Tyro Payments Limited (TYR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Tyro Payments Limited H1 FY '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Fiona Pak-Poy, incoming Chair of Tyro. Please go ahead.

Thank you, Rachel, and good morning to shareholders and our many [ registered guests ]. It's wonderful that there's so many who are interested in hearing our positive results. It's with great pleasure that I am joining today as the Incoming Chair of Tyro. After spending 4 years as a nonexecutive director and 3 years as Chair of the People Committee, I am really excited to Chair Tyro going forward, as we rejuvenate the business on our path to becoming the leading specialist payments and banking providers for trade businesses, accelerating our delivery of innovation to our merchants. I'm joined today by Jon Davey, our CEO; and Prav Pala, our CFO. We released our results for the first half of the 2023 financial year this morning and the results were very pleasing, showing a strong performance in all key metrics, including transactional growth value, growth in merchant numbers, growth in lending originations and improved operational leverage. Most importantly, this translates to our first statutory net profit and positive free cash flow for reporting period since we listed on the ASX. Jon and Prav will provide with more details on the results in our strategy going forward. However, while Jon and the entire Tyro team had a single-minded focus to deliver on our strategy, you would be aware that we have been dealing with interest from third parties to acquire Tyro, ongoing since September last year. I would like to provide a brief update on the current process and the board's commitment to act in the interest of all shareholders. Following the dropping share price in the 2022 financial year, the Board was acutely aware that the price in which Tyro shares have traded, did not reflect the fundamental value of the business. Consequently, the board undertook a significant amount of work to assess the intrinsic value of the business, taking into account our attractive growth prospects, that Tyro continues to take share in Australian payments and business banking markets. Our continued improvement in operating leverage, and is currently well funded and capitalized to support our growth ambitions. The results we have achieved in the first half of 2023 financial year and our upgraded FY '23 guidance, are a clear indication that Tyro's living on its strength to be profitable and operate on a positive free cash flow basis, while delivering a significantly better customer experience, whilst also further reducing our cost base. The share price levels at which Tyro is trading, clearly made its takeover targets with strategic buys and private equity, we see the long-term value of the Tyro Payments and banking proposition. On the 7th of September last year, Tyro received a nonbinding indicative offer from Potentia, to acquire Tyro at $1.27 per share. This was followed by interest from other parties, including Westpac, and a further offer received from Potentia on the 11th of December 2022, at $1.60 per share. Once the Board carefully considered all the offers and interest from third parties, with the assistance from our legal and financial advisers, the Board determines that the offers presented by the third parties, significantly undervalued Tyro, and as such, were not in the best interest of shareholders as a whole. I would like to take this opportunity to ensure our shareholders that Tyro remains open to engagement with any critical changes until proposals are received, that represents compelling value to Tyro shareholders as a whole. We continue to engage with Potentia, who is currently [ undertaking with ] the Board with due diligence offers, with the aim to develop a significantly improved proposal and confirm the necessary funding commitments attached to any possible future offer. Tyro notes that there is no certainty that a further nonbinding of these offers, or a binding offer, or a transaction of any kind will be [indiscernible]. We will engage with all shareholders and keep you updated, as discussions with Potentia progress. I would like to again reiterate that the Board will only consider offers that respect compelling value for you and our shareholders. With that, I would like to hand over to Jon and Prav to take you through the first half FY '23 results.

