EML Payments Limited (EML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EML Payments Limited H1 Results Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tom Cregan, Managing Director and Group CEO. Please go ahead.

Thank you very much. Good morning, and welcome to the EML Payments' earnings call for the first half of the 2021 financial year. My name is Tom Cregan, Managing Director and Group Chief Executive Officer. And I'm joined today by Rob Shore, our Group Chief Financial Officer. We'll take you through our financial results in the half, a general business update and our financial guidance, which we are reinstituting. Given we're still in lockdown in Melbourne here, and will be here for 1 more day, let's hope we get through the next hour without my neighbor deciding to mow his lawn, my dog going off on a tirade or the local rubbish collection guy picking the bins up, which he is just about to start doing. So let's get into that and see how we go. As investors are aware, we removed our guidance in April of the 2020 financial year due to some immediate and some unknown impacts of COVID on our business. And we wanted to get through the 2020 holiday season and assess particularly the gift and incentive segment to determine how that would impact 2021 EBITDA before commencing formal guidance. And having now got to this position, we feel comfortable in putting a guidance range back in place for the financial year. As those who follow the company know, we've had a long-term strategy of diversification across multiple levels and a clear strategy of transitioning the company away from a reliance on gift card revenues into one that derives the majority of its revenues from GPR programs. And in the first half of the FY '20, if we go back in time, we derived approximately 70% of revenues from the G&I segment. And in the first half of FY '21, we now see GPR revenues accounting for 57% of group revenues. Breakage on gift cards now accounts for something like 16% of revenues versus 40% in past results. This repositioning has really helped the company manage through the challenges that COVID has presented us with thus far. And obviously, the most notable of those challenges was the impact of lockdowns and curfews in Europe and Canada with most malls closed from the middle of December onwards in line with stage 4 and 5 restrictions. And those that did remain open did so on significantly reduced hours. Despite that, our diversification, I think, has continued to pay off with record first half EBITDA of $28.1 million, an increase of 42% on the prior comparative period. Had we not seen more closures in December that we did, arguably, our results would have been significantly north of $28 million of EBITDA, given 6% higher in December prior to those lockdowns occurring. GDV in the Mall segment was down $100 million against the prior comparative period, but offset by higher breakage rates, which minimized the gross profit impact of that volume decline and growth in our incentive programs overall. So despite the moving parts within the Gift segment, the segment was only down $3.4 million in gross profit on the prior comparative period, which I think was a great result. I hope you agree with me that this result demonstrates a key point, and that is that we are no longer in "a malls gift card company." And while we want to be successful in all of those verticals that we operate in, the malls vertical and that seasonality at the end of December is now the difference between a very good result and a great result as opposed to being fundamental to the result itself. And despite current lockdowns and curfews still in place in Canada, Italy, the U.K., France, Spain, Belgium, we could go on, we are guiding to a full year EBITDA result of between $50 million to $54 million, basically the midpoint of analyst consensus, which ranges from $48 million to $57 million. We'll obviously be steering towards the top end of that range, and we'll tighten that range as we get later into the financial year. If we can weather the COVID challenges and perform as we have in the first half and deliver on our full year guidance, then I'm genuinely excited to see what FY '22 and beyond holds as we -- as economic growth rebounds in North America and Europe and these economies and markets reopen. In addition to our financial results, we've continued to grow the business with the addition of new programs in all regions and have set the foundations for Project Accelerator, which is focused really on our transition to our platform-as-a-service broader digital payments business. This is obviously a summary of that strategy, but we will be investing in our technology and our infrastructure to support a single touchpoint integration as well as enhancing our sandbox capabilities and being scheme-agnostic so offering the same solutions across both scheme networks, Mastercard, Visa and others. We'll definitely become product centric, partnering with other companies and integrating their solutions into our own, providing additional functionality and value to our customers and to their cardholders, and we will look to invest in technology companies that can enhance our own solutions and expand the ecosystem of opportunities to flow from that, known internally for us as FinLabs. In the first half of the financial year, we spent a lot of time on system design, project design, and we're now in build mode on several fronts. Commencing on Page 3 of the deck, investors will be well aware of our mission statement and our vision statement and purpose statement, which we launched late last year. We'll be providing more detailed update on Accelerator in the full year result, but I will talk about our FinLabs investments later on this morning. And hopefully, you'll see how they fit into that vision and purpose statement. Moving to Slide 4. And the main call out here is that we are becoming a larger business with 486 team members as of the half year. And we have continued to add to the team in the first half. We added approximately 36 employees in the first half, really as a response to the level of new business opportunities that we're seeing and projects associated with Accelerator. And we would expect to add another 10 to 15 employees by the end of the full year. We've never been a company that wanted to win what I call the headcount stakes. That's never really had much appeal to me. But we do outline later in the deck that we signed 69 contracts in the first half. We launched 64 programs and expanded our sales pipeline in the process. So to not be investing now would be the epitome of being penny-wise and pound-foolish if we want to continue to grow at a similar pace in future years. Rob will talk to our expense base, but we've previously guided last year for $66 million to $72 million. And that difference of $6 million was basically our short-term incentive plan and whether that would be achieved or not achieved. As you'll see later in the deck, we spent $39 million in the first half. And whilst some of those costs are decidedly first half in nature, such as EMLCON and insurance and so on. We'd expect this level of expense to repeat in the second half, given it's largely headcount-related to sales supporting our expanding business, particularly in operations and onboarding into various Project Accelerator initiatives. We've guided for $76 million to $80 million for the full year. And the midpoint, I think, is where we're likely to end up. Moving on to Slide 5, and in our opinion, we've had a strong start to FY '21. Group GDV increased by 54% to $10.2 billion. Group revenue increased by 61% to $95.3 million. As previously mentioned, EBITDA increased