in) investing activities (1,378) (1,479)
Cash flows from financing activities Proceeds from borrowings 35,500 85,250 Repayment of borrowings (54,500) (87,250) Repayment of lease liabilities (3,400) (3,343) Net cash flows (used in) financing activities (22,400) (5,343)
Net (decrease) in cash and cash equivalents (15,180) (22,371) Cash and cash equivalents at the beginning of the period 106,548 81,101 Effects of exchange rate changes on the balance of cash held in foreign currencies (112) 634 Cash and cash equivalents at the end of the period 6 91,256 59,364
The accompanying notes form an integral part of the condensed consolidated statement of cash flows.
Cash Converters International Limited 11 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
1. Significant accounting policies
(a) Basis of preparation
The condensed consolidated financial statements have been prepared on the basis of historical cost, except for the revaluation of certain non-current assets and financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted.
The accounting policies and methods of computation adopted in the preparation of the half-year financial report are consistent with those adopted and disclosed in the Company’s annual financial report for the financial year ended 30 June 2020, except for the impact of the Standards and Interpretations described below. These accounting policies are consistent with Australian Accounting Standards and with International Financial Reporting Standards.
Changes to presentation Certain classifications on the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows and notes to the consolidated financial statements have been reclassified. The Group believes that this will provide more relevant information to stakeholders. The comparative information has been reclassified accordingly.
(b) Statement of compliance
The half-year financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 and AASB 134 Interim Financial Reporting. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. The half-year report does not include notes of the type normally included in an annual financial report and should be read in conjunction with the most recent annual financial report.
(c) Changes to accounting policies
New and amended Accounting Standards that are effective for the current period
The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current half-year. There were no adjustments to the amounts recognised in the financial report as a result of adopting these new and revised Standards and Interpretations.
(d) Rounding
The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument, amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.
Cash Converters International Limited 12 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
2. Revenue
31 December 31 December 2020 2019 $’000 $’000 Financial services interest revenue Personal loan interest and establishment fees 33,558 56,703 Pawnbroking fees 11,898 15,840 Cash advance fee income 2,916 7,248 Vehicle loan interest and establishment fees 8,229 10,166 Other financial services revenue 157 206 56,758 90,163 Sale of goods Retail sales 34,032 42,794 Vehicle trade sales - 178 34,032 42,972 Other revenue Bank interest 127 217 Other vehicle revenue - 198 Income from subleasing - 150 Other revenue 1,540 1,046 1,667 1,611
3. Expenses
Financial services cost of sales Net bad and doubtful debt expense 2,362 23,752 Commissions 4,298 6,665 Other financial services cost of sales 2,455 2,382 9,115 32,799 Employee expenses Employee benefits 28,495 34,467 Share-based payments 536 608 Superannuation expense 2,505 2,553 31,536 37,628 Occupancy expenses Rent 134 105 Outgoings 965 1,069 Other 966 1,101 2,065 2,275 Depreciation and amortisation expense Depreciation 5,943 5,890 Amortisation 2,326 2,513 Loss on write down of assets 13 249 8,282 8,652 Finance costs Interest 3,729 4,274 Interest expense on lease liabilities 2,153 2,255 5,882 6,529
Cash Converters International Limited 13 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
3. Expenses (continued)
Class Action settlement expense On 21 October 2019, the Company announced that it had reached a settlement in relation to the Lynch Proceeding, under the terms of which the Company paid a total of $42.500 million ($32.500 million in November 2019 and $10.000 million in September 2020) into a fund for distribution to members of the class.
4. Segment information
The Group’s operating segments are organised and managed separately according to the nature of their operations. Each segment represents a strategic business unit that provides different services to different categories of customer. The Chief Executive Officer / Managing Director (chief operating decision maker) monitors the operating results of the business units separately for the purpose of making decisions about resource allocation and performance assessment. The Group’s reportable segments under AASB 8 Operating Segments are therefore as follows:
Franchise operations This involves the sale of franchises for the retail sale of second-hand goods and the sale of master licenses for the development of franchises in countries around the world.
Store operations This segment involves the retail sale of second-hand goods, cash advance and pawnbroking operations at corporate owned stores in Australia.
