EML Payments Limited (EML) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the EML FY '20 Annual Results Conference Call. [Operator Instructions] I must advise you that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Group CEO and Managing Director of EML Payments, Tom Cregan. Thank you. Please go ahead.

Thanks, Edlin. Good morning, and welcome to the EML Payments earnings call for the 2020 financial year. My name is Tom Cregan, Managing Director and Chief Executive Officer. And I'm joined today by Rob Shore, our Group Chief Financial Officer. We'll take you through a business update on our financial results, but we will also use the opportunity to share with you some details on our corporate strategy, Project Accelerator, which [indiscernible] on July 1. This is certainly an unusual reporting season for EML given we experienced the impacts of COVID-19 as well as the closing of the acquisition of Prepaid Financial Services on April 1. We've included as much detail as possible to try and explain the relative impacts of both on the 2020 financial year result, but more importantly and in the absence of earnings guidance on the future outlook for the business. As those who follow the company know, we've had a long-term strategy of diversification, be that at a product level, geographic level and financial level. We've had a clear strategy of transitioning our company for one deriving the majority of its revenue from gift cards into one that derives the majority of its revenues from GPR programs, and with concluding the acquisition of Prepaid Financial Services on significantly improved terms with a clear demonstration of that strategy. That strategy has served us well in weathering immediate impacts of COVID in the second half of the financial year, which started to impact our results in our Gift & Incentive segment in late February and saw GDV in our mall gift card programs fall by more than 90% in April due to lockdown measures in most countries. Putting that into perspective, each $100 million of GDV in the Gift & Incentive segment equates to approximately $6 million in revenue and $4.9 million in gross profit. So the impact on our financials was immediate and significant. Offsetting that was an increase in our incentive gift card programs, which ended up representing a larger share of the GDV in the G&I segment. And our GPR segment continued to grow both organically and inorganically through the contribution of PFS. The impact of COVID gave us the perfect opportunity to refine and focus on our strategy, in courtesy of our renegotiated terms on the PFS acquisition, the balance sheet to execute on it. We'll get into that later in the presentation, but it is important that we share that strategy with investors. It's probably something we don't do often enough. And that you understand where we will see ourselves competing and winning in the global payment market in the years to come. We've embraced in the disruption to our business, and we will benefit from working with companies looking to disrupt their own industries and using our payment technology to do so. On Slide 3, we have our company snapshot. Group revenue increased by 25% to $121.6 million, driven by a 54% increase in GDV to $13.88 billion. Group EBITDA increased 10% to $32.5 million. And group NPATA increased 17% to $24 million. EBITDA was excluding our acquisition costs for the PFS transaction and included $600,000 in one-off restructuring costs that we incurred in late June, with respect to targeted redundancy payments, which we expect will generate $1.5 million of savings in FY '21. So without restructuring costs, we would have come in at a number closer to $33.1 million, but it made sense to make those decisions in late June and clear the decks for FY '21. So we've had the impact of COVID and expanded all of our key measures with a pleasing result, and a testament to the team and to our customers and our partners' ability to adapt to changing circumstances, such as the New South Wales health department salary packaging launch without any in-person meetings being possible; or our card manufacturing partner, [ GND ], managing supply chains that became more complex, particularly due to the lack of availability of freight, yet managing to have cards manufactured and delivered with no customer impact. Moving to Slide 5. The main callout here is that our underlying cash flow was $35.8 million at 110% of EBITDA. Again, underlying cash flow excludes acquisition costs. It also excludes a one-off $3 million foreign exchange cash gain we made on the unwinding of a hedge put in place in November 29 -- 2019 and unwound in March 2020. But as it was a one-off cash, FX gain was excluded from our calculations of underlying operating cash flows. The second callout is that the $118.4 million in cash obviously gives us a very strong balance sheet. Whilst we would not expect to see much in the way of acquisitions in the next 12 months, our cash balance and access to debt markets would position us favorably to take advantage of opportunistic M&A opportunities if they were to be around. But what we do have is the cash to fund Project Accelerator, which is focused fairly and squarely on driving organic growth. On Slide 6, we have a recap of the PFS acquisition. The original purchase price was $425 million, representing an EBITDA multiple of 7.5x, plus a performance-based earnout. Under the revised terms of the acquisition, the valuation was $268.4 million (sic) [ $264.8 million ]. Whilst their short-term financial results were also impacted by COVID due to lockdowns in their key markets in the U.K., France and Spain, GDV has recovered to a company record of $520 million in July 2020, which is a positive sign and certainly befits our view that their programs are more nondiscretionary in nature. And as a result, we would therefore expect that our effective acquisition multiple is significantly improved versus the original. On Slide 17 -- Slide 7, I beg your pardon, we restate what the GDV breakdown was for PFS when we acquired them. We have seen a mix shift between those segments, post acquisition. But given the impact of COVID and the fact we've only had 3 months of ownership, we'll need another quarter or 2 to determine whether that shift is temporary or extended. GDV, as I mentioned in July, was a record at $520 million, with a strong performance in the Banking-as-a-Service and government segments at a conversion rate of 124 basis points. The conversion rate when we acquired PFS was circa 165 basis points, and that yield has come down in the last quarter to 124 basis points, driven largely by lower volumes in