by 42% to $28.1 million. Operating cash flow was $34.8 million, which is 4x higher than the prior comparative period and 124% of EBITDA as a result of a couple of things. Number one, our transition to GPR revenue to a GPR business, where cash flows are going to be more in time with revenues. Cash conversion on breakage funds and great -- and a really great effort by our finance team to manage receivables and ensure that we're treating our cash with the importance that we should be treating it with. Those 3 initiatives, I think, had a great result of operating cash flow for the half. That cash flow in turn, allowed us to invest in those first 2 Accelerator initiatives which were worth a combined $9.8 million, and end the half with a cash balance of $136.5 million to 15% higher than what it was at the end of FY '20. That cash balance, in turn, provides the funding necessary for contingent earn-out payments on historical acquisitions without the need to raise funds and to continue to look at FinLabs investments and potential acquisitions. So they've got plenty of optionality there, that shareholders should feel pretty good about. I'm sure the M&A question will come up somewhere, as it often does, and last year I thought that we might be precluded from full-scale M&A due to the logistics of travel and due diligence. But despite that, we are really seeing an elevated level of M&A activity on the global payments industry. If anyone's following the level of deals in the industry, be they trade sales, mergers, back listings and so forth, it's pretty evident that the market has found a way continue to drive acquisitive growth, and it will continue to be a part of our focus in 2021. Moving to Slide 6 and our results by segment. The most notable result here is in our GPR segment where revenue increased 314% to $54.4 million, with PFS generating $38 million of that $41 million increase. So in percentage terms, that also means with the historical EML GPR business also grew by 25% due to growth in Salary Packaging and Gaming. In relation to gaming, just out of interest for investors, our exit run-rate in the U.S. is now about $200 million a year in GDV. So it's a positive result for the North American business, and it's a testament to the work that had been put into growing that market in years gone by. It's not -- it's within a bunch of brands that wouldn't be necessarily household names. They're not the FanDuel's. They're not the DraftKings. That number is the number. So that's a very positive thing for that market. It's a very significant transformation for EML because revenues in that -- in our overall GPR segment will now be over $100 million for the first time, which is certainly a bell weather moment. In fact, in the month of December alone, we processed $890 million in GDV in that segment. GPR gross margins declined slightly, but most investors understand that PFS outsources its transaction processing and pays for access to the U.K. faster payment network. Therefore, has lower gross margins than the kind of pre-existing EML GPR business. So that's the reason for the decline versus any pricing pressure or any other impacts. As we start to migrate those volumes to our own processor and we go live with Faster Payments as a direct member, then that GBP 3.5 million starts to decline and we'll see corresponding gross margin increases in that segment. And that will obviously flow through to the group gross profit margins and EBITDA margins. In the Gift & Incentive segment, as I said before, GDP in the Malls vertical declined by 19% offset by growth in our Incentives vertical of 11%. And whilst incentive programs convert at a lower rate than malls, largely due to lower breakage, collectively, they provide a larger opportunity for growth than the Mall's vertical. And within the Incentive segment, there are different yields for consumer incentive programs versus employee incentive programs, with employee incentive programs converting at a lower rate because if you're all given that by your employer, and you're seeing that affect their salary, and therefore, you're likely to try to use as much of that balance as you can. In the first half, we did see a definite shift from consumer programs to employee incentive programs, which makes sense given FMCG and other companies aren't investing in driving consumer demand for their programs when you've got lockdowns and curfews in place. That would make no sense. And employers were rewarding their staff financially just due to the challenges of that experience last year working under lockdown conditions, particularly in Europe. Partially offsetting lower volumes in the Mall segment was an increase in cash breakage rates, which, again, is logical, given people are visiting malls less. We were asked about this last year on a number of calls, we said it was a trend we were watching. We've been watching that trend carefully and working with our actuarial partners and banks and the data supported an increase in breakage of $5 million of upside, which obviously reduced the half year gross profit impact of lower volume. A great result in trying conditions. And again, it just talks about kind of natural hedge that exists for us in this business. And we've got additional breakage funds to recognize in the second half as well. As our cash flow would indicate there was a strong correlation between breakage accrual and cash conversion. But we've mentioned numerous times over the years that breakage can be significant in an aggregate sum but is insignificant at a per card level. And just out of interest for investors, we have COVID impacting usage because you're seeing lower redemption, therefore higher breakage. As the issue of these programs, we do allow cardholders to call us and push out the redemption period on their cards, and that's something we're always willing to accept their calls on. The number of calls we've received due to COVID is completely de minimis relative to level of our card sales. So we saw that again. We saw that in 10 years ago in the GSC, we saw it with double debt recessions in the U.K. We're seeing it now with COVID. And so that trend, I think, just continues. And ultimately, I think we'd expect that as we get to Christmas this year, and you've got progress with vaccines and the reopening of those cities and economies, we'll see a recovery of GDV in the Mall segment albeit with breakage rates that probably revert back to historical levels. The VAN segment was pretty much a steady state story. We had GDP growth of 6%. We onboarded 2 new clients in the half and expect to see more output from them in the next 12 months as well as onboard additional clients in this current half. But really, the focus for us in the first half of this year was the integration of PFS. So we need to keep focused on the VAN segment for the reasons that we've mentioned previously. We won't spend time on Slide 8, but it details our track record of growth over the last 5 years. Just for a change, we're showing the monthly GDV in each segment that we thought investors would find interesting just on a month-to-month trend basis. The next few slides call out the movement in that Gift & Incentive segment, which I've spoken about before, but again, just more information. As we've discussed, the Malls segment saw a GDV decline of 19%, which only translated net-net into a gross profit decline of $3.4 million. In the current quarter, we would expect volumes to still be heavily impacted in that segment given restrictions and curfews are in place still in all those places. And volumes in January were down in the order of 50% on the PCP and similar trends in the first half of February. The