Thank you, Fiona, and good morning to everyone. This is the first period since COVID-19 first impacted our communities. The business for customers that we support, has returned to more normal conditions. It was, however, also a half characterized by rising inflation and rising interest rates. It is in this environment that Tyro delivered strong first half results, driven by growth in all our industry verticals, and the continued adoption by customers of payment and banking products. The investor presentation I will refer to today, was released earlier this morning and is available on the ASX platform and on our Tyro Investor Center. In this presentation, I will talk to you about our business and our ongoing focus on growth, profitability, delivering innovation, the opportunity we have to maintain momentum, our immediate strategic priorities and key financial and operating highlights for the half. Prav will then take us through our financial performance, before I provide trading update and answer questions. I will now direct you to Slide 4 of the investor presentation. The last 6 months have been significant to Tyro in 4 areas; growth, profitability, delivering innovation and through the renewal of leadership. We've had strong growth across several parts of our business, including the value of payments processed, the number of customers that we've added, and in the value of loans that have been originated. Transaction value growth has been significant, up 37% in the corresponding period, driven by a 9% increase in customer numbers, a reopened economy and the impact of inflation. We've also seen an increase of 40% in gross profit and 101% increase in the value of loans originated. Our customer growth has been accelerated by distribution of our products through our exclusive partnership with Telstra. Tyro's terminals and the Tyro Go Card Reader are available in more than 350 Telstra stores. During the first half, 13% of all applications were initiated by Telstra. We can also confirm that as of this week, Tyro Go is available in over 400 Australia post stores across the country. We are excited to partner with Telstra and Australia Post, 2 of Australia's most iconic brands, and we certainly believe both will make a significant contribution to Tyro's continued growth. We've also launched digital sales and onboarding process by tyro.com and through our partner channels. This will remove some of the friction associated with our current sales process and deliver a significantly better customer experience. We've had a strong focus on operating expense management, which together with our growth has helped drive Tyro's profitability. In early October, I announced implementation of the cost reduction program, to deliver a 10% reduction in the number of Tyro team members, and an $11 million in annualized operating cost savings. Largely completed by early November, this program is on track to meet targets, coupled with strong transaction value and lending growth, I am pleased today to confirm the statutory net profit of $1.1 million and $600,000 of free cash flow for the half. This is Tyro's first reporting period profit as a publicly listed company. When I started as CEO in October, we rationalized our project investments and prioritized a small number of critical initiatives. I'm pleased to confirm we've made good progress on these. During the half, our Tyro Go's [indiscernible], and next-generation Android platform terminal was launched, and our automated customer onboarding experience was implemented. While there is work to do to scale these offerings, strong progress has been made and we now have platforms we can build on. As announced 2 weeks ago, we've entered a principal settlement of the class action filed in the Federal Court of Australia, relating to the terminal connectivity issue that occurred in January 2021. As noted in our ASX release, closure is subject to court approval, but payment of the settlement amount is not expected to involve any additional cost or expense to Tyro. Finally, we assume the renewal of leadership in both Board and our management team. On our Board, Fiona has been elected as our new Chair to replace David Thodey; and Claire Hatton, and Shefali Roy joined our Board during 2022. Our management team is also being renewed. I was appointed CEO in mid-September, taking over from Robbie Cooke on the 3rd of October. During the past 6 months, we've also made changes to the leadership at technology, products and sales teams. Turning now to Slide 5. Our vision is to be Australia's leading financial services technology and innovation company. We have a history of backing Australian businesses and reimagining payments and banking. Our value proposition is based on our strength of Australia's leading specialized payments provider and our differentiated industry-based customer solutions. We have direct integrations to more than 330 point-of-sale systems that deliver customers a simple payment and reconciliation solution. Our banking license is unique among local and international specialized payments companies operating in the Australian market. It allows us to deliver faster settlement for customers, offer solutions that not only support being paid, but also helping customers pay their suppliers, and it allows us to provide simple working cash flow solutions. We also provide Australian-based 24/7 customer support. Turning to Page 6; the opportunity for Tyro is significant, both in our traditional in-store card payments business, but also by providing banking products and services to the over 66,000 customers that support Tyro today. With more than $740 billion of in-store payments processed annually, Tyro has today captured less than 6% of the total market. In an industry that has grown at 4.8% annually for the past 5 years, we have outpaced the market by a factor of almost 6 to deliver annual growth of more than 27%. A 20% share in key verticals and our continued growth in hospitality, retail and health, highlight not only the opportunity that exists when industry-leading customer features are provided, but the potential we see in the broader market. On Page 7 now. We also see significant opportunities to leverage our banking license, to deepen the relationship that our customers have with us through the provision of banking products and services. We believe that Tyro's lending solution remains the leading cash flow management solution in market. As data highlights, that customers who have had a loan with us are 2.5x more satisfied and significantly less likely to churn. Today, less than 10% of our customers have an active Tyro bank account and only 6% are taking loans. In the first half, we originated $72.7 million of lending, of which 77% was from repeat customers. This highlights that customers that have access to lending, and a simple product that helps to manage cash flow, love