Financial Report YE June 2016
Perth, Sep 30, 2016 AEST (ABN Newswire) - Cash Converters International Ltd (
ASX:CCV) (LSE:CCVU) (CKKIF:OTCMKTS) is pleased to provide the Company's Financial Report YE June 2016.
Operating and financial review for the year ended 30 June 2016.
Following a review of the Group operations, the results of which were announced in February 2016, the Company has taken the opportunity to restructure its operations, with major changes to our UK and Carboodle businesses. These changes included the sale of 44 corporate stores, the closure of a further 15 stores and the wind-down of the personal loan book in the UK, with the aim to have the book collected and closed off by November 2016.
The review of the Carboodle business resulted in the closure of the Carboodle outlets in Melbourne, Sydney and Brisbane and a change to the product offering for this business, moving from an operating lease to a traditional car loan, principal and interest product. This car loan product is more readily accepted and understood by the traditional car broker network and as a result the loan book is growing strongly since the product launch in March 2016.
These restructure changes have put the Company into a far stronger position going forward, however the cost has been high with total charges relating to the restructure being $33,331,472. If the Group's results are adjusted for these costs and other normalised expenses, the Group has achieved earnings before tax, depreciation, amortisation and impairment (EBITDA) of $71,872,936, up 14.5% on the prior year figure of $62,745,379. This result has been derived from a 1.2% growth in revenue, up $4,433,933 to $379,326,572 (2015: $374,892,639) with strong revenue growth coming from store operations, which has increased by $10,375,499 for continuing operations.
A summary of consolidated revenues and results by significant segment is set out in the following table (refer to link below). EBITDA was $20,353,105 (2015: $9,121,649) and the statutory net loss after tax was $5,271,982 (2015: net loss of $21,483,718).
A summary of normalised results is presented in the following table (refer to link below).
Franchise operations
The EBITDA for the franchise operations rose $1,305,429 (21.9%) during the 2016 financial year to $7,270,483 (2015: $5,965,054). The UK franchise operations performed well delivering an EBITDA of $3,189,001, which was up $1,424,500 (80.7%) against last year's result of $1,764,501. This was partly due to the fact that the 2016 financial year for the UK had no bad debt write-downs that amounted to $448,000 in the previous year.
The Australian business contributed an EBITDA of $3,633,302 down against the previous year's EBITDA of $3,698,348.
Normalised EBITDA from the international franchise operations was $448,180 (2015: $502,205). This division included a write-down of the Mexican franchise investment amounting to $764,331, following a decision taken by EZCORP Inc to close this operation early in 2016. EBITDA has been normalised for this charge.
The total number of franchised stores globally now stands at 666, with 201 stores in the UK, 82 in Australia and 383 throughout the rest of the world. The Company continues to look for opportunities to expand its franchise network, both in Australia and internationally.
In January 2014 Cash Converters International Limited, through a subsidiary company, acquired a 25% equity interest in all aspects of the New Zealand Cash Converters Master Franchisor, including corporate stores, franchise contracts and financial services. This interest was acquired for $5.5 million, which reflects the pro-rata share of the actual investment cost incurred to date by the New Zealand Master Franchisor. Since the acquisition in January 2014, 13 stores have been opened - 11 corporate and two franchised - taking the total number to 15 corporate and 12 franchised stores as at 30 June 2016. During the 2017 financial year it is planned to open one franchised store taking the total store number to 28. This subsidiary contributed a loss of $1,392,037 for the period, which has been included in the head office costs in the previous table (refer to link below).
During the year new franchised stores were also opened in France, South Africa and Spain.
Corporate stores operations
Corporate stores generate their revenue through the operation of retail premises across Australia and the UK, and also through online retail sales via the Cash Converters Webshop. The stores also receive commission from Cash Converters Personal Finance business for personal loans generated in the stores. The stores offer a mixture of 'buys and loans' (traditional pawn broking and second hand goods buying), personal finance (in the form of personal loans and cash advance) and the retailing of new and second hand goods.
