EML Payments Limited (EML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EML Payments Limited Full Year 2023 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Kevin Murphy, Interim Group CEO. Thank you. Please go ahead.

Thank you, Jody. Good morning, ladies and gentlemen, and welcome to EML financial results presentation for the 12 months ended 30 June 2023. I'm Kevin Murphy, Interim Group CEO, and I'm joined on this call by our Interim CFO, Jonathon Gatt. Jon and I are looking forward to taking you through our presentation for the next 30 minutes or so, and then we will be pleased to take questions. Today, I'll outline the EML group results, some perspectives on the business from my short time as CEO and an update on the operational priorities and strategic review announced by the renewed Board in April this year. Jon will then provide more details on our financial performance before I finish off with our focus for FY '24. To begin today, I wanted to give an outside in view of EML's business after my first few months as Interim CEO. Our new shareholders may also benefit from me spending a few minutes, restating the commercial fundamentals of your company. Despite a number of headwinds and challenges, which we acknowledge and have been well documented over the last 18 months, my clear assessment is that, EML has strong core business attributes with effort, focus and financial discipline can capture much more of the attractive markets in which we operate. We are operating in a large and growing payments vertical, where innovation in B2B and B2C payments remain strong. Our core infrastructure remains relevant and attractive. As an example, the global prepaid card market today is estimated at $3.5 trillion and expected to nearly double to $6.7 trillion by 2028. We are also seeing contracting competition due to tightened capital markets, together with the new cost base realities of operating regulated e-money businesses globally, which severely impacts subscale competitors. I believe our investments in risk and compliance capabilities in response to the new regulatory reality will translate to a competitive advantage for EML as the e-money market continues to rationalize. This puts us in good stead. Indeed, in Europe alone, new EMIs have reduced from 206 in 2018 to 31 in 2022, while closed EMIs have increased from 9 to 17 in the same period. From a financial perspective, we have a track record of organic growth. In our core business, we have strong margins and profitability, particularly our Gifting business and General Purpose Reloadable cards, the foundations of this business for many years. We also have a diverse set of revenue streams across the customer's life cycle, establishment fees on sign on, annual recurring account management fees, transaction-based fees, breakage and float interest. This allows us to effectively hedge our revenue streams. Our client base of over 1,800 customers is engaged long-standing with debt in corporate, retail, government and employee benefit sectors. And importantly, we have a renewed Board and leadership team with discipline and a focus on addressing the challenges the business faces today. resolving remediation and regulatory needs swiftly, retaining and developing our 600-plus experienced workforce, implementing a plan to control and rightsize our cost base and manage loss-making businesses to become sustainable and reigniting the growth machine or focus has been lost following leadership change in July '22. FY '23 had a number of key changes throughout the year to the business. Challenged acquisitions, disappointing financial performance, ineffective leadership change and a complex organizational restructure were catalysts for shareholder led change. A new Chair, Board and Interim CEO joined in H2 FY '23. The new Board set aside the long-range strategy previously announced to focus on the challenges of today, including retaining leadership close to our customers and remediating operational challenges weighing on the business. While we have much work to do, we see encouraging early progress in cost optimization with further opportunities to improve margin from FY '25 onwards. Our senior leadership team is rebuilt -- is being rebuilt at speed and will be in place in H1 '24. And at the AGM, we will articulate EML's future shape together with FY '24 guidance, if not sooner. Despite the difficult year, we have delivered an FY '23 financial results ahead of guidance. In FY '23, our core business strengths have shown through, and I'm pleased to report that EML has exceeded guidance. At a revenue level, we have exceeded the top end of our guidance range by 4% and 9.1% at an underlying EBITDA level. Outperformance on guidance was driven by a number of factors, including renewed contracts, upside from renegotiated float interest and the commencement of our cost rationalization activities. We remain committed to returning to our historical track record of meeting and beating earnings guidance. Today is the first step. Turning to our financial highlights for the year. Despite a challenging year of headwinds, we have recorded total revenue of $254.9 million, which is up 9% on FY '22 and a GDV uplift of 62%. The biggest driver of revenue growth was the normalization of interest yields on our flows, a core part of our contract pricing and revenue mix that was significantly impacted during the COVID period, including negative rates in some markets. We also saw modest growth in all 3 business segments with 2 operating entities remaining subject to growth caps by their respective regulators. Our Gifting segment performed strongly, up 24% in gross volumes versus PCP. This was driven by growth in miles post-COVID and strong year-on-year performance of the Australian business and our European incentive product Perx. Our Digital Payments segment also performed well with a full year of Sentenial represented in these numbers, realizing an uplift of 73% on gross volumes and an uplift of 24% on revenues. Our GPR segment was impacted by regulatory growth restrictions on our European business, PCSIL and U.K. business PFSL. From an underlying EBITDA perspective, we delivered $37.1 million in earnings, down 28% on PCP. For PCP comparative purposes, shareholders should note that FY '22 included a once-off material revenue recognition of $17.9 million, which dropped fully to the EBITDA line. We also