the multi-currency segment due to lower worldwide travel. Those programs are at a higher conversion yield, lower interest rates and the establishment and setup fees being amortized over the life of the contracts, the AASB accounting standards. Moving on to Slide 8. We're showing GDV trends by segment over a 2-year period, so investors can see the impact of COVID at a segment level on GDV. In the Gift & Incentive segment, our seasonal GDV in FY '20 was 17% up on the prior year in those 2 seasonal months, and we were 26% up at the end of February on a year-to-date basis. So traveling were very well relative to the prior year in that segment. And as I mentioned before, we then saw significant declines in our mall programs for the next few months, but offset to some degree by growth in incentive gift card programs. For example, in April when our GDV in that Gift & Incentive segment was $30 million, the vast majority of that was the incentive programs. In the GPR segment, we saw resiliency in gaining programs and continued growth in Salary Packaging and PFS volumes obviously came into play in the last quarter. In the VANs segment, we saw a volume decline in the last quarter as well, particularly in the health care industry, our customers in the health care industry, due to social distancing and mobility restrictions but obviously, this is the lowest revenue yield of our 3 segments. On Slide 9, we've shown a number of new contracts that we entered into, some of which were shown in our previous presentations during FY '20. On Slide 11, we're pleased to announce some additional contracts entered into that will launch in the current financial year and continue to drive our growth. Despite the impacts of COVID and remote working, the pace of digital payment adoption has increased significantly, and our sales pipeline is reflective of this, which all goes very well for future revenue growth. In terms of terminology, just one point I'll make on that slide is that ControlPay remains our banner for programs involving consumer credit and companies disrupting traditional consumer credit programs. Salary-as-a-Service is just new terminology for programs involving salaries, whether that be salary packaging or payroll cards or earned wage access programs where workers are able to access parts of their payroll prior to payday. Given salary packaging is largely an Australian program, we need to standardize our terminology, so overseas partners, prospects and investors understand the programs that we're offering in that broader space. On Slide 11, we have continued to provide a bit more clarity on the metrics of each segment and to break down for investors and analysts, the gross profit we generate on a per card or per account basis. And you could obviously back solve for the revenue generated on a per card per account basis as well. We continue to try and simplify our Investor Relations narrative. And with the business as of current size, boiling that down is now the simplest way to analyze the business versus trying to do an assessment of segment by segment by segment, and understanding all of the moving parts in those segments. As we've previously disclosed, in March, we have suspended our guidance, and we won't initiate that until the new calendar year. But we are a platform technology company. And with millions of cards issued every year and millions of accounts on the platform, it would take a significant new customer and a disproportionately higher or lower yield or higher or lower margin to change those averages. Meaning, we can simplify our guidance going forward and focus on the number of cards and/or accounts we expect to manage, irrespective of what industry our customers operate in. And that, I think, should simplify our modeling and our analysis in the market and be advantageous to investors. Again, there was a COVID impact in these numbers so that has to be taken into account, that in the G&I segment, we generated approximately $5.44 per card in gross profit, $25.41 per account per annum in the GPR segment and $0.38 per transaction in the VANs segment. The other main takeaway from this slide is our gross margin of 72.9%. EML has previously been working to increase our gross margins from the low mid-70 region to circa 80%, largely through self-issuing and removing those input costs. And excluding PFS, we did achieve that this year, but including PFS, the group result was 72.9%. Investors will recall that salary packaging programs are lower margin because of higher transactional usage. The PFS margins are lower than EML because of outsourced processing costs. We previously indicated that we expect to generate circa $6 million in synergy savings over 3 years from PFS on the processing side, and that would equate to a roughly 5% to 6% margin uplift. So that and a recovery in multi-currency volumes at a higher yield would also lead to margin uplift closer to the original expectations when we acquired the business. Realistically, if we see a recovery in mall gift card volumes this year, particularly in the seasonal peak months, our expectation would be that overall gross margins remaining in the low 70% range in FY '21 for the combined business. I won't spend as much time on Slide 12, but to grow GDV and revenue in each segment was a great result, in our view. Obviously, $1.25 billion in GDV from PFS in the fourth quarter means we're positioned to have real material growth in our GPR segment in FY '21. On Slide 14, if I kick on that, we show our 5-year track record of EBITDA growth and our growth drivers going forward and our July gross debit volume. And whilst it's only 1 month, we processed $72 million in the G&I segment, $834 million in the GPR segment and $727 million in our VANs segment. So we've started the year, the new financial year, well with $1.63 billion processed in July. That refers back to Slide 3, I think, of the deck where we said the annual GDV run rate is in excess of $17 billion. Clearly, it's 1 month and we can't read too much into 1 month, but we're way better to start positively than not. So we are optimistic about the way we started the year. Our growth drivers are many, but we certainly see Banking-as-a-Service and fintech programs supported by just general long-term growth thematics in that space. We see an expansion of salary-related programs. And we see them in the market, we see them within our existing sales pipeline. We've got ControlPay and launches pending in the Buy Now Pay Later segment. And I've previously mentioned sales growth in digital incentive gift cards. Malls, interestingly, have gone from the mainstay of the business to providing