us. The opportunity is to make it available to more of our customers. We have 25,000 inactive bank accounts, that is customers who have opened a bank account but not yet activated. We are working to drive activation of these accounts. In turn, this will drive deposit growth and facilitate lending eligibility. With average annualized interest income on loans at 24.4%, and ability to fund lending at a stable and attractive cost of funding, and low penetration of banking amongst our established customer base, the opportunity is significant. Turning now to Page 8 and our immediate strategic priorities. We have 3 immediate strategic priorities to guide our decision-making, our project prioritization and our investments. Payment banking product innovation, revenue growth and margin optimization and operating efficiency and cost reduction. Referring firstly to payment and banking and product innovation; developing the products, features and payment and banking solutions that our customers want is core to our planning. Our immediate focus on implementation of new payment acceptance form factors with Tyro Go, our card reader solution and Tyro Pro, our new Android-based terminals, are progressing well, and though early days, we are pleased with the preliminary results. In whole, we have prioritized the integration of our digital platform with the new third-party funding sources for private health and medical specialist claims. And we will shortly launch new web banking capabilities that will open new opportunities to drive growth in our banking business. Referring to revenue and margin optimization; optimizing revenue generation, while carefully managing margin, is critical to the realization of financial outcomes. During the first half, we pursued initiatives to drive value for Tyro and for our customers. We are working on products and product features that include a zero-cost acquiring solution, and on enhancements to our [indiscernible]. We are also in the process of finalizing strategies to undertake a rolling program of customer profitability analysis and repricing. Our banking license will drive an increase in average revenue per customer, capturing deposits and funding a growing lending portfolio. Finally, referring to operating efficiency; we will continue to manage our operating costs with discipline and an [ open ] mindset. While the October cost reduction program has been completed, changes to the operating model plans for implementation in the coming months will provide great clarity of accountabilities and further streamline operations. We have also prioritized the ongoing digitization of customer acquisition, onboarding and customer service. We are implementing our digital service strategies to deliver a leading customer experience and drive cost efficiencies. Automated customer onboarding is the first of these initiatives, that will be followed with a focus on digital self-service. Turning now to H1 performance on Page 9. The first half of FY '23 has been a strong one for Tyro. We are pleased to report a statutory $1.1 million profit, and we have delivered $600,000 of positive free cash flow. As I noted earlier, this is the first profitable result Tyro has delivered as a publicly listed company. Our focus on growth, profitability, delivery and innovation is gaining momentum. We demonstrated strong performance against most operating and financial metrics. Compared to the corresponding period, our key growth metrics were all up. Transaction value was up 37%, gross profit was up 40%, EBITDA increased from $2.8 million to $19.5 million. We increased our customer count by 9% and the numbers of activated bank accounts and loan originations increased by 10% and 101%, respectively. Our focus on profitability is highlighted by our statutory profit results. Our positive free cash flow and operating leverage that has decreased from 95.9% to 79.6% compared to the corresponding period. We are pleased the 2023 financial year is off to a strong start and that we are well positioned to maintain momentum into the second half. Turning now to Page 10, our payments business overview. Our transaction value of $21.7 billion was 37% higher than the prior period and resulted in a 5-year annual growth rate of 27%. The half did benefit from external factors, including the absence of COVID lockdowns and inflation, but we saw a growth of more than 60% in our hospitality vertical and 32% in our health vertical. Hospitality remains our largest industry vehicle with 35% customers, now followed by health at 26% and retail at 22%. We also saw international card transaction value increase to 2.3%. We generated 8,473 new customer applications, at an average of 1,400 per month and a $0.15 increase in the half. The core Tyro customer base grew by 16%. Our Bendigo customer base has decreased, however the number excludes approximately 1,000 customers who were in transit reporting dates, and we need it recorded on Bendigo or Tyro systems. Transaction value remains in line with expectations. Customer churn was 11.7%, up from 10.1% in the corresponding period. Analysis highlights that 50% of it was caused by businesses closing their doors. Transaction value churn at 8.9% is slightly down on the corresponding period and well within accessible levels. Finally, I'll refer to Page 11 and an overview of our banking business. As I've highlighted, our banking business, particularly lending had gained momentum during the first half. Total originations of $72.7 million were 101% up on the prior period, and we now averaged $3 million in lending per week. Our net interest income of $5.2 million for the half was up from $1.8 million, and lending losses was 1.2% of originations, lower watch points indicate that these continue to be well managed. We believe that our lending product, the fee loans repaid as a percentage of daily takings, and an average loan tenure of a relatively short 6 months, provides a good level of risk mitigation in the event of further economic downturn. While our number of activated transaction and deposit accounts has increased by 5%, deposit balances have decreased. Tyro had 2 deposit products, a transaction account and churn deposit accounts. Outstanding balances in the transaction accounted for the half were $88.1 million. Our term deposit increased to $6.9 million from $5.8 million. We believe that our deposit products provide a compelling proposition to customers, including 7-day settlements and not available to customers using non-Tyro accounts. However, enhancements are required to add further value, and we must improve our marketing and customer onboarding. Much of this activity will complete in the second half. While needing to be addressed, our deposit loan book ratio of 2.1x provides headroom for future loan book growth. I will now hand over to Prav, who will take us through the detailed financial performance.