quarter is not a key quarter for gift card sales. But nonetheless, plays into our EBITDA guidance for '21, given it makes sense to be conservative with guidance. The flip side of that and the positive side, again, referring back to GPR is that you can see the monthly volumes there for GPR. And in the month of December, PFS, just as a stand-alone business was slightly over GBP 300 million. And in February, February is a 28-day month, obviously. But if February was just standard 30-day months, we'd be over GBP 300 million again for this month. So the GPR segment is proving very resilient across the board, but also in Europe, despite those kind of conditions that we find ourselves in. In Australia, where we weren't subject to mass lockdowns. Companies can run more consumer incentive programs. We actually ran 150 digital programs using our PAYS technology. So that kind of demonstrates the trends we're seeing at incentive programs moving from physical to digital and some in industries that wouldn't have been able to support a physical card program. So positive to see, and hopefully, we see that in the regions -- in the other regions. We continue to sign new distribution partners, some of which are the bottom, some are live, some will launch in the coming months. And that's just key to continuing to grow the number of programs that we run. On the next 2 slides, before I hand off to Rob, there were several operational highlights that are worth noting I mentioned the biz development front earlier in terms of 79 contracts and 64 programs. Our sales pipeline expanded, and our win rate for new business was 39%. So we were asked that by investors last year. We said we would kind of commit to providing some information on that. And that's the first time we've really looked at that number. So we'll continue to measure that in future periods. But in a competitive global prepaid market, winning 4 out of 10, we think is a pretty good win rate. Obviously, we would be hoping that initiatives related to Accelerator or other things can kind of increase that win rate going forward. It's also worth noting that when we talk about a pipeline of 408 prospects, the future GDV at maturity that we believe we will see from this pipeline translates back to the programs we believe we will win. So we're not taking a number of $8 billion that we believe is the maturity on the current pipeline in 3 to 4 years on the assumption we're going to win 408 prospects. It's on the assumption that we're going to win what our current close rate is. Moving on, we launched a payout program for Paddy Power in Ireland and converted existing cards in markets that were managed by a competitor. That migration was completed in December, fully -- so it's been fully active now for several weeks. And that will certainly be a positive for our Gaming segment in the second half and beyond. In PFS -- the PFS kind of EML business has been given the green light to become a direct member of Faster Payments in the U.K. and that should be fully implemented by the end of the financial year, resulting in savings of approximately GBP 480,000. That was one of the main synergy projects when we acquired PFS, and it will be a positive to head into '22 -- FY '22 with those savings hitting the bottom line. Also in the U.K., we've gone live with Phase 1 of a program for the home office and expect this to be fully implemented by the end of the financial year as well, which gives us a good lead up in -- good lead into FY '22. In the Salary Pack vertical, we continued the transition of accounts with Smartgroup and we ended the quarter with 282,000 accounts, now 286,000 accounts. And we expect to hit 300,000 accounts in financial Q4 of this year. In the Neo Lending vertical, we continue to add new partners, including Laybuy Australia and Fu and others. But I think it's worth noting that because those companies are early stage businesses, it's worth noting that when we launched MoneyMe, a year or so ago, I think it's now 15 months, the cumulative GDV for that program now stands at $23 million. And that's a number that MoneyMe is comfortable with me sharing. Otherwise, we don't normally share customer data. So that goes back to the kind of cohort analysis that we took investors through last year. And how GBV starts from a low base on some of these programs that we're adding and then builds over time, and that's the kind of compound growth factor that benefits us in the business. In the government sector, we actually ended the half with 561 active programs, which I think talks largely to the presence we've got in the U.K., but also in some other European countries. We've seen local councils and other governments expand the number of programs they run due to COVID, with funding for programs such as domestic violence, mental illness, welfare and so on. And I think as we come out of lockdown, we will see countries have formal lenders for stimulus programs that will be in the hundreds of millions of dollars. So similar to what the Australian government have done here with sector-specific support. I think we'll see that to a pretty significant degree across Europe as these economies reopen. Locally, we signed a deal with 8common, that some people may know, another ASX-listed business. Who are working to cross-sell our card program into their corporate expense programs, they manage for more than 100 kind of government agencies as well as working on additional opportunities, such as the NDIS. And we also announced the pilot with the New South Wales Department of Transport, along with Mastercard and the Commonwealth Bank to launch the pilot of the digital Opal card, which could be significant for us in future years as well, as that pilot moves into full launch mode. And there's media coverage on that front that investors can look at and keep abreast of. And finally, just a short word on our first 2 FinLabs investments. We've completed the system's integrations for Interchecks. We've signed 2 contracts. Actually, I think that could be 3. As of today, we've got 15 in the pipeline. And the common theme is providing corporates with both card and non-card payout and pay-in options. So the ability to pay a customer in several ways. So for example, one of those first contracted customers is in what we call the earned wage access base in North America, where companies are facilitating employees drawing down on their salaries flexibly during their pay cycle as opposed to just on a due date. And their customers might want to draw that partial salary down into a card, into a bank account or a combination thereof. But they want one provider to support both solutions as opposed to having to use 2 suppliers. In a simple sense, that's what FinLabs is about and ties back to our vision of providing customers with a simple single touchpoint as well as enhancing our product capabilities for scheme and non-scheme payments. FinLabs allows us -- that -- looking at that investment, FinLabs allows us to invest and obtain that technology today versus build it and take 2 years to build it, because it'd be competing with other internal projects, and we miss the boat in what is an increasingly fast-paced industry. Hydrogen is almost complete from a systems integration perspective with a likely launch in Q4, financial Q4 this year. With revenue generation into FY '22, which is in line with previous updates that we've given to the market. And pleasingly, they've had over 100 companies go through beta testing to integrate onto that platform. So again, should provide us with just an additional lever for growth in the years to come. And with that, I'll -- Rob, I'll hand over to you for the rest of the presentation.