earnings optionality as volumes recover, and albeit that sector is not without its challenges and it's still too difficult to predict what that recovery looks like and over what time period. We continue -- on Slide 15, we continue to be committed to the G&I segment and mall cards. There's no -- that, that shouldn't be read any differently. But clearly, there are COVID-related impacts that make volumes unpredictable. We see malls that are open but do not have any attendance selling gift cards. Simon Malls being one of those examples. We see others that are in administration, such as intu properties in the U.K. So they're open. It's selling a fraction of their previous volume because customers would be questioning whether they would buy a gift card and whether they could use it going forward because, obviously, they're reading in the news media that intu is in administration. We have others that are open but selling a fraction of previous volumes. We see malls open and selling, but with foot traffic down 30% on historical levels. We've got malls that are open, but with 20% of tenants closed within the mall. And then we've got malls in countries like Italy and Scandinavia that are basically back to pre-COVID levels already. So it is a mishmash of what we're seeing there still in the mall space. It's also possible that European countries reinstitute some lockdown measures as they go through the European winter, which could also negatively impact seasonal peak volumes. So again, hence, why we have suspended guidance for the year, and we'll look to do that and reinstitute that in the new calendar year once we've got through that peak seasonal period. We continue to roll out in EML Connect. This is a platform to enable malls to sell cards digitally through e-commerce channels. And we've made the decision to exit the UAE market. Slide 16 is self-explanatory. We've added 58,000 active accounts in our salary packaging programs with a further 67,000 accounts to transition over the course of the financial year, which is an exciting proposition for us. As exciting, the majority of those customers have transitioned across the Mastercard and our self-issuance platforms, be that the ACT government and New South Wales Health, Southgate, PBI Solutions, Smartsalary, AccessPay, [ Match CL ] and so on. So we have made a lot of progress with our key partners in that space in the last 12 months. Now I want to spend a few minutes on Project Accelerator, given that we are often asked by investors how we can pick just against other large players in the payments industry. Referring to Page 18 of that deck, investors should be well aware of our mission statement. They've heard [indiscernible] funds. And part of the project, defining a vision statement and for us, and this is a strategy that has been worked on for several months, not for a number of weeks, the vision that we've settled on is to offer customers a feature-rich, fully-embedded payment solution via a simple, single touch point. As you would have seen earlier in the deck, we are pleased to announce that we will be partnering with Laybuy, a leading buy now, pay later company, soon list on the ASX, to support their business in Australia and the U.K. later this calendar year. A new partnership that we're really excited about, but one that also requires Laybuy to undertake 2 integrations with EML, one to our Australian processor and one to our European processor. These multiregional fintech partnerships are what we want to see more of and what we want to compete more often for. And to compete for those programs, we need to offer our customers a single integration touch point. As we've grown through acquisition and have 3 processes, we do not intend on migrating to a single processor. We do intend on building middleware so that it's one integration, one application layer, one touch point to the customer, irrespective of which processor or processers are then used to actually process transactions. Our purpose statement has also been refined to as inspiring transformative digital change for our customers and our communities. So what that means is that if a customer wanted to process $1 billion of VANs through our platform, we would obviously do that because our shareholders would expect that and our budgets would demand that. But we will generate longer-term shareholder value from partnering with fintechs that are disrupting their own respective industries, and we'll be using EML in part to support the payments aspects of their business and of that disruption. This is obviously a summary of the strategy. But looking at Slide 19, we will be investing in our technology and our infrastructure to support that single touch point integration as well as enhancing our sandbox capabilities, becoming cloud-native and becoming scheme-agnostic, so offering the same solutions across all scheme networks. And we expect to invest roughly $10 million to $15 million over the next 2 years. Whilst we support Visa products in Australia and North America, we don't support digital tokenized payments on the Visa network. And historically, this hasn't really been an issue because customers tend to see them in the same light. But as Visa and Mastercard have their own investment funds, we are seeing them use their balance sheets to invest in and therefore, lock in certain programs to certain networks. And we've been caught in the cross fire on that on a couple of occasions, so we will invest in product parity so we can support whatever scheme preference our customers might have committed to. We expect to spend $10 million to $15 million over 2 years. And roughly speaking, we'd expect that to be a 65-35 split over those 2 years. We expect part of that to be capitalized, and the noncapitalized component will self-fund through expense rationalization elsewhere in the business, such as the $1.5 million of savings generated for employee rationalization late in FY '20. We will become a product-centric organization, partnering with other companies and integrating their solutions into their own, providing additional functionality and value to our customers and their cardholders. We will look to invest in technology companies that can enhance our own solutions, our own go-to-market offering and expand the ecosystem of opportunities that flow from that, which we've coined internally as FinLabs, and we will align our decisions behind Accelerator. So whether that be who will be higher, whether that be where we invest our capital, where we focus our marketing, our marketing spend, our decisions an organization will be driven by Project Accelerator in that vision and