Thank you, Jon. If you could all please turn to Slide 13. The financials for the first half was strong, and we delivered what we committed to, which is strong growth and improving EBITDA margin, assisted by our cost reduction program announced in earlier quarter, and positive free cash flow for the half year. Importantly, this was achieved earlier than forecast. The best measure of our growth is gross profit, which performed strongly, as we continually balance our payments portfolio for potential volatility in [ COGS ] and margins. For the half, we posted a gross profit of $95.2 million, which represented a solid growth of 40% compared to the first half of FY '22. Part of this growth is attributed to the COVID impact in the comparative past, with the vast majority of our merchants managing for this period and now trading strongly, especially in our hospitality vertical. I will talk about performance by vertical later in this presentation. Growth in gross profit resulted in a strong positive EBITDA for the half year at $19.5 million, EBITDA was more than 7x greater than the prior comparative period. For the first time, the EBITDA margin exceeded 20%, moving closer to our [ global view ], as we begin to demonstrate the long-term profitability potential of the business. The cost reduction program announced in October 2022 also assisted in driving up the improved EBITDA margin, although the realization of the benefits of the program will be more moving forward in the second half of the financial year. Our focus in free cash flow, meant that higher finished the half year in positive territory and posted its first statutory profit since listing. While we had guided those at the end of FY '23 positive free cash flow, merchant trading surpassed our internal forecast, partially driven by the impact of inflation on customer trading volumes. We consequently upgraded our guidance for the full year in January. As Jon will talk about shortly, we are confident of achieving our revised guidance. If you could please turn to Slide 14 to review our first half in more detail; our strong growth was underpinned by transaction value growth of 37% versus the prior comparative period. The growth was driven by a number of factors that favorably impacted our business. Firstly, the comparative half was significantly impacted by COVID, with both New South Wales and Victoria being in extended lockdowns. Under normal conditions, [ these phase ] represent around 60% of our total transaction value. The 6 months of December 2022 was the first half in the last 3 years, which is free from lockdown and [indiscernible] closures. Merchant trading grew strongly and merchant churn of 11.7% per annum, was better than our internal forecast. We saw inflation drive up our average transaction basket size for our customers. For the 6 months to December 2022, the average basket price per transaction was $44 compared to $42 for the 6 months to December 2021, an increase of 4%. Our hypothesis, is that some of this increase, especially for products with inelastic demand, will now be embedded into our future portfolio growth. However, this is yet to be tested. For the first half, while interest rates have risen, we have not yet seen a significant decrease in discretionary expense. We have, however, exercised appropriate caution in guiding for the transaction value growth for the second half of the year. These factors resulted in us processing a record $21.7 billion for the half. Of it, the Tyro core book represented $19 billion, which is a growth rate of 42%, at a 5-year CAGR of 27.6%, we are outpacing overall market growth by 6x. In analyzing the performance, our hospitality vertical continues to be our strongest performer. At $9.3 billion, it comprised 49% of the total transaction value, and grew by an impressive 60% for the comparative half. The retail vertical processed $5.5 billion, up 24% from the comparative costs, while the health vertical comprised $2.5 billion, up 32% from the comparative half. The remaining $1.6 billion was outside of our core 3 verticals, which also grew strongly at 35%. The Bendigo book contributed a further $2.8 billion for the past year. Further adding to our gross profit performance, although on a smaller base for our banking business, our loan originations more than doubled for the half year, with close to $73 million in lending, with only 6% of our merchants currently using this unique and innovative cash flow management products, a large opportunity remains untapped. We expect the banking business to meaningfully contribute to our gross profit into the future, allowing our strong growth momentum to continue. From citing above drivers to the income statement and starting with the payments business, growth in both revenue and direct expenses exceeded transaction value growth. Revenue grew by $63.4 million or 43.5%, driven by merchant service fee increases in the period and a shift in card mix. As expected, they were included in more expensive international and premium costs category, as trading conditions returned to normal. Offsetting the $63.4 million increase in revenue, was an increase of $40.1 million in direct expenses. The net increase in gross profit contributed by payments was therefore $23.3 million, which was an increase of 36% to the prior comparative period. This correlates to a 37% growth in transaction value. I will talk to the margin trends in more detail shortly, covering both impacts of pricing and a changing economy. Moving on to our growing banking business; we originated $72.7 million in lending in the first half of FY '23, compared to $36.2 million in the corresponding period. Of the $72.7 million, $56.1 million in loans were to repeat borrowers, demonstrating the strong value proposition of the product. We recognized interest income of $5.2 million of lending, but offsetting this income, was a negative fair valuation of $0.8 million, which includes a converted estimate from management and the potential impact of a downturn in the economy in the second half. As a result, banking contributed $4.2 million in gross profit compared to $2.4 million in the comparative half. While we remain cautious of the macroeconomic environment in the short term, we aim to grow the banking business in line with our strategy and within our risk appetite. For the first half of this year, we were targeting to originate $3 million, which we achieved. Adding value to the banking business is our ability to [indiscernible] and working capital, via stable and attractively priced deposits, which will grow as the need arises. In aggregate, therefore, we reported gross profit of $95.2 million, up from $68.1 million in the corresponding period, a growth of 40% or $27.1 million. Operating expenses of $75.7 million was up $10.4 million or 16% to the comparative half, but a 4% increase to the second half of FY '22. You will find details of these in the appendix. However, walking through the large [indiscernible] a $4.6 million increase in employee contractor costs, representing $2.6 million increase in settlement salaries and $2 million for short-term contractors. $2 million were internal repair and logistics costs. We rolled out 5,200 terminals to Bendigo merchants through the year and refurbished terminals to [indiscernible] any terminal supply issues. 