took an impairment charge in relation to our PFS Group and Sentenial Group acquisitions of $189.7 million and $69.2 million, respectively. I would note that these are non-cash items and do not impact our underlying profit. I would now like to address the strategic priorities of the business under the new Board and outline our progress to date. It is clear that the 2020 acquisition of the European business, PFS, has led to several major challenges for the group over the past few years. These challenges include a complex remediation program in PFS unrelated to EML's foundational businesses, materially increased overheads and significant reduction in group profits, disproportionate operational distraction for management and a complicated matrix organizational design not aligned to financial outcomes. These challenges created a need for change to protect and grow EML foundational businesses, Australia and global Gifting, which remains strong and to resolve the European challenges. In FY '23, the previous Board and management developed a long-range strategy, a new organization and operating structure, despite the business facing material current day challenges around remediation and regulatory reviews, global operating cadence, growth challenges and workforce attrition, particularly at the ex-co level. We acknowledge these events had a significant negative impact on the share price. In February, the new Board was appointed and in April, they announced a new strategic focus, squarely aimed at solving the issues in the business today and simplifying the EML business. While the business remains subject to significant headwinds, notably continued regulatory imposed growth restrictions, the Board and senior management are in lockstep on delivering substantive progress on the 4 operational priorities set out by the Board in April: remediation; cost optimization; growth in our core businesses; and talent retention. In the 4 months to June, EML made tangible progress on the Board's 4 operational priorities. I would like now to step through each of these in more detail. Firstly, remediation. To date, the Board has established a sub-committee to oversee the remediation programs and generate regulatory activity across the group, which includes reviews by the French regulator, ACPR, and Spanish regulator SEPBLAC in calendar '22 through calendar '23. This sub-committee will also oversee the standard regulatory audits by regulators. We have progressed U.K. remediation and are stepping through the embedding phase towards third-party assessment expected to start around September '23. We've also uplifted our capability within the Central Bank of Ireland remediation program and await the finalization of key scheduling matters over the next few months to determine the time lines in the future state of this business. On reducing our overheads, EML has embarked on an enterprise-wide cost optimization program that will streamline our operating model, making it leaner and more efficient. To date, we have conducted a comprehensive analysis of the cost drivers within our business to inform the program. So far, we have simplified our group operating model, removed matrix structures and identified headcount reductions. In FY '23, overhead increases were the result of ongoing investment in headcount, regulatory remediation activity in Europe and technology cloud migration across all regions. We acknowledge overhead growth over the last 3 years is unsustainable. I will touch more on this when I speak to our future priorities later in the presentation. The third priority, targeted growth in core businesses is about unlocking growth in our most profitable business lines, where our products and services are well placed to serve customer needs. This is namely our Gifting and Incentive business and our Australian business. And in the last 4 months, we have been rebuilding our regional commercial teams and we'll continue this into FY '24. Lastly, talent retention is focused on rebuilding core capabilities, particularly across senior management and business unit leadership and the commercial functions in our core businesses, as I have mentioned, which is a particular area of focus for me. Incentive plans have been activated with our key people to drive commercial outcomes, including remediation milestones, cost savings, growth and strategic review-related matters. Whilst only a few months into this plan, we have made good progress, and I look forward to sharing more on what this means for FY '24 shortly. Further, the new Board announced the strategic review to simplify the EML business and maximize shareholder value. The review remains ongoing and continues to assess the potential sale of all or parts of the business. To date, EML has received a number of approaches. We are working with Barrenjoey to assess this interest and determine the appropriate next steps with a view to maximizing shareholder value and minimizing disruption across the group. The review was focused initially on loss-making entities to assess their strategic fit within the EML group and resolve operating losses from business units. The Board and myself are determined to complete this work by no later than the end of the first half of FY '24. As part of the strategic review, the Board has also determined to separate the U.K. and Europe, General Purpose Reloadable business. The U.K. business, PFSL, will be a stand-alone business from the Irish domiciled European business, PCSIL, which I'll pause on for a few minutes to provide further color on. The separation of PFSL from PCSIL under EML's GPR segment has well progressed and is expected to be completed by January '24. PFSL and PCSIL are inherently different businesses in different geographies. There are no scale benefits being derived from this grouping. So it makes sense for them to operate on a stand-alone basis given their fundamentally different client and risk profiles and remediation status. Focus, execution speed and quality and financial accountability are fundamental to the new Board's desired operating cadence. Today's organizational structures that do not support this are being actively dismantled to improve performance and unlock value. Should note that PCSIL remains loss-making while PFSL enjoys positive EBITDA. For now, I will hand over to our Interim CFO, Jon Gatt, to go through the financial results in more detail.