Personal finance This segment comprises the Cash Converters Personal Finance personal loans business and Mon-E, which is responsible for providing the internet platform and administration services for the Cash Converters network in Australia to offer small cash advance loans to customers.
Vehicle financing This segment comprises Green Light Auto Group Pty Ltd, which provides motor vehicle finance.
The accounting policies of the reportable segments are the same as the Group’s accounting policies. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under review.
Segment profit represents the profit earned by each segment without the allocation of central administration costs and directors’ salaries, interest income and expense in relation to corporate facilities and tax expense. This is the measure reported to the Managing Director and Chief Executive Officer (chief operating decision maker) for the purpose of resource allocation and assessment of segment performance.
Personal Vehicle Store Franchise Corporate Total finance financing operations operations head office $’000 $’000 $’000 $’000 $’000 $’000 Half-year ended 31 December 2020 Interest revenue (i) 34,953 8,232 17,326 157 - 60,668 Other revenue - - 34,178 7,956 - 42,134 Gross revenue 34,953 8,232 51,504 8,113 - 102,802 Less inter-company sales (548) - (3,363) (590) - (4,501) Segment revenue 34,405 8,232 48,141 7,523 - 98,301 External interest revenue (ii) - - - - 127 127 Total revenue 34,405 8,232 48,141 7,523 127 98,428
Cash Converters International Limited 14 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
4. Segment information (continued)
Personal Vehicle Store Franchise Corporate Total finance financing operations operations head office $’000 $’000 $’000 $’000 $’000 $’000 Half-year ended 31 December 2020 EBITDA (iii) 18,064 6,411 6,258 5,917 (12,017) 24,633 Less inter-company eliminations (380) - 1,083 (703) - - Segment EBITDA 17,684 6,411 7,341 5,214 (12,017) 24,633 Depreciation and amortisation (305) (237) (4,438) (276) (3,026) (8,282) EBIT 17,379 6,174 2,903 4,938 (15,043) 16,351 Interest expense (2,513) (1,325) (1,853) (13) (178) (5,882) Profit / (loss) before tax 14,866 4,849 1,050 4,925 (15,221) 10,469 Income tax expense (2,776) Profit for the period 7,693
Half-year ended 31 December 2019 Interest revenue (i) 59,696 10,196 26,244 631 - 96,767 Other revenue - 376 42,677 14,178 - 57,231 Gross revenue 59,696 10,572 68,921 14,809 - 153,998 Less inter-company sales (1,263) - (5,341) (4,885) - (11,489) Segment revenue 58,433 10,572 63,580 9,924 - 142,509 External interest revenue (ii) - - - - 205 205 Total revenue 58,433 10,572 63,580 9,924 205 142,714
EBITDA (iii) 20,127 3,130 11,810 7,411 (55,042) (12,564) Less inter-company eliminations (1,033) 4 1,487 (458) - - Segment EBITDA 19,094 3,134 13,297 6,953 (55,042) (12,564) Depreciation and amortisation (274) (158) (4,946) (451) (2,823) (8,652) EBIT 18,820 2,976 8,351 6,502 (57,865) (21,216) Interest expense (2,933) (1,410) (2,020) (49) (117) (6,529) Loss before income tax 15,887 1,566 6,331 6,453 (57,982) (27,745) Income tax benefit 8,348 Loss for the period (19,397)
(i) Interest revenue comprises personal loan interest cash advance fee income, pawnbroking interest from customers and commercial loan interest from third parties (ii) External interest is interest received on bank deposits (iii) EBITDA is earnings before interest, tax, depreciation, amortisation and impairment
31 December 30 June 2020 2020 $’000 $’000 Group assets by reportable segment Personal finance 187,786 196,915 Vehicle financing 44,294 53,100 Store operations 111,920 96,693 Franchise operations 15,583 15,609 Total of all segments 359,583 362,317 Unallocated assets 108,706 117,517 Consolidated total assets 468,289 479,834
Unallocated assets include various corporate assets including cash held at a corporate level that have not been allocated to the underlying segments.