that purpose statement. Slide 20 expands on these themes a little, including the fact that we will be partnering with disruptive fintechs and supporting their programs and looking for ways of integrating their solutions and/or cross-selling our solutions to their customers. And on Slide 21, we'd like to announce the first FinLabs investment in the U.S.A., an investment of USD 2 million into the Series A raising of a company called Interchecks, which is a payment platform specializing in noncard payment agreements. For example, if a gaming customer wants a payout to a card, we can clearly facilitate that. If that gaming customer wanted to partially pay out to a card but also to a bank account, we would have development effort there. If they wanted to partially pay out to a card, some to a bank account and potentially some to a social media account, again, we would have development effort there. Interchecks provides us with that capability from the get-go and the ability to offer our customers a more feature-rich product as well as cross-sales capability for their customers looking to integrate a prepaid payout functionality. We're actively progressing a second opportunity in terms of FinLabs and hope to close that over the next 30 days. And the combined investment level for both investments would be circa USD 9 million to USD 10 million. We are very clear on where we would look to invest and why. And these are key points. We're approaching each opportunity based on its ability to generate a cash-on-cash return for EML, with any gain on valuation upside being a secondary consideration. So we're not entering these investments thinking like a traditional PE investor may think. We'll manage our risk exposure and not bet family inheritance on one deal, and the 2 that we have worked on have undergone extensive due diligence. It's worth noting that any impairment in valuations could impact NPATA, which in turn, will impact on executive compensation. So we aren't out there spending like the proverbial dragon sailor just because we have the balance sheet to do so. We'll be selective, and we're not going to undertake dozens of these investments in an untargeted manner. We'll make them selectively. We'll integrate them with other plans to monetize them before moving on to identify other opportunities. They are minority investments. They're not investments that give us control over the entity. As you'll see on the following page, many of our competitors and the largest players in the industry have similar incubation and investment strategies, and they've deployed their capital to drive their own organic growth and valuations over the years. So Strike with, I think, the last valuation worth $35 billion, had strike that much as their similar part of their business. Edenred, EUR 10 billion market cap company, has Edenred Capital Partners. FIS, one of the largest payment companies in the world, has a $150 million investment fund. Mastercard and Visa have similar Mastercard Express and Visa has -- Mastercard Fintech Express and Visa had their own similar option. And more recently, in Australia, you can see the big banks have started doing something similar. So it's common in the payments industry and probably more common than most investors would appreciate. We feel that we can deploy our capital smartly to drive our own organic growth rates. And whilst larger M&A is more difficult, unless the company is known to us, those challenges are less when considering investments of this nature. As you would appreciate, a significant part of M&A is understanding the people and understanding the team and understanding the cultural fit and understanding how you'll integrate 2 businesses. In this case, we're an investor into those businesses. So the focus from our due diligence is far more on technical and far more on integration than it is on the other -- on those other items. On Slide 23, we've got a slide -- just a general slide talking about what the fintech ecosystem includes. There's different slides available that would show different things. But what we wanted to say is we already see the several customers across each different segments. And at the end of the day, Project Accelerator have constituent parts are there to turbocharge those endeavors over the coming 3 years. When COVID hit, we did not see that through a narrow prism of survival, right, nor did we want to recover from COVID in the same shape that we went into it. We did not want to come out of COVID as the largest mall card provider in the world. We took the opportunity to reimagine what this business could look like in 3 years, and we hit the ground running. And the investments that -- in Interchecks and others and deal flow and other product partnerships that will be made in due course reflect the work that's already been done in the previous 6 months to get us into this position. Finishing up quickly, looking to Slide 25. We are holding EML.CON virtually this year, but we'll include a range of global industry experts, partners and customer presentation that will include our FinLabs investment partners in that. So it's a great opportunity for us and for them to show you Accelerator in action. One point I would make is that we won't might be pushing to provide investor access to our FinLabs investments given that we are a minority shareholder, and they have businesses to run. But EML.CON and the use of other social media platforms provides us with the opportunity to communicate those to the market. And before I hand to Rob to go through the financials, we are committed to our people. We've included a few slides on those initiatives. It's not corporate speak, it's a serious commitment. And we feel that when challenges are thrown at us, such as COVID, our people rise to the occasion and, in and of themselves, are a competitive advantage for us. And our environmental initiative, which you may have seen through media channels, is called Change for Good, which will see us try and replace as many plastic cards as we can with more environmentally friendly and digital alternatives. And our aim is to eliminate 25 million cards, plastic cards, over the next 3 years. So we're not eliminating the volume, we're just eliminating that -- switching the form factor, if you like, from plastic to more environmentally friendly or digital alternatives. So far, we've had orders worth about $600,000 in environmentally friendly alternatives. And many of our retail partners share the same goals we do with respect to the environment, and they're looking forward to championing this change along with us. And with that, I'll hand over to Rob.