Thanks, Kevin, and good morning, everyone. I'm going to take you through our financial results. Starting with revenue, which is up 9%. The business has seen positive tailwinds coming from a return to more normalized levels of interest rates having been adversely impacted by negative rates in Europe over the last few years. This, however, is partially offset by lower establishment income as growth restrictions continue to impact the ability to onboard new distributors in Europe. Notwithstanding this, once you adjust for one-time account maintenance fee recognized in FY '22, revenue was up 17%. We continue to have cost linked to the cloud section, regulatory matters and restructuring and strategy, which drove overheads in EBITDA. And whilst these costs are material, underlying EBITDA better represents the trading performance of the group. And when we exclude these non-recurring costs, underlying EBITDA is down 28% versus PCP, with increases in underlying overheads offsetting revenue upside. These increased costs has primarily come from our continued investment into the Sentenial business, our support of the turnaround of the PFS business and general cost pressures relating to employees, investment in IT and expected credit losses. I'll go through these in more detail later in the presentation. As Kevin mentioned, we ended the year with a net loss after tax of $284.8 million, which is primarily as a result of impairments, which I will go through on the next slide. As foreshadowed in our announcement on the 31st of March, the imposition of further restrictions on the PFS business by the Central Bank of Ireland, as well as changes in the macroeconomic environment has required the business to further moderate the growth assumptions underpinning its impairment analysis. This has required an impairment of $189.7 million for the year. In relation to Sentenial, whilst the business is growing strongly, the timing underpinning acquisition growth assumptions, combined with the slower growth we have seen in the overall market has required an impairment on that CGU of $69.2 million for the year. As Kevin mentioned, both of these are non-cash. We look closer at our 3 segments. Our Gifting segment continued its volume recovery. This segment volumes were up 24% on PCP. As I mentioned at the half year, this upside largely came from our incentive programs, which grew 41% and our growth in our traditional Gifting product, up 13%. We expect this segment will further benefit from a more focused and simplified operating structure going forward to deliver further growth in FY '24. Looking at revenue, and notwithstanding the prior year benefiting from one-off fees, we have seen growth overall of 12% coming from volume improvements, as well as some upside on interest. Also highlighted at the half year, the increasing proportion of our incentive product and the subsequent mix shift has resulted in revenue yields, reducing and margins remaining largely flat on the PCP at 81%. Looking at our General Purpose Reloadables segment, we have seen growth in our Australian and U.K. businesses, which we expect to continue. However, the European GPR business continues to be challenged by ongoing regulatory matters impacting overall growth. As a result, we've seen modest growth in GDV, up 3% on prior year to $12.8 billion. Revenue was $157.8 million, up 8%, and that was primarily driven by a key revenue source for which this business is the largest contributor, which is interest. That's partially offset by lower establishment income. When the non-recurring revenue in the PCP is adjusted for, revenues are actually up 17% in this segment. Gross profit margins were flat against the PCP and the interest offset by one-time income in FY '22. Moving to Digital Payments. This includes a full year of the Sentenial business, which was consolidated at 30 September 2021 in PCP. The Sentenial business, including Nuapay grew 84% and the remainder of the segment grew volumes 13%. Total segment revenues increased 23% to $21.7 million, whilst margins were impacted by higher scheme costs. If we now take a look at interest? As we mentioned earlier, interest income is a fundamental revenue generator for EML and it has been adversely impacted by the protracted negative interest environment we've seen over the last 10 years, particularly in Europe. This year, however, has seen most Central Banks issue successive rate rises. And given Central Banks continue to now challenges around coming inflation, we expect to see further upside into FY '24. This has resulted in net interest income for FY '23 of $32.7 million versus only $1.4 million last year. This result has been further improved by action