The strategic review of the business identified the corporate store division in the UK as requiring a significant restructure and recommended the sale of the store network or the closure of poor performing stores. Since March 2016, 44 stores have been sold to the existing franchise network and a further 15 stores have been closed.
The cost of this restructure has been $22.7 million and is detailed below.
- Goodwill / asset write offs $9.5 million
- Redundancies $1.1 million
- Lease commitments on closed stores $9.1 million
- Personal loan write offs $3 million
- Total restructure costs $22.7 million
Following this restructure the UK business is in a far stronger position to generate ongoing profit following its repositioning back to a franchisor with a 201 franchised store network.
Australia
The corporate store network in Australia produced a normalised EBITDA contribution of $18,181,543 (2015: $20,530,222), down $2,348,679 (11.4%) on the prior year.
A mixed result for year on year KPIs, on a like for like basis, with retail sales (including scrap gold and Webshop sales) up 8.4% on the previous corresponding period, however pawn broking interest was slightly flat, only achieving a marginal growth of 1.1% compared to the same period last year. Both cash advance and personal loan products performed worse than last year with outgoings down 6.3% and 4.8% respectively on the previous corresponding period.
The total number of corporate stores in Australia as at 30 June 2016 was 71. Revenue from online sales via the Cash Converters Webshop increased by 39.2% to $5,448,178 (2015: $3,910,341) as the site has become more widely known for high quality second hand products. With over 70,000 products listed, most people find the site interesting and good value for money.
United Kingdom
EBITDA for the UK corporate stores reported a normalised loss of GBP2,144,884 ($4,388,217) (2015: loss GBP1,498,066 ($2,960,609)), after normalising for costs associated with the UK restructure.
Webshop
The Cash Converters Webshop was initially launched in early 2008 and expands Cash Converters' online presence. Not only generating revenue in its own right, Webshop is proving to be an essential ingredient in introducing people to the Cash Converters brand, with many 'in-store' experiences being borne from an initial search of the online store. Customers who searched the online store and later went into a store to complete the purchase generated retail sales of $3,115,540 during the financial year ending 30 June 2016 (2015: $1,946,274).
Webshop was initially only servicing the corporate store network, but has since been expanded to allow the franchise network to utilise the platform and list their items for sale. The Company receives a commission based on an agreed percentage of retail sales for the provision of the site and payment services. Each store is responsible for its own item listings and despatch.
Items listed for sale on the site can be purchased through auction or a fixed price 'buy it now' option. Online sales have increased 37.4% in the UK and 37.6% in Australia over the last 12 months.
Financial services operations
These divisions incorporate the trading results of Mon-E Pty Ltd (Australia), Cash Converters Personal Finance Pty Ltd (CCPF) (Australia) and the UK Finance Division.
Mon-E Pty Ltd is responsible for providing the administration services for the Cash Converters network in Australia to offer small cash advance loans to their customers (average loan size of approximately $403). The cash advance principal loaned is financed by the corporate stores and the individual franchisees for the cash advances provided by their stores. Mon-E receives commission from the store network for each cash advance processed through their systems.
CCPF provides small, largely unsecured loans through the franchise and corporate store networks in Australia and online. The principal is funded by CCPF, which pays a commission to the stores (both corporate and franchise) for the generation of the lead and processing the application in store.
The UK Finance Division utilises the software developed in Australia, for both cash advances and personal loans.
The UK Finance Division ceased issuing new loans in May 2016, and therefore does not form part of the Group's continuing operations.
During the period under review the normalised EBITDA for the continuing operations in this division was $65,855,220 (2015: $67,068,870), down $1,213,650 (1.8%) on last year. CCPF contributed an EBITDA of $57,719,885 (2015: $54,550,276), Mon-E $7,062,113 (2015: $11,483,175) and the UK Cash Advance Division a profit of GBP525,341 ($1,073,222) (2015: GBP554,401 ($1,035,419)).