Thanks, Tom, and good morning, everyone. I'll take you through the financial results review starting on Slide 29 of the pack. The financial year ending June 30, 2020 was a split story. We had a strong set of trading results for the first 8 months of the year, followed by a challenging period where COVID impacted us quite significantly, and then the signs of recovery through June. I'll talk more about the July results, July 2020 results and what we can share on the outlook for FY '21 later in this presentation. So whilst the year was impacted by COVID, the results for the year still delivered record GDV, record revenue, record EBITDA, record net profit after tax, excluding acquisition-related costs, which is our preferred metric moving forward. Record underlying operating cash conversion, 110% or $35.8 million, and also the largest acquisition we've completed to date in PFS. So there's quite a bit to walk you through, as shown on the highlights in this slide. And in all the comments I'm about to make, it's important for you to remember that PFS was consolidated from the first of April 2020. Starting with group gross debit volume on Slide 30, there are some key takeaways to highlight. Whilst we saw COVID impact all segments and regions at some point from March, the GPR and the VANs segments were impacted much less significantly than our Gift & Incentive segment. Our Gift & Incentive segment saw significantly reduced volumes in malls due to global closures during the worst month of the pandemic. It's kind of impossible to accurately quantify the impact of COVID on the segment, but we'd estimate it will be significantly more than $200 million of GDV based on the run rate as of the end of February. We've seen the majority of the volume for the segment recover through June and July. And whilst we're encouraged by this, we remain cautious about interpreting too much from 1 or 2 months' volume data. What we have seen in this most recent months is, firstly, mall volumes have recovered to about 75% of pre-COVID levels. We've got better numbers out of Europe than North America, but we do expect social distancing will remain an issue for some months to come. So what that means is service desks are not necessarily open to sell gift cards in all malls at all times. Simon Malls, for example, is only expecting to reopen all their service desks during August. European customers seem to be working through this on a mall by mall basis. We've seen a customer into its insolvency in the U.K. Whilst we've got no material financial exposure to EML, more customers are obviously aware of this, and it might be discouraging the purchase of gift cards that have got a 1-year life on them. So it's a volatile market. We're certainly more positive than we were in April, but there's some way to go until we see what we call normalized trading. The volume mix in the Gift & Incentive segment has shifted to incentive. So customers are taking advantage of our mobile plastic solutions to deliver incentives for employee engagement, customer engagement, marketing programs and the like. Incentive programs are not typically restricted to where the funds can be spent. And so the breakage income is typically lower. And so you've got a lower yield on these programs. And so the mix shift to incentives is unfavorable, and it will be a headwind on the overall segment yield for FY '21. But we're clearly pleased to see volumes returning from the lows of April. June was only down 6% on the prior year, and July 2020 was up 7% on the prior comparative period. So the second yield for Gift & Incentive has historically run either side of 600 basis points. And looking forward to FY '21, I'd expect to see it move towards the more 500 basis point level for the next year given the mix shift towards incentives. In our General Purpose Reloadable segment, gaming volumes have dipped but they recovered through May and June. Our payroll cards, salary packaging vertical were not impacted and have been performing strongly in July, with revenue up about 50% on the prior year comparative period for the July 2019 numbers. In PFS, the Banking-as-a-Service programs and the multicurrency programs were impacted earlier than we saw for EML programs because their key markets of Spain and France went through a severe lockdown earlier, which was prior to EML ownership. Since taking ownership of PFS, we've seen the recovery through April to June. And we've seen that recovery continue through July with record volumes in July 2020 of $520 million. This is mostly Banking-as-a-Service programs and government programs. The multicurrency programs remain impacted by travel restrictions. There were some delays to health care payments in the VANs segment and as people delayed health care procedures during the pandemic. And so we saw a smaller impact to that segment because it is our lowest yielding segment. Looking at Slide 31. The record GDV growth converted into record revenues, which were up 25% to $121.6 million. This revenue number is adjusted by $671,000 of noncash amortization. That's on AASB 3 fair value uplift on the PFS bond portfolio. It's noncash. It relates to the acquisition. And so consistent with our treatment of other AASB 3 items, we added it back. We're calling it out because it did impact FY '20, and it will impact future years as this unwinds. So we'll be consistent in our approach moving forward as well. The majority of our revenues are generated from recurring revenue streams, and we're making less than 22.8% of group revenues from breakage now. It's been falling for a number of years, and we expect it to continue to fall as a percentage of group revenue in FY '21. Looking at the redemption on the cards during March to June, we've seen lower redemptions and lower spend on the cards, and that has impacted our interchange revenue stream throughout the March to June period. We've taken a conservative approach not to adjust breakage rates through this period as our assumption is that the redemptions will come through in FY '21. So at this point, it's the delay rather than expectation that customers will spend less of the balance on their cards. But we'll update on this as consumer behavior trends become more evident in the data that we'll review. Interest has been a headwind across all segments with lower interest rates throughout the year and then falling further as governments have responded to the economic impacts of COVID. I'd certainly expect this to be a headwind in FY '21 as our view and probably consistent with most views is that central bank rates aren't increasing anytime soon. We generate approximately $6 million of revenue for each $100 million of GDV in our Gift & Incentive segment, so the loss volumes certainly impacted the group over the year. And this is about $4.8 million of gross profit on each $100 million of lost volume. At a headline level, gross profit margins fell back to 73%. But this headline level is masking some great improvements in our gross profit margins because the dilutive impact of consolidating PFS for that last quarter of the year. Excluding PFS, group margins increased to 82.1% as our self-issuance strategy delivered our expected outcomes. So investors who followed the EML story for some time will recall this has been a 2 to 3-year focus of the group, so we're pleased to meet our targets on a like-for-like basis. Looking at PFS. PFS is dilutive to group margins because they outsource processing. But as we bring a direct connection to faster payments online and we bring processing in-house over the coming years, both synergies were identified in the acquisition thesis of $6 million total synergies. Their margins will improve, and they'll come back to be more in line with group margins for the GPR segment in the mid-60s. PFS has also adopted AASB accounting standards for the last quarter since EML acquired them, which means they're spreading out establishment income, set up income over a longer period. And as I said before, they've also seen lower multi-currency volumes, which also depressed margins for that last quarter of the year. On to Slide 33. We would guide cash overheads as a percentage of revenue to be a key metric of operating performance. It increased in the period to 46.2%, and that was due to lower unit sales from gift and incentives really impacting the metric. But in the context of lost several hundred million dollars of GDV for the segment and the associated revenue on that, the percentage would have been much lower. So we're comfortable with where the business is heading. At a headline level, 84% of the year-over-year increase in cash overhead, that was $12.9 million was the year-over-year increase, that relates -- 84% of that relates to the acquisitions of Flex-e-Card, which was consolidated from the first of July 2019 and the acquisition of PFS, which was consolidated from the first of April 2020. A couple of callouts on this slide as well. We took on about $600,000 of costs predominantly to restructure part of the European business post the acquisition of PFS. This is going to generate recurring savings of $1.6 million in FY '21, and these savings are additional to the $6 million synergy number we identified in our acquisition thesis. We received pricing amounts of government assistance during COVID worldwide. But we took the decision not to force employees into taking annual leave