taken to improve yields, which we will continue in FY '24. If we move to the next slide, we will look in more detail at underlying overheads, which increased 27% versus PCP. As Kevin mentioned earlier, management will review that the growth in cost needs to be addressed, and Kevin has touched on the work done so far towards this, controlling and reducing costs where they are not tied to achieving our operational plan will be a focus in FY '24. As we look at the cost drivers in FY '23, in addition to the full year inclusion in investment in Sentenial, we, like most companies, have been impacted by inflation, tightening labor markets, particularly in Ireland, impacting our cost base. Likewise, professional fees were driven higher due to increased cost of audits and our professional advisory. Credit losses have increased by $5.1 million versus PCP, where our clients, especially within the GPR segment have been impacted by the tightening liquidity globally, driving collection delays. To address this, we have increased our focus on early identification of delinquencies and uplifted collection processes, including the engagement of third-party collection agencies to support our internal collection efforts. ICT costs have increased by $4.2 million. As again, like many other firms, we have invested in improving the resiliency and security of our global tech assets. As I mentioned at the beginning, bringing down our rate of cost growth will be a key focus in the next financial year. If we switch to cash, which has remained largely flat and included cash inflows from the sale of Interchecks during the period. Our cash flow -- our cash outflows linked to litigation, regulatory costs and other one-time events largely offset otherwise positive underlying cash flows. When we look specifically at underlying operating cash flows, you will see that the business generated $29 million during the year, underpinning the strong fundamentals of this business in the absence of the non-underlying impacts and highlight the importance of resolving non-underlying drivers as quickly as possible. With that, I will hand over to Kevin to wrap.

Thank you, Jon. I now want to touch on our operational priority for FY '24. Building on FY '23, we will progress the 4 operational priorities with the objectives of closing out remediation work for PFSL U.K. and PCSIL, creating a leaner, more cost optimized business, reigniting our sales machine and rebuilding our core talent capability. On remediation, we need to bring these projects to a successful conclusion, including the near-term cessation of operating losses while simultaneously creating the right operating structure through separation of the PFS units, as I have discussed. This will remain top of my agenda with the Board into FY '24. Regarding cost optimization, the group will continue its work on organizational redesign to simplify the business. EML will take $10 million of cost savings in FY '24 to arrest the trend line circa 25% cost growth profile, thus, ensuring cost growth is more akin to inflation. We are also targeting all subsidiaries to be breakeven or better in H1 '24. We are prioritizing investment in growth in our core business of Gift and Incentive and Australasian GPR businesses through building the sales team's capacity and go-to-market activities. We've also planned incremental technology improvements to expand our offering and will optimize treasury management across the group. Lastly, on talent management, we will continue to rebuild our senior leadership team and empower our operational teams through a simpler, flatter organizational design that drives greater accountability in our local teams, making sure decisions are made closer to our customers and for the benefit of our customers and operational teams. The Board and leadership team acknowledged the challenging year that was 2023. We thank both our long-standing and new shareholders for their patience and support. Collectively, we are energized by the challenge and focused on leading a talented, hard-working and committed team through these challenges and emerging as an innovative, operationally excellent and sustainable growth-orientated payments company in FY '24. That ends today's formal presentation. Thank you for listening. I will now hand back to the moderator to open the call up to questions.

[Operator Instructions] Thank you. We aren't showing any questions at this stage.

Okay. Jody, thank you, and thank you to the participants for listening to our call this morning. We wish you a good morning. Thank you.

Thank you very much. That does conclude our conference for today. Thank you all for participating. You may now disconnect your lines.