1.4 million was in license and hosting costs, including cyber security. As a result, we reported an EBITDA of $19.5 million, being a combination of the growth in both the payments and banking business and a disciplined approach to expenses. As payments comprised more than 90% of our gross profit, it will be useful to analyze the margin trends, which I will do so on the next slide. If you please turn to Slide 15. This slide analyzes the performance of the Tyro core book, with MSF or merchant service fee, which is the top most line we see on the graph, was up 4 basis points compared to the second half of FY '22, and about 7 basis points compared to the first half. MSF was largely driven by pricing and [ card ] interchanges of the 7 basis point increase, around 5 basis points related to the price increases we implemented in March and September last year, while the remainder is due to more expensive cards being processed in the half year, and their fees being passed on to merchants on certain pricing plans. More specifically, we processed 31% in premium cards, up from 28% in the comparative half, while international transactions increased to 2.3%, up from 0.6% on the comparative half. Net merchant acquiring fees, which is the green line in the graph, is our indicator of transaction margin. This was up 1.2 basis points compared to the first half of FY '22. The last 2 price rises have served to offset any cost increases and the dilutionary impact of the lower expenses costs. As a result, we improved our net margin, while at the same time, growing our total transaction value by 37%. And finally, gross profit, which is the light green line, remains steady at 41.3 basis points. Gross profit includes income other than [ expansion ] acquiring fees, notably terminal rental income, which is a fixed monthly fee, not related to transaction value. Turning now to Slide 16. We have consistently talked about the business' long-term ability to achieve improved operating leverage and ultimately generate free cash flow. In the chart on the left, you can see the operating leverage improving consistently year-over-year from 116% in FY '17, down to 88% in FY '21. In FY '22, however, there was an increase, as we continue to invest in the business, while the economy went to extended lockdown. With a combination of strong growth and the focus on cost management in the first half of FY '23, we saw the operating leverage drop to below 80%, a significant improvement of 13 percentage points from FY '22. The impact of the cost reduction program is best seen by comparing cards, with the growth in expense being only 4% compared to the second half of FY '22. Only 2 months of the cost reduction programs were realized in the reporting period, with the rest to come through in the second half. For your modeling purposes, I would call out that our salary review cycle is the 1st of January each year. Factoring increases from salary reviews and the benefit of the cost reduction program in the forecast. We are guiding towards an operating leverage for the full year of 79%, allowing us to balance profitability, with appropriate investment into the business as required. Turning to the next slide; we are committed to delivering positive free cash flow, which we did earlier in the forecast. For the first half, starting with our normalized EBITDA of $19.5 million, $17 million was spent on capital expenditure, which included $10.2 million on terminals, and approximately [ $6.6 million ] on project capitalization. These were largely from the 3 new projects we have spoken on our delivery, in the [ entry based ] Tyro Pro, [indiscernible] and automated onboarding. We continue to guide the full year CapEx to circa $35 million. Redundancy payments of $1.2 million and other cash payments of an aggregate amount of $0.5 million were incurred in the half. We expect the full year free cash flow to be similar, in addition to the guidance we have provided, additional cash outflows that should be modeled in for the second half, which are not in the first half, office rental, change of control costs and Bendigo guaranteed payments. As part of incentives for our offices at 55 Market Street, we have negotiated the rent free period for year 1. As such, the first half has no rent payment, however, an outflow of $3 million should be factored into the second half of the year. Secondly, $1.9 million of change of control costs, having accrued for in the first half remain unpaid. And finally, any shortfall in the Bendigo commission payment, which is currently estimated at circa $1 million, will be paid in the second half. Moving on to Slide 18, which is [ more information ], which clearly show the reconciliation between our first half statutory results to underlying normalized results. The largest adjustment of statutory results, is the removal of the gross profit share from our Bendigo Alliance. The payment to Bendigo is essentially a commission expense, and will therefore reflect the payments by reduced gross profit. Switching costs income for merchants who are yet to transition to Tyro switch are temporary and will disappear in the next financial year. Our investment in ME&U fell below 5% this half. We have historically accounted for this investment using the equity accounting method. Given the [indiscernible] shareholding, we are now carrying the assets at fair value and therefore recognized a gain of circa $4 million in our accounts. This was a one-off noncash adjustment which we have removed from our reported revenue. And finally, $3.1 million in expenses were [indiscernible] costs incurred in control methods, as well as redundancy repayments. That concludes the financial section of the presentation. Recapping the 3 key messages; firstly, continued strong growth for the year. Secondly, an improving EBITDA margin, which for the first time, was over 20%. And finally, positive free cash flow achieved earlier than the forecast. We look forward to delivering the second half of the year [indiscernible] to the market. Thank you for your attention. I will now pass back to Jon for a trading update.