Thanks, Tom. Good morning, everyone. I'm going to take you through the financial results review starting on Slide 14 of the pack. In summary, I mean, the first 6 months of the FY '21 financial year have delivered a really strong set of results. And it's a record start in all key measures, including gross debit volumes, $10.2 billion, that's up 54% on last year. Revenues, $95.3 million, that's up 61% on last year. EBITDA, 28.1 million, up 42%. NPATA, 13.2 million, up 30%. So some really strong set of P&L measures, but also pleasingly, really strong cash flow measures, underlying cash inflows of $35.1 million at the operating level or 125% conversion to EBITDA. So definitely a strong start to the FY '21 year. Putting that in context, these 6 months results are pretty close or ahead of what we delivered in the full 12 months of FY '19. So strong growth in that 18-month period despite challenging trading conditions in many of our key markets, as Tom has highlighted earlier. PFS, which we acquired 1st of April 2020 was consolidated into the financial results for the full 6 months of the current period. I'm looking at Slide 15 now, group GDV, there are some key takeaways to highlight on that page. We forecast this a number of times previously, but to drill at home again, the general purpose with all of the segments is our largest segment in terms of gross debit volume, the largest segment in terms of revenue and gross profit, and it's our fastest-growing segment, both acquisitive growth and organic growth, which is a really good story. PFS. Looking first at PFS, it performed well in most of their key verticals, particularly in the digital banking and the U.K. government verticals and then continuing to launch new programs, and we definitely see strong periods of growth to come from this business. Organic growth in the sort of non-PFS remainder of the GPR segment was also strong, had growth of over 20% or over the PCP. The transition of Salary Packaging programs in Australia is nearing completion. We've got over 282,000 accounts live at the end of December. And the growth in this vertical in the first 6 months of the year is going to annualize through into the second half and into future periods. Gaming disbursements also grew strongly domestically in Australia and overseas, particularly with the launch of Poker Winnings disbursement program in the U.S. and the program with Paddy Power in Europe in December 2020. So they'll both benefit the second half in full. In the Gift & Incentive segment, we saw reduced volumes in the malls that were down about 19% due to global closures, social distancing, lockdowns in various key markets during the period. It's impossible to accurately quantify the impact of COVID on the segment. But we'd estimate it will certainly be more than $100 million of GDV, which is it's impactful, it's significantly impactful, but it's definitely better than what we're seeing at the start of the pandemic. And trading conditions, though, did deteriorate in early to mid-December. As Canadian European lockdowns became more severe. We continue to see significant impact on the segment volumes in January 2021. We're forecasting to start to see improvements in quarter 4 of this year. So whilst we saw more volumes impacted, we did see growth in incentives or non-mall programs. They're up 11% with new programs launching, taking advantage of our digital solutions for employee engagement, customer engagement, marketing programs and the like. In the VAN segment, it was relatively flat volumes, ended the 6 months with the December run rate of $815 million of monthly GDV, gives us some optimism for the remainder of FY '21. And we're equally optimistic about stronger growth given our sales pipeline in this segment. Looking at Slide 16. The 6 months delivered record revenues were up 61% to $95.3 million. The majority of our revenues are generated from recurring revenue streams in the GPR segment. The GPR segment accounts for about 57% of group revenues in the period. Growth in the GPR segment was both acquisitive and organic. And so PFS contributed about $38 million of revenue with broad growth across their business and their verticals they operate in. The remainder of the GPR segment contributed about $16.5 million of revenue, and revenue grew 25% on the prior comparative period. Organic growth before was sourced from Australian payroll, salary packaging programs, where we're approaching an annualized volumes of $2.5 billion a year in global gaming disbursements where we exit December with an annualized run rate approximating $1 billion. Revenue yield in the GPR segment was consistent with the prior quarterly yields for the last 2 or 3 quarters of about 112 basis points. The Gift & Incentive segment contributed 37% of group revenues. And in the 6 months December 31, we made about 16% of group revenues from breakage. So it's significantly down in any of the prior periods, and it will continue to fall as a percentage of group revenue through to the full year results. We flagged previously that we've spent a significant amount of time evaluating with our third-party statisticians and North American sponsor banks, evidence of low redemptions on more programs. So this is likely due to lockdown and social distancing, reducing traffic in the malls and consequently reducing card spend over a 12- to 18-month period post activation of the card through the pandemic. This is translating into higher breakage rates. We've taken a conservative approach, and we've only adjusted for cards issued earlier in the first of December 2019. So where we've got more than 12 months of data that have lapsed [indiscernible] loaded. And that gives us a high degree of confidence in the data. And we expect to do more work on this through the second half, and we expect to see further upside in the second half. The overall revenue yield for the Gift & Incentive segment was ahead of expectations of 467 basis points due to the adjustment above to brokerage rate which has started to convert to cash in February 2021 and will be received into cash in full by June 30, 2021. The VAN segment stabilized actual run rate exceeding $100 million in December, consistent revenue yield of 13 basis points. Central Bank interest rates on our cardholder flows have been a headwind across all the segments, when we've seen lower interest rates throughout the period and negative interest rates in the Eurozone. We incurred net negative interest rates on our European liquid float balance, so that's the amount not invested. That cost is an expense of approximately $0.5 million in the first half. The global treasury team works very hard to minimize the impact through term deposits or government-backed bond investments. But this is cost, and we remain cautious about the risk of further drops in Central Bank interest rates, particularly in the U.K. and the Eurozone. Our total float is approximately $1.8 billion, $1.9 billion worldwide. And we should see -- should we see rising interest rates in future years, we would be a beneficiary of that. Moving to Slide 17. At a headline level, gross profit rose to $67.3 million, slightly lower margins of 71% due to a segment mix towards GPR and the dilutive impact of consolidating PFS. PFS outsources payment processing and its fast payment connections, resulting in lower gross profit margins for that business. These were 2 synergies that we identified in the acquisition thesis, and we're on track to bring a direct connection to Faster Payments online by June 2021, and that will deliver a savings of approximately $0.5 million in FY '22. The project to bring processing in house remains on track and as a target completion date by the end of FY '23. We continue to regard cash overheads as a percentage of revenue as a key metric of operating performance, and we ran at 41% of revenue, which was down slightly from 42% in the prior comparative period. The