Cash Converters International Limited 15 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
4. Segment information (continued)
31 December 30 June 2020 2020 $’000 $’000 Group liabilities by reportable segment Personal finance 51,150 71,938 Vehicle financing 25,806 32,457 Store operations 59,945 57,014 Franchise operations 4,259 5,618 Total of all segments 141,160 167,027 Unallocated liabilities 12,669 6,436 Consolidated total liabilities 153,829 173,463
Unallocated liabilities include Group borrowings not specifically allocated to the underlying segments.
5. Dividends
31 December 2020 31 December 2019 Per share Total Per share Total cents $’000 Cents $’000 Recognised and paid amounts Final franked dividend - - - - Proposed and unrecognised amounts Interim franked dividend 1.00 6,164 - -
6. Cash and cash equivalents
31 December 30 June 2020 2020 $’000 $’000 Cash on hand 2,999 2,050 Cash at bank 88,257 104,498 91,256 106,548
Cash at bank includes restricted cash of $6.582 million (30 June 2020: $4.839 million) that is held in accounts controlled by the CCPF Receivables Trust No 1 that was established to operate the Company’s securitisation facility with Fortress Finance, and a further $6.220 million (30 June 2020: $6.270 million) on deposit as security for banking facilities.
Cash Converters International Limited 16 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
7. Trade and other receivables
Current Trade receivables 1,340 1,862 Allowance for impairment losses (133) (154) Total trade receivables (net) 1,207 1,708 Vendor finance loans 785 1,797 Other receivables 4,164 3,195 Total trade and other receivables 6,156 6,700
Non-current Vendor finance loans 788 2,060 Loan to associate 2,858 2,848 Other receivables - 22 Total trade and other receivables 3,646 4,930
8. Loan receivables
Current Personal short-term loans (unsecured) 98,382 97,245 Allowance for impairment losses (15,551) (17,922) Total personal short-term loans (net) 82,831 79,323 Vehicle finance loans (secured) 17,754 18,908 Allowance for impairment losses (4,141) (4,544) Total vehicle finance loans (net) 13,613 14,364 Total loan receivables 96,444 93,687
Non-current Personal loans (unsecured) 5,171 4,444 Allowance for impairment losses (756) (817) Total personal loans (net) 4,415 3,627 Vehicle finance loans (secured) 29,750 39,398 Allowance for impairment losses (5,073) (7,096) Total vehicle finance loans (net) 24,677 32,302 Total loan receivables 29,092 35,929
During the period there was a change in estimates including a specific provision of $1.867 million included for accounts reported as being in hardship to reflect the uncertainty and increased credit risk for this customer cohort. The provision assessment has required the application of judgement as the underlying data trend seen is potentially impacted by government stimulus which is not anticipated to endure beyond March 2021. The outlook in forecast unemployment has improved significantly since the June year end although management remain concerned with the potential for continued short-term volatility given the rapid change in outlook in only a few months. Noting the uncharacteristic macro-economic environment in which originations have occurred during the reporting period, the assessment has been informed by stress testing alternative scenarios and assessing model outcomes arising from extended data windows.
Cash Converters International Limited 17 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
9. Goodwill
Allocation of goodwill to cash-generating units
Goodwill has been allocated for impairment testing purposes to the following cash-generating units or groups of cash-generating units:
31 December 30 June 2020 2020 $’000 $’000 Personal finance 90,561 90,561 Store operations 18,288 16,406 108,849 106,967
Goodwill related to acquisitions of franchise stores completed during the period as disclosed in note 12 has been provisionally allocated to Store operations. The allocation of goodwill will be finalised within the measurement period of 12 months from acquisition date and disclosed in subsequent reporting.
Impairment testing
Half-year ended 31 December 2020
Impairment testing was completed at 30 June 2020, based on management’s expectation of future performance, taking into account potential future legislative requirements. No impairments were identified at 30 June 2020. Refer to note 3.7 of the 30 June 2020 annual financial statements for further information.
Impairment testing has been updated to reflect business performance in the half-year ended 31 December 2020. No impairments were identified based on expected future performance, under proposed future revisions to the SACC Protected Earnings Amount (“PEA”) legislative requirements detailed below.
Significant accounting estimates and assumptions
Significant management judgement is required with respect to estimating the timing and amount of forecast cash flows including:
• projecting loan origination volumes, customer repayments and the forecast doubtful debt allowances; • consideration of the impact of COVID-19 on lending volumes, loan loss rates and retail sales, including expected recovery timing and rates in these metrics; and • the potential impact of changes in PEA legislation.