over the period. And so to some extent, we incurred additional costs for annual leave accruals over this period. We're comfortable with this philosophy of looking after our employees, and we're certain this is going to benefit the group in FY '21 and beyond. So there's no issue to us on that. We've made the decision to close the UAE business. The challenges of growing this business out into a GPR segment business or into a larger Gift & Incentive business in other countries whilst dealing with the impacts of COVID that we think is going to be multiyear to that region, it just wasn't going to deliver a sufficient return that we could have got elsewhere. And so we've decided to close that business down. And we'd expect the region to be closed down by the end of FY '21. We expect the cash overheads for FY '21, including PFS and the synergies mentioned above, to come in around the middle of the range we've given there, so around the $68 million mark for the next year. Closing out the P&L on Slide 34. We delivered a record EBITDA for the group of $32.5 million and a record NPATA of $24 million. You'll see us placing increasing importance on NPATA moving forward, with the lease accounting standard, AASB 16, share-based payments are making the EBITDA measure less relevant to us. I've detailed out some items that fall below EBITDA on this slide. And on Slide 42, you'll see a full reconciliation between NPATA and EBITDA just to keep this nice and neat. We exclude a $3 million cash gain that we made on unwinding forward exchange contracts that were connected to the acquisition of PFS and we exclude that from both EBITDA and NPATA. And we also exclude all FX gains and losses from the EBITDA numbers. Tax was a net gain this year due to the impact of share-based payments being deductible as they vested, which isn't expected to occur at the same levels in future years. We generate the majority of our profits in our U.K., Irish, U.S. and Canadian entities. And so the average tax rate is sensitive to the mix of earnings in those countries where the rate of tax varies between 12.5% and 26.5%. We've obviously incurred significant acquisition expenses, $15.8 million in connection to the PFS acquisition, and that's bringing statutory impact to a loss of $5.8 million, which we don't expect to recur. Looking at the balance sheet on Slide 35. The first callout is that we split our cardholder assets of $1.265 billion and liabilities owed to cardholders of $1.265 billion. These amounts are held on behalf of our customers and cardholders, and they directly offset the liabilities to them. So following the acquisition of PFS, it's a little bit more complicated with last year in that there was a long-term asset in the shape of bond investments, which I'll talk more in a moment. As we continue to increase the self-issued element of our business in Europe and Australia, these amounts have been growing, and we expect them to continue to grow. So concentrating on the corporate balance sheet. The group's sitting on surplus cash of $118 million. We've got no secured debt. Our businesses remain cash generative, which I'll discuss more on the next slide. We're also holding a contract asset or a breakage asset of $31.8 million. About $22 million of that is expected to convert to cash over the next 12 months. Looking at the bond investments. The group has funded the premium on the bond investments. These are what the European regulator deems as zero risk, so very low-risk government-backed assets, where we invest cardholder funds, the group will receive the economic return, the interest on those bonds. We have a policy of not actively trading the bonds, and we hold them to maturity. So this is -- we've invested the premium on those bonds to purchase them at the outset. This is more than $10 million of group cash, which will convert back to cash in future periods. The bond is an important part of our treasury policy to offset extremely low negative central bank interest rates on the cardholder float. So in terms of the short-term liquidity funding across it, across the business, we've got $118 million of cash, $22.3 million out of breakage that we expect to convert under 12 months, and then we've got this bond premium of more than $10 million, which will convert back to cash. Intangibles in our books mainly relate to the acquisitions we've made because the businesses that we buy are not capital intensive. So you typically end up with quite large intangible assets and goodwill, making up a significant portion of the purchase price. The AASB 3 valuation of PFS has been provisionally completed in the period and reflected in those numbers. We've got a deferred tax asset of $25 million on the books, which $16.5 million relate to tax losses available for use in future periods. And we started using the tax losses in Australia this year, and we expect to utilize the overseas losses within the FY '21 year. Looking at the cash flow on Slide 36. Statutory operating cash flow includes acquisition costs. That includes the cash gain on the unused acquisition hedges. It includes tax, it includes interest payments. So these total $19.8 million, which aren't included in EBITDA. So to get to a like-for-like comparison and the operating position, we add this back. So the underlying cash flow for FY '20 was $35.8 million, which is a record for the group and 110% conversion of EBITDA. This improvement in the second half cash flows was flagged in February when we reported our interim results. Cash flow conversion is more than EBITDA due to the breakage converting into cash. So we converted more breakage from prior periods in March to June than we accrued in the period March to June. This will impact the FY '21 year. So the inverse of that is next year, we expect cash conversion percentage to be slightly lower because we expect to accrue more breakage in the fourth quarter of FY '21. Then it's going to convert to cash in the fourth quarter of FY '21 because our volumes this year were depressed. So the inverse of FY '20. We're going to continue to invest in CapEx related to building the technology that's going to drive the group's growth in future periods. And as Tom mentioned earlier, investors should expect this to increase in FY '21, above the $8 million or so we spent in FY '20. To wrap up before questions on Slide 37, we summarize some of the talking points in relation to FY '21. It's important to me be clear on this point. We're not giving guidance, and we don't expect to do so until February 2021 because of the continued uncertainties in the Gift & Incentive segment, in particular, and mall programs and the ongoing impacts of COVID to those programs. What we're doing on this slide is trying to give investors some more detailed information on what we're seeing right now. We won't be breaking PFS out from the GPR segment in future periods. We don't run our businesses in this way, disaggregate entities. So from our perspective, it's part of the overall GPR segment, and it's included there. But to giving investors some confidence they continue to trade extremely well, the July volumes were a record $520 million, as detailed on Page 7. So variability in the FY '21 result will really be driven by the performance of the Gift & Incentive segment in November and December, when we typically see between 43% and 46% of our annual volumes for the segment in those 2 months. This is linked to consumer behavior in the malls and how those programs perform given social distancing and other challenges. Both June 2020 and July 2020 have shown improvements in the Gift & Incentive volumes and very strong volumes in GPR space. Australian salary packaging is one to call out because they continue to perform well with GDV and revenue up 50% on the prior comparative period from last year, alongside some strong results from the PFS business. VANs volumes dropped in July relative to a year ago, but they were up on June 2020. Monthly volumes do move around on a month-to-month basis. You can see this on Slide 9 and 15 where we sent monthly volumes in a graph. This month-to-month movement is because processing volumes depend on timing. They depend on the number of weekdays falling in a month. So we don't read too much into single-month results. Program pricing is stable, so segment yields aren't expected to move too much in FY '21, though the group yield is going to reflect the segment mix. Cash overheads will likely be towards the midpoint of our range of $64 million to $72 million for FY '21. Operating cash flow is expected to convert to around 70% to 75% of EBITDA, so we're expecting some strong cash flows in FY '21. Internally generated software increasing to $12 million to $16 million, including PFS and the additional spending on the Accelerator project that Tom described earlier. And we're expecting interest expense to be a headwind into FY '20. There's no real signs of increasing central bank rates on the horizon. So we've given some ranges there as well for the below the line numbers to help investors and analysts with their models, given the impacts of bringing onboard PFS this year. And as I said earlier, we'd expect to give guidance when we publish interim results for FY '21 in February, after we see how the Gift & Incentive business performed in the run-up to Christmas. And so with that, operator, I'd like to open the line up to any questions.