majority of the increase over PCP, about 90% of it relates to the acquisition of PFS being consolidated for the full 6-month period. Employment-related expenses make up 69% of the group cash overhead. That's really reflective of the nature of our business. The employment costs, as a percentage of revenue remain consistent. Despite increasing accruals for cash based, short-term incentive plan expenses to reflect the likely maximum achievement for several of our businesses in the FY '21 year. So we're running ahead of our expectations for overheads, running above our expectations in the half year. There's a few reasons. Firstly, the higher STIP accruals because the business performance has been strong. Secondly, we capitalized internal development time capital to less internal development time at $4.8 million than we expected. The $4.8 million replaced the depreciation amortization charge of $4.6 million in the period. So excluding the acquired assets that we'll be amortizing because we really spend more time on maintenance activities, and maintenance activities and replacement activities are expensed rather than new functionality, which is capitalized. But as accelerated projects move from design into the build phase in the second half. We expect this capitalization rate to increase. We also chose to exceed -- thirdly, chose to exceed the overheads target given the business is performing well, and there's a strong level of new contract signings and a strong pipeline. So it's important to continue to invest in wells that drive growth, such as customer onboarding, product and IT teams. The increased spend has been directed to high-growth areas, including PFS as we're integrating that business into EML. As a result, our cash overhead guidance for the full year moves up to $76 million to $80 million. On Slide 18, and the outcome of this is an EBITDA of $28.1 million for the 6 months to December 31. This continues our track record of growth, which is now a 5-year CAGR of 56%. On Slide 18, we're reconciling between EBITDA and NPATA. And there are a couple of highlights to call out. Depreciation and amortization of $13.9 million at the statutory level, 67% of that relates to amortization of acquired intangibles -- So they're fair value uplift that we do when we buy a business. The BAU element of that is $4.6 million, which is included in the NPATA measure. So you'll see that on the bridge. Share-based payments relate to executive STIP and senior leadership LTIP and are included in the NPATA number. Other expenses is mostly foreign exchange on translation of foreign currency balance sheet items. And then the next one is we incurred an expense of $24.9 million, which is mostly in relation to bringing up the contingent consideration payable for the acquisition of PFS to our current estimates of their trading performance. So we made an estimate of contingent consideration payable when we made the acquisition in end of March 2020, and all the forecasts were conservative at that time, including the vendor forecasts, so don't forget the vendors at the time have just accepted a price reduction of more than $180 million. Since March 2020, we've seen a rapid recovery and improvement in trading in that business. This has been particularly evident in the 6 months we're reviewing now. So we're now forecasting that PFS will achieve their maximum earn-out over the 3-year assessment period. So now we're at the maximum, the will be no further expense to be booked in future periods, and the first payment will fall due based on actual results to June 30, 2021. That will fall due in August 2021. So it does impact the statutory NPAT number, but it very much relates to the acquisition of PFS. And so it's excluded from the NPATA and EBITDA numbers. Looking at the balance sheet on Slide 19. The first call out is that we split out cardholder assets of $1.63 billion and liability load to cardholders of the same amount. These are the amounts held on behalf of our customers and cardholders the direct offset by the liabilities to those same cardholders. So we'll concentrate on the corporate balance sheet column. The group's sitting on a surplus cash of $136.5 million with no secured debt. Our businesses are cash generative. So I'll discuss in more detail on the next slide, and we're also holding a contract asset or breakage accrual assets of $29.1 million, of which $18.4 million is expected to convert to cash over the next 12 months. The Group's funded a premium on purchasing bond investments, these are what the European Regulator deems as 0 risks, so they're very low risk government-backed assets, where we invest cardholder funds, but the Group receives the economic returns. We have a policy of not actually trading the bonds and holding them to maturity, this is more than $6.5 million of Group cash which we'll convert back to cash in future periods. The bonds are an important part of our Treasury policy to offset extremely low or negative Central Bank interest rates on the cardholder float. So in terms of the funding, it's $136 million of cash, $29.1 million of breakage and a bond premium of $6.5 million. Moving on to the cash flow on Slide 20. The business continued to generate a significant amount of operating cash inflows with a new record cash inflow of $35.1 million, which is 125% of EBITDA. We've previously forecasted that cash conversion would be more than EBITDA. It's due to the timing of breakage converting into cash. So we've converted more into cash than we accrued in the period from July to December. Alongside, a strong focus on improving working capital by the funds team. We expect strong cash inflow performance to continue through FY '21, although as Gift & Incentive volumes improve in quarter 4 and beyond into FY '22, we would expect to accrue more breakage. And therefore, we'd expect to see a working capital be investment at that time. We continue to invest in internally generated software development, capitalized $4.8 million of 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 the second half as Accelerator projects move from the design phase into the build phase. We made 2 FinLabs investments in Interchecks and Hydrogen and that totals $9.8 million in the period. Moving on to Slide 22 and looking at our guidance for the full year 2021. There's still a number of moving parts, and these will firm up as we get further into Half 2. And so that's driving the fact that we're giving a range, and we're expecting a guidance range of $50 million to $54 million at the EBITDA level. The most material impact is driving the forecast range is really the European, UK and Canadian lockdowns and the timing of when we'll see them ease and trading conditions improve. Business performed well with less harsh lockdown conditions in the July to October period last year and early November. So we do expect to see a rapid recovery once the conditions improve. We've assumed that we'll see tough conditions continue through to March, the end of March, and we'll see improvements through quarter 4. We will recognize $3.8 million of breakage, and that's in the second half, and that's carried over from first half Gift and Incentive activations, down on the prior comparative period where we carried over $6.8 million and that's due to lower unit sales in the first half, and particularly the timing of weaker sales in the immediate weeks running into Christmas in that December period as well. Foreign exchange rates and interest rate -- or foreign exchange currency rates and interest rates are outside of our control, our guidance is based on no material changes to the rates that we saw in force at 31st of December. Operating cash flow is expected to continue to be strong for the second half and will be around 90% to 110% of EBITDA for the full year, we think. So that's our guidance numbers for FY '21. With that, operator, I'll open the line up to any questions for Tom and I.