Thank you, Prav. Now moving to Slide 19. We've seen a strong start in the second half. Transaction value for the period January 1 until last Friday, February 24, were $6.3 billion, 23% higher than the corresponding period. Loan originations of $22.5 million were 30% up, slightly lower than our $3 million per week average from the first half, but in line with forecast for the January holiday period. In the end of January, group profit was $15.4 million, up 39%, EBITDA was $3.6 million, and our operating leverage was 76.6%. I would highlight that the month of December and in particular January, typically had lower expenses, as we benefit from annual lead provisional releases. As a result, operating leverage was lower in the short term. Finally, if you could turn to Slide 20. On January 16, we upgraded our earnings guidance for the 2023 financial year. I am pleased to reaffirm that we are on track to deliver all metrics within the guided range. To conclude and before we turn to questions. Over the past 6 months, we've had a strong focus on growth, cost management, delivery and innovation. This has led to a very good first half results, including record EBITDA, profitability and achieving positive free cash flow for the first time. We have delivered important initiatives, which have delivered benefits to our customers, our competitiveness and to our current and future growth. We believe that Tyro has a long runway, both in our traditional payment business, but also by leveraging our banking license, which is unique among our specialized payment competitors. We remain as ambitious today, as we were when we were founded 20 years ago, and we believe that the market opportunity is as compelling as ever. This financial year is off to a strong start, and we are well positioned to maintain this momentum into the second half. I now invite any questions, as directed by our call host.