[Operator Instructions] Your first question comes from Nick Caley from Baillieu.

Are you seeing anything in the way of client migration out of Wirecard in Europe at this stage?

No. Not much. The Europe business for Wirecard was more issuing a stand-alone issuing business. So really low margin, high risk because you've got all the regulatory risk and none of the yield upside. So most of it was just issuing. There was very few programs where they were the issuer and processor and program manager, which are the type of deals we would look to do. They're out there busily selling off assets all over the place, none of which we're that interested in. And the U.S. business is an incentive gift card business, which is up for sale and probably get sold soon enough, but it didn't have any interest for us, I tell you, except -- there are a few programs here and there, but nothing meaningful to speak of.

And just secondly, just any updates on sort of gaming with bet365 or GVC?

Yes. But I mean nothing on the GVC front on -- there will be something hopefully to announce shortly. I think some of the European operators that have bricks-and-mortar stores have realized that COVID provides a bit of a challenge when you've got no stores anymore, when you can only have 2 people in the store. So surprisingly, those conversations, which have gone -- they've gone kind of dormant, have come back -- have kind of come back to life a bit. But some things in there that I think might be in the second -- more in the second half of this year than the first. In the U.S., not seeing much in the way of gaining volumes with either of our existing partners. But in the non-gaming space, BGW, which is an Australian poker company which operates over there, we launched it recently and that's actually been one of our better performers out of the gate. So then there are a couple of other daily fantasy sports companies launching a company called Potent, which is in the parimutuel space. So it can operate in 48 states without having to go state by state. So making some progress on companies that are probably not household names, but the -- out of the gate, the programs will be okay. I think on the European front, we'll probably have some news there into this calendar year, maybe start of next calendar year.

Great. Just one final one. Your people on the ground was concerned about any further lockdowns in Spain or France at the moment?

It's not Spain and France necessarily, but Ireland, I think, has kind of started already getting it -- people ready for the fact that you should expect it. Spain have already had some -- I think Spain are now doing kind of more targeted regional lockdowns as opposed to kind of full national lockdowns. Italy, mobility's kind of pretty much back to where it was. So I don't think they're that concerned. But it could be Germany, it could be Ireland, it could be the U.K. certainly because they've pulled back some of their opening up measures.

Your next question comes from William Cunning from Carter Bar Securities.

Just one quick one for me. I was just hoping to get a little bit more -- a bit more color on sort of the updates provided for July and just sort of where that GPR GDV is coming from. Maybe a bit of an update on gaming from Australia and Europe as well and what you guys are seeing there.

Do you want me take that one, Rob? Or maybe you take it? Do you want to jump in?

Yes. Sure. No problem. So I think well, it's default. The Australian salary packaging business is definitely performing really well. We've transitioned all the customers over the FY '20 year, and that's going to annualize out through FY '21. That's one. Gaming has not been -- it's been going okay. I wouldn't say it's been probably reasonably resilient, I think, despite sort of the lack of sporting events, and we're just seeing that sort of returning to normalized levels. Australia went okay, probably is the best way putting it, through May and June. We've seen improvements through July in Europe. So they've been going okay. And then we've seen the PFS program is going really well. The digital banking solutions and the government programs they do are growing strongly. So although we haven't seen the multicurrency elements of the PFS business bounce back, they're probably still down at least 50% on the same time last year. The rest of their business is performing really well, so that's where the GPR side has been down strong.

Yes. Great. Just a second one for me was just whether there's any update on the in-house processing and how that's sort of going.

In the European business?

Yes. Just in the -- yes, from the PFS side as well.