[Operator Instructions] Your first question comes from Garry Sherriff with RBC.

Tom and Rob, just a few questions. Firstly, looking at GPR, you guys said you had really strong growth in Salary Packaging, up 60% and Gaming up over 40%, but the PCP growth was 25%. So I'm just trying to figure out what segments might have dragged down that overall growth rate?

I think when you -- I'm not sure where you've seen 60% and 40%. I think the overall for the revenue was up 25%, and you've probably got the mix between different programs. There's a lot of different moving parts, but the Salary Packaging is probably the big piece, the growth in the accounts from June 30, to December 31, isn't sort of a straight line between the 2 so that's really going to -- that $282,000 that we finished the December 31, is it what's going to annualize through the second half. Does that answers your question?

Yes. Sorry, my mistake. The guidance that you guys are looking at in terms of what you're talking about lockdowns in April, does that mean we should be seeing a similar level of restrictions as the U.S. or are we talking pre-COVID type lockdown or no lockdown, I guess. I'm just trying to get a sense on, certainly, the next couple of months are looking tough or you're assuming that, but when you talk about post that, what are you assuming?

You want me to take that Rob?

Yes, sure.

Yes, yes. I mean, I think in kind of a simple term, if you look at the Q1 result of this year, which was, I guess, the first quarter coming out of COVID. I guess, the Q4 of FY '20 was the one that was most impactful within that Gift business. We -- our Q4, our Q1 EBITDA number was $10 million and so obviously, you could spend $18 million in the second half. So I think it's a fairly safe assumption to think that this quarter and the next quarter with the growth in GPR, it's kind of higher than what it was back in that same quarter means that it's a fairly good bet to say that each of the next 2 quarters would be $10 million or thereabouts in EBITDA plus growth. So the $50 million is a conservative number. I mean, we've got to give ourselves a range because we understand -- you miss the number, you get hung. So there's no point for bravery when it comes to guidance, but we'll be steering towards that kind of that $54 million range. But I think we've got the benefit, if you like, you've almost got the benefit of being at $28.1 million plus the $3.5 million of AASB. So you really get -- in an accounting sense, you couldn't look at it this way, but you're effectively at $31.5 million really. And so 2 quarters similar to the first quarter that we're in this year, but again, wouldn't have had any of that AASB carryover, kind of gets you to that $52 million in range, and then it's a question of getting up above that.

Yes, that's clear. Thanks, Tom. And the last question. Thank you for providing the win rates at 39%. How does that look historically? Is that in line? Or is that lower or higher than your historical win rates if you've got that information?