Personal loans - Australia
The Australian personal loan book has fallen from $119,448,669 at 30 June 2015 to $113,036,461 at 30 June 2016, a drop of 8.1%. During the year, 77,955 (2015: 55,902) online loans were advanced totalling $85,162,510 (2015: $63,400,900), representing an increase in value of 34.3% over the previous year. Online lending now represents 45.4% of the total principal advanced during the year.
For Australia, bad debt levels have increased to 7.6% (2015: 7.0%) of the net principal written off to the total principal advanced. The total bad debts written off value has fallen from $45,126,911 in FY 2015 to $38,805,911 in FY 2016.
The Christmas period is one of the busiest periods for the personal loan product and this year was no exception with an amount of $24,105,300 advanced in Australia during December 2015 (December 2014: $23,008,250).
The December 2015 value is the highest amount ever lent during a month and just eclipsed the December 2014 value.
Some key operating statistics for the Australian personal finance division:
- Total number of approved loans increased by 5.3% to 186,565
- Total number of active customers increased by 2.8% to 140,635
- Personal loans EBITDA up 5.8% to $57,719,885 (2015: $54,550,276)
Personal loans - United Kingdom
The strategic review of the UK business identified legislation as a key risk associated with operating a UK personal loan book and as a result recommended the wind-down of the loan book. In May 2016 the UK business stopped advancing principal in regard to personal loans. The UK collections team are now actively collecting the book with the aim to have the majority of the book collected by November 2016.
The UK personal loan book at 30 June 2016 was GBP6,434,593 ($11,595,951) (2015: GBP9,285,480 ($19,058,925)).
During the year bad debts of GBP6,402,728 ($13,107,752) (2015: GBP8,715,133 ($16,327,227)) have been written off, which is significantly lower than the previous year.
The EBITDA for the UK personal loan book was a loss of GBP230,207 ($344,045) (2015: Loss GBP2,815,508 ($6,006,044)).
Cash advance - Australia
The Company derives income from the cash advance product in multiple ways. Mon-E Pty Ltd receives a commission from all stores (both franchise and corporate stores) for the provision of the online software platform and administrative services. In addition, the corporate store network generates interest and loan establishment income from the loans provided to their customers.
A review of the cash advance online product was conducted in the third quarter of FY 2016 and a decision was made to cease offering this product. This decision was based on the availability of appropriate information required from customers, the time taken to process an application and the overall profitability of the product.
During the FY2016 over $14.6 million was advanced, compared to $11.2 million in FY2015.
The EBITDA for the Australian cash advance business was $7,062,113 (2015: $11,483,175). No normalisation adjustments were made.
Key performance indicators for Cash Advance - Australia:
- Total principal advanced down 5.6% to $235,530,880 (2015: $249,547,610)
- Average loan amount $403 (2015: $411)
- Total customer numbers decreased by 2.1% to 585,110 (2015: 597,891)
Cash advance - United Kingdom
Following the sale of the majority of the corporate store network to franchisees, the cash advance product is now only offered through the franchise network in the UK. The normalised EBITDA for the 2016 financial year of GBP525,341 ($1,073,222) (2015: GBP554,401 ($1,035,419)) represented an increase of 3.7% on the previous period.
Key performance indicators for the UK Cash Advance product are:
- Total principal advanced down by 18.1% to GBP27,820,840 (2015: GBP33,960,004)
- Average loan amount up from GBP147 to GBP173
- Total customer numbers increased by 9.3% to 196,176 (2015: 179,534)
In July 2014 the Financial Conduct Authority (FCA) published its paper on the proposed rate cap in regard to high-cost short-term credit in the UK. Following consultation the FCA published their final paper in November 2014, with the introduction of the rate cap on 2 January 2015. Along with the rate cap and the assumption of regulatory responsibility by the FCA on 1 April 2014, further companies have announced their intention to restrict the level of services they currently offer under the high-cost short-term credit industry in the UK.