Yes. That's kicking on. So I think the programs are starting to be migrated. I mean the biggest bang for the buck will come when their largest customers migrate across. And that will be done progressively because most companies in the space that have tried to do big cutovers have actually caused themselves self-inflicted gunshot wounds to the head and always get wet. So their 2 largest customers will eventually start to migrate onto their platform. I think they'd be expecting their largest customer start doing that early calendar year next year. So those kind of things are being put in place. And then that will be a progressive thing. So given card lives, the card life is a 3-year life. As those cards expire, the card that customers get as replacement will be on the new platform. And so I think the foundation delayed for it to happen. It's now just a matter of new programs going on it, and their largest customers migrating to it as cards get replaced.

Your next question comes from Owen Humphries from Canaccord.

I've got a question around your cash conversion guidance. I've just seen these 2 numbers here, 65% to 75% or 70% to 75%. Just maybe you can clarify which one is correct?

Yes. I'd go 65% to 75% is pushing the pressure. I mean it's -- the impact on this is really the breakage and that we didn't accrue much breakage in Q4 of FY '20. So there's not been as much to convert into FY '21. So we'll be accruing more. So the contract assets fell in Q4 of FY '20, and you'll see it rise in Q4 of FY '21. So that's the movement. 5% on that isn't a huge number. You probably pick the midpoint and say 70% is the best estimate.

Good one. And then just shifting to Gift & Incentive. Well done on July, is trending back up versus PCP. I'm guessing the incentive in Simon Malls is contributing to that uplift. You've also got a slide number there saying 43% to 47% generated in 2 months. Is the expectation is that number will hold in FY '21 given what you said about social distancing and various concierges being closed et cetera?

Yes. At the moment, Simon isn't open, so none of that recovery in volume has come -- is being driven by them. So that is due to open kind of imminently, I think, somewhere between now and the 22nd of August, something in that area. But that has been moved back 3 times so far due to COVID. So at the moment, that's what we're being told, but I wouldn't be surprised if it continues to get pushed back, just depends on how cases are going in the U.S. So the recovery in volume in July, and not much of it all was from Simon. So we've got that up our sleeve if we want to think of it in that sense from a growth point of view. How it shakes to Christmas, I think, will be, I think the next, I would say, the next month will probably be instructive for us a little bit because it's around this time of year that the malls have to order cards because they're obviously ordering more card inventory for those peak seasonal months. And so those orders are typically coming in now and through to the end of September and the cards get manufactured in October and then distributed to locations. I think once we start to get their orders in, I think we'll start to get an idea of how the actual mall customers think that what they're planning for from a kind of peak seasonal perspective. From my side right now, it's just too hard to predict. I mean it's just completely out of our bounds of forecasting. So it's a matter of just trying to settle on a number and be comfortable with that number, whether that's 50%, 60%, 70%, 80%. I mean, as we said, each $100 million, which will basically be 10%. I mean without COVID and the way we were tracking, as Rob said, it's hard to be specific and put it all to COVID, but we were probably tracking to the $1.1 billion in malls. So 10% of it is just over $100 million. So you have to come up with your own, really, view of do you think Christmas is 50% of last year, 70%, 80%. Yes, we just don't know. So we're just going to have to live with it, form a view as, in the coming months, as to what we think.

Yes. Okay. No worries. And maybe…

Look, it will be the biggest single swing factor on the result, I would note. No doubt about that.

Yes. And then maybe just shifting to the PFS margin. Maybe I've misread those charts on Slide 31 and 30. If I back solve the gross profit margin for PFS, it comes out at around that 45-odd percent. Maybe -- have I misread that.

Yes. You've misread it. It's just below 60%. So it is lower than odd. I mean, I think when you add back in the savings, we expect -- the synergies we expect to generate from in-sourcing processing, it will fall back in line with EML's because the items that fall into COGS for any of our businesses are there's cost of plastic, which is part of it, we don't make much margin on plastics. And then you've got scheme fees and sort of banking connections. And so their programs and our programs are operating the same way. GPR is a high transaction segment relative to sort of gift. And so as far as our margin there, didn't have the breakage. But their programs will operate in the same way as ours. And then the multi-currency is probably -- it's slightly higher margins. But that's really the differences.

The back sale of that fourth quarter in terms of revenue to GDV for PFS, it comes in around that 125%. And then in that July number you've given, call it, $500-odd million, you were doing $3 billion in calendar year '20, $500 million is a big number to annualize that. Is all of that coming through that 125-odd percent? The basis points?

125 basis points, yes, that's the average. I mean the average for a set of programs is consistent. A program operates at its normal conversion yield. It's the mix between programs that moves the conversion rates around.

Good one. I think I might just step back there. Maybe just quickly on the OpEx and CapEx. The cash OpEx guidance obviously excludes the investment you're making in software. That's right. You split out the 2 between OpEx and CapEx, is that right?

The OpEx will be within that number. So the -- our view is we'll self-fund that. So the $1.5 million in restructuring costs that we took at the end of June was really just at a management level, but there actually wasn't a lot of headcount per se, it was just targeted jobs where we had duplication. And so that $1.5 million went into that. Suffice to say, we will continue to look and we will have other areas of opportunity and other kind of cost savings, I guess, cost rationalization within the business. But if we had, we'd invest it into Accelerator. So if we saved $300,000, $400,000, $500,000 from, again, some further staff rationalization, people going to Accelerator and just fund that. So the expense -- it's within the expense line. The OpEx part is already within the expense line.

Thanks, operator. I think it's the end of the questions.

Yes. Please go ahead. Thank you.

Thank you. So with that, I'll wind up. And on behalf of Rob and I, thanks for attending this morning, and that will be -- we're talking to a number of you in the coming days in one-on-one sessions. So look forward to that, and thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.