Actually, we've never looked at it, Garry, this is the first time we've looked at it, which might come to a surprise to investors, but we invested in HubSpot last year. So we integrated that to enable us to have greater kind of granularity on the deals in the pipeline. And then you can post audit after the fact how did they perform relative to the forecast that we put in there during the period. It helps us look at how quickly these programs are being closed and quickly they're being implemented. So that took us 6 months to implement in the first half. I'm not sure we really had that number until now. So in the past, we're just been focused on, I think, winning the more material deals. There's 2 parts of that win rate, it's an interesting number, and I don't really have anything to go on other than the fact that it sounds intuitively good to be winning 40% of deals globally across countries where we have multiple competitors. So I think it's a very positive number. Can it get better with Project Accelerator? You'd like to think so because that would be why we'd be investing in that in the first place, but there can be some false econimics too,because if you're winning -- of 408 deals in the pipeline, I know of 10 that are in the pipeline that we would consider fairly -- we're in the real running to win. And those 10 probably worth $20 million to $30 million in revenue. So they're not all created equal. So you win 70% of deals, but if those 70% of deals are small fintech startup businesses, then it's a great number, but it's not really going to translate to the bottom line. So there's a balance -- there of -- you've got to have a good win rate, but you've got to win the ones that matter. The deal that could be brought on that could be a million, two,, three. four in revenue as opposed to just winning every deal.Because -- I hope I'm explaining that right.

Sorry, just going back to that first question. So I am looking on page -- slide of your segment performance. And that's where I'm seeing the Salary Packaging revenue up 60% PCP and Gaming revenue up 42% PCP. And I think you had mentioned that the non-PFS had grown 25% PCP. So again, I'm just trying to figure out, there must be other segments, I guess, which are dragging down the non-PFS segment.

Yes. I mean you got -- that's really comparing those individual segments against each other, right? So it's a relative performance of those programs against themselves and then in the rest of GPR, you got a whole bunch of programs everything from he LuluRoe program through the CapCharge type programs, there's a whole raft and variety of other different programs around the world doing different things. And so that's where you're kind of looking at the individual segments. So I mean there's always ups and downs, and that's why we try and say, look at the segment as a whole rather than trying to drill it into individual pieces and going down into 50 different parts because it doesn't really add a lot of value.

Yes. No, understood, Rob. No, I do quite a bit of nitpicking.

It's all going up and down a little time, and it's just the nature of the industry, like our customer success is some are going to be in different periods, and we don't really control that. And so that's why we think it's better to look at the overall picture just it's cleaner and easier.

Your next question comes from Steven Kwok with KBW.

The guidance is very helpful. Guess my first question is just around the M&A pipeline, given you have substantial amount of cash on hand. Can you just talk about the pipeline, like what verticals or geographies you're currently looking at?

Yes, I can do. I mean, the -- look, in terms of geographies at the moment, largely North America and Europe, because we have beefed up our executive team over the years, by design. And so in North America, there aren't lockdowns. So people can travel for work and without being flippant about it, I mean our head office is Kansas City. But the chance of getting COVID in Kansas City would be the same as you -- that of getting it in New York. So people can travel for business and conduct on-site DD and spend time with companies that we're looking to acquire. And I think the same was the case in Europe really until the lockdown middle of December, and I think once that eases then. Then that will pick up again. There aren't any real challenges getting out of Australia for those countries. So we -- myself and Rob and my team at here have just got to rely on doing that more through online means because we just precluded from physically going somewhere on DD. So geographically, they're going to be the 2 main areas. From a product perspective -- from an M&A perspective, where at the moment, not trying to buy scale for the sake of scale. So for example, if there was a company that was like us in the prepaid space in the U.S., and buying that business for the sake of scale would probably be a lower priority than kind of the folks here on our own organic growth or I like that company had significant growth of itself and then that would propel our earnings there. One of the things we're looking at a lot is the FinLabs investments and those type of investments, technology companies that can add weight to our platform. We're doing a lot of work looking at companies in the open banking space, because we think that, that is just another evolution of payments, that in a way Interchecks -- you wouldn't call Interchecks an open banking company because they're sending to people's bank accounts through a Visa Direct or Mastercard Send. So they're still using schemes, but direct payments as opposed to card payments,. We see that open banking piece as just the next iteration of payments, and being to be able to facilitate payments to bank accounts, facilitate payments to cards. So we're doing a lot of work, we've been looking in that space for quite a while. There are some unbelievable valuations in that space, so we've got to be pretty selective. But I think I can see that -- rather than buying another PFS for example in the U.S., we would be open to, if that if it came along, but rather than that, it would probably be something like that added to our product capability that in turn enabled us to have faster organic growth.

And my follow-p question is just around the customer base you have, like do you feel like with the pandemic, has anything changed? You mentioned around the breakage rate and stuff like that, is there a chance that it can come back and then you could have -- to reverse the breakage or is that permanent?

Yes. it's permanent. So once the cards expire and once the -- I mean they've got expiration periods. So, in Australia it might be 12 months, in U.S. it could be 3 months. In Germany and markets like those it's 3 years because there are different consumer protection laws. But once they're expired, they're expired. So, there's no out of period reversible, or anything like that that occurs with breakage. Breakages are -- I mean I've always said for 9 years, it's a good asset because -- and you've got to be battle-tested for this stuff. So in the past where we've had accrual, we had unit volumes GDP going up and we had breakage accruals therefor going up in line with that a well. In the last -- certainly in the last 7 or 8 months, we've had lower unit sales, but the cash conversion is from products you sold 12 months ago or 18 months ago. So that's why we've got really positive cash. That's the natural hedge within that Gift Card business. And I think come Christmas this year is, as I said as economies reopen, you'll have higher unit sales volumes, and then you're starting to rebuild that accrual base again. So I don't really see -- in the 10 years I've been here, there's been no pattern, no change in breakage through all manners of economic cycles and downturns. So we see that as just a fundamental part of the business, but clearly the PFS acquisition and our investment in technology was really pivoting to reloadable because that is more of -- that's more in keeping with out vision around digital payments. So that's where the focus of the business will be in the years to come, for sure.