Vehicle financing - Green Light Auto
Following the strategic review of the Carboodle business, the operating lease product is being phased out progressively and replaced with a principal and interest loan product. The new product is a more traditional car loan product and is more readily accepted by the finance broker network, through which the business is being promoted. The new product has been offered since March 2016 with some success. There are 170 active loans and the loan book stands at $3,326,511 as at 30 June 2016 and is anticipated to grow by approximately $1 million per month.
As at 30 June 2016, 781 active operating leases were in place with forward contracted lease payments of $19,615,624. Total revenue for the 2016 financial year was $9,283,610.
The normalised EBITDA for the business was a loss of $2,352,823 compared to a loss of $1,987,167 for last year, after normalising for costs associated with the restructure of $2,227,773.
Corporate office costs
These costs represent the corporate office costs for both Australia and the UK and are shown separately because these costs cannot be allocated to any specific division/segment, and to calculate an arbitrary split of the costs would not be appropriate in obtaining an accurate contribution from each of the divisions.
The normalised costs for the year ended 30 June 2016 were $14,580,878 (FY 2015 $15,400,790). The Australian corporate office incurred additional legal fees during FY 2016 of $2,441,962 in relation to the ongoing Queensland Class Action, additional professional fees in regard to the business strategic review and a review by PWC in regard to compliance and the culture of the business amounting to $1,506,044. The corporate office costs have both been adjusted to normalise for these expenses.
Financing and investment activities
Banking services
In August 2015 Westpac Banking Corporation informed the Company that Westpac has taken the decision to cease to provide banking and financial products and services to its customers who provide Short Term Credit Contracts (STCCs) or Small Amount Credit Contracts (SACCs) under section 5(1) of the National Consumer Credit Protection Act 2009 (Cth). Cash Converters is a licenced provider of financial services under the terms of this Act.
Westpac assured the Company that they would implement this decision in accordance with the Company's contractual agreements with Westpac, and in a considered and consultative way so as to allow the Company to establish alternative banking arrangements. The Company replaced the securitisation facility with Westpac with a securitisation facility with Fortress Investment Group in March 2016. The Fortress facility covers a five year term, with an initial three year loan period and an option for a two year extension at the Company's discretion.
It allows for a drawdown of up to $100 million, compared to $70 million under the Westpac facility, with the drawdown criteria being less restrictive than the Westpac facility.
The Company has also signed a five year agreement with a service provider to replace its Westpac transactional banking facilities. It has been progressively transitioning its existing facilities in a measured and deliberate manner, to ensure no disruption is experienced by its customers, franchisees, employees and suppliers. The transition to a replacement transactional banking service provider was finalised in August 2016.
Outlook
Following the strategic review of the Group, a number of changes have been made to the operations, both in the UK and to the Green Light Auto business, along with other operational changes. These changes will deliver a stronger business going forward. The Company expects demand for the products and services in Australia, the United Kingdom and New Zealand to continue to grow. The Company is also expected to deliver underlying profit growth.
The short-term lending industry will continue to receive a lot of attention from government and regulators. As a result, the Company will work closely with ASIC and the Federal Government to ensure their view of responsible lending requirements is achievable without making the entire short-term lending business unattractive for the Company and others in the industry. The Company will be making a concerted effort to continually improve internal compliance and responsible lending systems, policies and procedures.
To view the full report, please visit:
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About Cash Converters International Ltd
Cash Converters International (ASX:CCV) is a franchised retail network listed on the ASX. It specialises in the sale of second-hand goods. The Cash Converters group employs modern retailing practices, professional management techniques and high ethical standards to the management of its stores throughout the chain which appeal to a wide cross section of the community. As a result, Cash Converters has been able to position its outlets as credible retail merchandise stores, resulting in a profitable market for the group.
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