Significant management judgement is required with respect to the application of an appropriate discount rate to present value the forecast cash flows in which the purpose is to estimate, as far as possible:
• a market assessment of expectations about possible variations in the amount or timing of those cash flows; • the time value of money, represented by the current market risk-free rate of interest, • the price for bearing the uncertainty inherent in the asset; and • other, sometimes unidentifiable, factors (such as illiquidity) that market participants would reflect.
Cash Converters International Limited 18 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
9. Goodwill (continued)
Impact of COVID-19
The impact of COVID-19 on the general economy is sufficiently pervasive to be considered an impairment indicator. Impairment testing undertaken at 31 December 2020 incorporates assumptions on lending recovery for the remainder of the financial year reflecting the recovery trends observed in the period to 31 December 2020.
Impact of regulations
As disclosed in note 3.7 of the 30 June 2020 annual financial statements, on 28 November 2016 the Minister for Revenue and Financial Services issued a media release in response to the Final Report of the Small Amount Credit Contract (SACC) Law Review advising that the government supports most of the recommendations, in part or in full, of the Final Report.
Subsequently on 25 September 2020 the Treasurer released an announcement “Simplifying access to credit for consumers and small business” stating:
“SACC providers and consumer lessors will be prohibited from providing a SACC or lease that would result in: • A person who receives 50 per cent or more of their net income from Centrelink from devoting more than 20 per cent of their net income to SACC and consumer lease repayments, with no more than 10 per cent of this being allocated toward SACC repayments. • A person who receives less than 50 per cent of their net income from Centrelink from devoting more than 20 per cent of their net income to SACCs or consumer leases (these are separate caps).
These ‘protected earnings amounts’ will maintain access to credit while ensuring enhanced protection for the most vulnerable consumers.
The reforms will be implemented through changes to the Credit Act and will take effect 6 months following passage of legislation.”
On 10 December 2020, the Senate referred the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 to the Economics Legislation Committee for inquiry.
The Bill includes the SACC PEA legislation changes as announced by the Treasurer above. The Committee received submissions on 3 February 2021 with hearings scheduled for 19 and 26 February 2021. The Committee is due to report by 12 March 2021.
No further action has been taken by the government at the date of this report and the Company is continuing consultations with various stakeholders around these recommendations, with no changes to the applicable SACC legislation having currently been enacted or substantially enacted.
Consequently, there is significant uncertainty with respect to the timing of enacting any legislative change, as well as the final scope and form of any eventual change, if any.
Cash Converters International Limited 19 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
9. Goodwill (continued)
Based on the above legislative background, impairment testing undertaken reflects the following key assumptions: • the PEA cap on SACC loans comes into effect at 20% of net income for non-PEA (employed) customers; • the cap will be reduced to 10% of net income for PEA (Centrelink) borrowers; and • legislation is expected to be passed by 31 March 2021 with a six-month implementation timeframe (effective 1 October 2021).
Note 3.7 of the 30 June 2020 annual financial statements included details of the key assumptions applied in the impairment testing as at 30 June 2020, and also noted that the recoverable value of both the Personal Finance and Store operations businesses may be impacted by potential future legislative changes given the impact on both the Group’s personal loan and cash advance operations.
The following key assumptions were used in the impairment testing at 31 December 2020:
Assumption Personal finance Store operations 2021 budget revenue growth / (reduction) (30%) (20%) 2021 budget expense growth / (reduction) (26%) (17%) 2022 forecast revenue growth / (reduction) 19% 9% 2022 forecast expense growth / (reduction) 14% 3% Revenue growth rate beyond year 2 (6)% to 5% 2% Expense growth rate beyond year 2 0% to 3% 1% to 2% Terminal growth rate > 5 years 2% 2% Post-tax discount rate applied to cash flows 10.6% 10.6%
For the year ended 30 June 2020, the key assumptions, included below, for forecast revenue and expense growth rates reflected the range of assumptions in the scenarios developed spanning varying lending recovery rates post COVID-19 in FY 2021 and FY 2022, as well as the impact of PEA legislation changes in FY 2023 (impacting cash flows beyond year 2). Probability weightings were applied to the scenarios.