Your next question comes from the line of Elijah Mayr with CLSA.

I just wanted to drill into the OpEx a little more just so I got this right. So the OpEx number and the overhead number being where it was, was more result of the endpoint of costs associated with the PFS being above expectations. Is that the right way to look at this?

No, part of it was PFS, but mainly to be honest, it just comes down to pure surprise around the level of business activity in the first half. I think when we gave the -- I it would have been the full year results, I think what we were talking about here's where we see the cost base being. The $72 million would have been full STIP budget. So that was the only item of difference between the $66 million and the $72 million. And when we started the year with a lot of -- still with a lot of uncertainty, I think, around COVID and how that would impact trading conditions, then $66 million would have been the low end of that. If you budgeted for trading conditions being within budget, and then $72 million would have been the cost base. We've, I think we've added 35 heads in that half and about 18 of them are Accelerator-related. If my memory serves me right, and, Rob, correct me if not, the other 17 or 18 are headcount supporting sales, incremental salespeople, banking operations team, onboarding because we've got to get these -- I mean, we can have a pipeline of 100,200,300,400 opportunities, but the rubber hits the road when these programs are actually launched. And so I think there's a resource -- there a plug you don't want to have there because you want to be able to get programs to marketers as quick as you can make it. So largely headcount, half of which would be Accelerator, half of which would be OpEx largely related to driving growth. The others in my mind are swings and roundabouts, of our like insurance went up, but every company has swings and roundabouts on things like that. But mainly, that was a -- and dare I say I was surprised here on quite a few things on COVID and got quite a few assumptions wrong, and I'm glad to be getting this one wrong because at the end of the day, in order to grow at our current pace, if we weren't investing to bring that business on, then I think would be crazy. I mean if we really believe that, and we do, our pipeline would translate into a win rate that would translate into $8 billion of GDV in 3 to 4 years for these programs at maturity. And you've got 100% -- 90%, 100% conversion rate. And you've got $80 million in 3 to 4 years of revenue growth, you'd be nuts not to be resourcing that now to be able to get there. So that's where it's heading.

Yes. And then, I guess, going forward, I guess, looking forward to FY '22 and onwards, I guess, is the employee base that you've now invested in, in place for the overheads, is that going to continue into FY '22 under -- is that range to continue? Or should we expect those OpEx costs to increase in line with revenues? Is there further investment to be going there? And I guess, just relating that to the PFS acquisition, as you continue to integrate that? Is there going to be cost stripped out that may sort of lower that number?

Yes, that's a good question. I mean I think the -- so we'll add another 10 to 15 kind of FTE by the end of the year. So we won't have the full impact of their cost in the second half because they'll be added gradually through the second half. So in fact, I reckon we would start FY '22 with circa 500. So yes, those peak would be on from there. We haven't sort of worked through what our budget position would be for next year and what kind of headcount we would want to look at to support the business. And most of what we brought on, I think, is a view of being able to support what we're seeing now and not being caught short. So I would be I'd be very surprised if -- in fact, I'd be shocked if we added 50 more FTE in FY '22. I think we're tooling up now to be able to bring on that level of volume and revenue. I'd be -- but there's a scale effect there. So I'd be surprised if we see anything like that in '22.

Yes. Understood. And just relating to PFS. I think previously, you have sort of said you might be able to get up to sort of $3 million sort of cost out realized. Is actually that largely realized or is that sort of -- is there more benefit to be had since you integrate the business? Or is it OpEx-based?

Yes, the OpEx base. I mean the -- so 2 points that -- of that $3.5 million synergy benefit, which is, call it, $6 million, $1 million of that was the integration into Faster Payments and just getting rid of that cost immediately. Our costs, for example, by using third parties to facilitate that cost is about 20p a transaction. And as a direct member, will cost us 2 pence a transaction. So there's the GBP 480,000 and that effectively disappear on July 1. So there's 1 million as of that $6 million that impacts the bottom line on -- in FY '22. And the rest of it is largely the conversion of programs from third-party processes to our own. And the way that we'll do that, I mean, it has to be phased because you can do it -- you can what they call recard someone. So if we've got millions of active cardholders in the market, we can go and recard everybody but at an expense of, you can imagine 2 million pieces of 2 million cards and it might cost you $10 million to go through that recarding exercise, but it has a significant risk because if you get something wrong in that recarding exercise, you can lose customers and cardholders. So typically, you would just convert those cards over as they expire, which is exactly what we did here with Salary Packaging. So we launched Salary Packaging with heritage and on the Visa network. We then converted across the Mastercard where we are the issuer, but we did it over 3 years, just as the cards naturally expired. So there'll be $1 million of the $6 million falls to the bottom line of FY '22, I would say, another $1 million of the $6 million falls to the bottom line next year through processing savings. And I would say, the other $4 million of the $6 million comes in FY '20 -- in FY '23 because that's when the majority of the cards will have migrated from the third parties on to our own.

Excellent. Appreciate the detail and congrats on the results.

Your next question comes from Brendan Carrig with Macquarie.

Just a few quick ones from me. Can you just confirm, Rob, if you mentioned the upside or further upside in the second half from the breakage side of things? Is there any of that factored into the guidance? I'm assuming it's not.