Assumption Personal finance Store operations 2021 budget revenue growth / (reduction) (26%) to (30%) (8%) to (9%) 2021 budget expense growth / (reduction) (8%) to (14%) (6%) 2022 forecast revenue growth / (reduction) 29% to 37% 7% 2022 forecast expense growth / (reduction) 13% to 16% 2% Revenue growth rate beyond year 2 (20%) to 5% (5%) to 1% Expense growth rate beyond year 2 (22%) to 3% (2%) to 1% Terminal growth rate > 5 years 2% 2% Post-tax discount rate applied to cash flows 10.6% 10.6%
Impairment sensitivity disclosures – Personal Finance
The following reasonably possible changes would reduce the current headroom to a breakeven position in the Personal Finance CGU:
• 2% decrease in the forecast revenues resulting from the PEA legislation changes over the 5 year forecast period. • 2% increase in the loan loss rates above forecast over the five-year forecast period. • Increase in the post-tax discount rate applied to the cashflows from 10.6% to 10.8%.
Cash Converters International Limited 20 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
10. Borrowings
31 December 30 June 2020 2020 $’000 $’000 Current Securitisation facility (i) 48,392 60,576 Insurance premium funding - 42 Total borrowings 48,392 60,618
Non-current Securitisation facility (i) 20,662 27,174
(i) The securitisation facility represents a liability owed by CCPF Receivables Trust No 1, a consolidated subsidiary established as part of the borrowing arrangement with the Fortress Investment Group. This liability is secured against eligible receivables (which includes Small and Medium Amount Credit Contracts issued by Cash Converters Personal Finance and secured vehicle loans provided by Green Light Auto) which have been assigned to the Trust. Collections from Trust receivables are used to pay interest of the securitisation facility, with the remainder remitted to the Group twice per month. Receivables have maturities of up to 5 years and the facility has accordingly been presented as current and non-current liabilities in line with the maturities of the underlying receivables. The facility limit is $150 million. In the ordinary course of business, the Group currently expects to utilise this facility until at least 18 December 2022.
11. Issued capital
31 December 31 December 31 December 31 December 2020 2019 2020 2019 Number Number $’000 $’000 Balance at beginning of half-year 616,437,946 616,437,946 248,714 248,714 Issued during half-year - - - - Balance at end of half-year 616,437,946 616,437,590 248,714 248,714
12. Business combinations
During the period the Group acquired the trade and assets of two Cash Converters franchised stores in Australia for total consideration of $3.288 million. The values identified in relation to the acquisitions are provisional as at the reporting date. Details of the acquisitions are as follows:
31 December 2020 $’000 Cash assets 33 Loan receivables 626 Prepayments 20 Inventories 357 Plant and equipment 175 Intangible assets 308 Trade and other payables (13) Provisions (100) Total identifiable assets acquired and liabilities assumed 1,406 Goodwill 1,882 Total consideration 3,288
Cash Converters International Limited 21 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
12. Business combinations (continued)
31 December 2020 $’000 Consideration: Cash 3,288 Acquisition costs expensed to profit and loss 208
Cash used to acquire the business, net of cash acquired: Cash (3,288) Less: cash and cash assets acquired 33 Net cash paid (3,255)
Included in the revenue for the period is $655 thousand, and in the net profit after tax for the period, $67 thousand attributable to the additional business generated by the two stores.
Accounting policy
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the consolidated entity in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3 Business Combinations are recognised at their fair value at the acquisition date, except that: • deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 Employee Benefits respectively; • liabilities or equity instruments related to the replacement by the consolidated entity of an acquiree’s share-based payment awards are measured in accordance with AASB 2 Share-based Payment; and • assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the consolidated entity reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement period is the period from the date of acquisition to the date the consolidated entity obtains complete information about facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year.
Cash Converters International Limited 22 Half-year report for the half-year ended 31 December 2020 Notes to the condensed consolidated financial statements For the half-year ended 31 December 2020
13. Contingent liabilities
In the course of its normal business the Group occasionally receives claims and writs for damages and other matters arising from its operations. Where, in the opinion of the directors it is deemed appropriate, a specific provision is made, otherwise the directors deem such matters are either without merit or of such kind or involve such amounts that would not have a material adverse effect on the operating results or financial position of the economic entity if disposed of unfavourably.
The Company has previously disclosed that on 7 August 2020, AUSTRAC issued a Notice on Cash Converters Pty Ltd, a wholly owned subsidiary of the Group. Issued under subsection 167(2) of the Anti- Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), the Notice required information and documents be given and produced on or before 2 October 2020. The relevant period to which the Notice applies is 14 February 2014 to 14 February 2020.
The Company has continued to co-operate fully with AUSTRAC and complied by responding to the requirements outlined in the Notice on or before the requested due date, as well as addressing in a timely manner all follow up information requests. Additionally the Group has significantly strengthened its Anti- Money Laundering and Counter-Terrorism Financing Program with ongoing constructive engagement with the regulator.
At the date of this report the outcome is unknown as AUSTRAC have not completed their investigation and therefore it is not possible to determine the extent of any potential financial impact to the Group. Consequently, no amounts have been included or provided for as contingent liabilities at the date of this report.
The directors are not aware of any other material contingent liabilities in existence as at 31 December 2020 requiring disclosure in the financial statements.
14. Subsequent events
There has not been any matter or circumstance other than that referred to in the financial statements or notes thereto, that has arisen since the end of the half-year, that has significantly affected or may significantly affect the operations of the Group.
Cash Converters International Limited 23 Half-year report for the half-year ended 31 December 2020 Directors’ declaration
The directors declare that:
a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable;
b) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the Group.
Signed in accordance with a resolution of the directors made pursuant to s303(5) of the Corporations Act 2001.
On behalf of the directors
Sam Budiselik Director
Perth, Western Australia 24 February 2021
Cash Converters International Limited 24 Half-year report for the half-year ended 31 December 2020
Deloitte Touche Tohmatsu ABN 74 490 121 060
Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia
Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au The Board of Directors Cash Converters International Limited Level 18 Citibank House 37 St Georges Terrace Perth WA 6000
24 February 2021
Dear Directors
Cash Converters International Limited
In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Cash Converters International Limited.
As lead audit partner for the review of the financial statements of Cash Converters International Limited for the half year ended 31 December 2020, I declare that to the best of my knowledge and belief, there have been no contraventions of:
(i) the auditor independence requirements of the Corporations Act 2001 in relation to the review; and (ii) any applicable code of professional conduct in relation to the review.
Yours sincerely
DELOITTE TOUCHE TOHMATSU
Leanne Karamfiles Partner Chartered Accountants
Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific Limited and the Deloitte organisation.
Deloitte Touche Tohmatsu ABN 74 490 121 060
Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia
Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Review Report to the members of Cash Converters International Limited
Report on the Half-Year Financial Report
Conclusion
We have reviewed the half-year financial report of Cash Converters International Limited (the “Company”) and its subsidiaries (the “Group”), which comprises the condensed consolidated statement of financial position as at 31 December 2020, and the condensed consolidated statement of profit or loss and other comprehensive income, the condensed consolidated statement of cash flows and the condensed consolidated statement of changes in equity for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration as set out on pages 8 to 24.
Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of the Group is not in accordance with the Corporations Act 2001, including:
(a) giving a true and fair view of the Group’s financial position as at 31 December 2020 and of its performance for the half-year ended on that date; and
(b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.
Basis for Conclusion
We conducted our review in accordance with ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity. Our responsibilities are further described in the Auditor’s Responsibilities for the Review of the Half-year Financial Report section of our report. We are independent of the Group in accordance with the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the annual financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s review report.
Directors’ Responsibilities for the Half-year Financial Report
The directors of the Company are responsible for the preparation of the half-year 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 half-year financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.
Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific Limited and the Deloitte organisation.
Auditor’s Responsibilities for the Review of the Half-year Financial Report
Our responsibility is to express a conclusion on the half-year financial report based on our review. ASRE 2410 requires us to conclude whether we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including giving a true and fair view of the Group’s financial position as at 31 December 2020 and its performance for the half-year ended on that date, and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.
A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
DELOITTE TOUCHE TOHMATSU
Leanne Karamfiles Partner Chartered Accountants Perth, 24 February 2021