[Operator Instructions] Your first question comes from Tim Piper with UBS.

Good to see that [ timing of ] margins half-on-half. Maybe just a comment around what you're thinking in change of pricing reviews over the next 6 to 12 months, just noting that, obviously, mix with debit card transactions dropping off and international mix moving higher, accelerated through the half? And then also, it looks like it's changed sort of up 30 bps or so half on half. What's your expectation in those trends and when do you plan to put through further pricing?

I might ask Prav to take that one.

So in terms of pricing changes, we have done 2 pricing changes over the last 12 months, being in March and September. One of them was a delayed one, as the merchants were in [indiscernible] pricing change. So we're doing a small pricing change as we see it right now. Other than that, we probably don't expect any further pricing changes till the end of the financial year. I think we are back into our cadence of regular pricing review. So the next one will be scheduled for about 6 months. But I think we've got a couple of other initiatives, where Jon has spoken about, so we've got [ MSF ] acquiring, which we're expecting to generate greater margin in terms of new businesses coming on board. We also are looking to do a continual portfolio performance review much regularly than every 6 months on smaller scale each month. So again, from a margin management perspective, we are looking to maintain or improve our margin. The increase in change in scheme costs are purely driven by the change in card mix. So with national cards compared to prior comparative, went up from 0.6% to 2.3%. And then commercial and premium costs, which are both -- not as expensive, but more expensive than the average MSF direct costs went up from 28% to 31%. We ended the year with a debit count of about 67% compared to 60% last year.

Okay. Got it. So is that a small pricing increase going through at the moment, would that keep your net MAF margins in [ flunge ] through this half compared to the first half?

It would. I will probably not read too much into that, though, because it's a much smaller cohort, and merchants that have not been priced last time, which was a larger cohort. I think what we expect in our guidance, if you look at our second half, is it's pretty much flat or slightly lower margin, international increases a little bit, but that guidance of roughly $187 million to $191 remains valid.

Okay. But it sounds like you're going to now be a little bit more active on an ongoing basis in terms of reviewing pricing across merchants rather than sort of the annualized price increases as well, is that your statement?

Exactly right. Yes.

Got it. And sorry, can you just quickly run through those second half cash flow items that you outlined in the present -- I missed a couple of those?

The first one is rental expense. We had negotiated a rent-free period for year 1 for our new campus. We expect approximately $3 million to come through in the second half, which would be from January to June. We have accrued about $1.9 million in legal fees and consulting costs in the first half, which are yet to paid, so that should come through in the second half. And finally, as we've noted before, with [ comparative ] payments to Bendigo for the first 4 years and any shortfall in that currency demand actually would need to be paid. It doesn't go to the P&L, it actually comes to our cash flow. So we're expecting that shortfall to be about $1 million to be paid around June this year. That's a total of about $5 million.

Maybe just a question on the merchant churn level has picked up. I note that payment churn is sort of flattish, but you said some of the [indiscernible] you're expecting that to come in? I mean, was there an expectation that the macro was going to impact in terms of churn and what you're sort of expecting through the second half?

Yes, look, I mean, I think this is something that we would obviously watch. As you note, the merchant churn has increased. We actually see this as being perhaps more related to a number of what's commonly called the zombie businesses, that have sort of closed in that post COVID period, and when we've actually looked at our analysis, as I indicated in my speech, about 50% of volume seems to be coming from businesses that are closing. So it is something that we are watching. But as you also know, when we look at transaction value churn, that's slightly down on the half. So we're reasonably comfortable with where that's at.

Okay. Sorry, another one on the financials, we are seeing receivables uptick, I know there's usual seasonality in that, but seasonality looks a little bit larger. Was there some particular timing issues there?

Yes. So our net scheme receivables are always high on a weekend, because effectively when we prefund mergers, and we are yet to receive the money from the schemes, which would then happen on a Monday or a Tuesday. So December 31st happened to be on a Saturday, which also, by the way, compresses our capital ratio temporarily, which was at 33%, but still very strong, but at 33% [indiscernible].

I understand. Got it. Sorry if I can just squeeze one more in. Just on the Bendigo merchant count, I know that that's been sort of coming down a bit. You mentioned there's about 1,000 merchants that are sort of in transition there. I mean, do you expect all 1,000 of those to remain as merchants, or should we knock a few out of those number?

No, I think that there's really a timing issue, Tim, where -- as we are transitioning customers from the Bendigo switch on to Tyro switch, we just had a short period there where, we have not recorded on either system. We would expect those merchants to migrate. And when we look at the transaction value that's coming through the Bendigo relationship, it's in line with our forecasts and expectations. So I would expect those [indiscernible].

Next question comes from Brendan Carrig with Macquarie.

Rachel, can we move on to the next question, please?

Your next question comes from Elijah Mayr with CLSA.

Just a couple for me. Maybe if we could go into the trading update in a bit more detail, are you able to lift the transaction value growth between January and February? I'm just conscious that January '22 would have still had a bit of a hangover of mandatory isolation within that period. So this was -- maybe if you could get a split maybe between the January growth and the February growth?

Look, we're not -- we'll probably have to come back to you on that one. We're not really able to provide any more detail than we have included here. I mean I think on a prior period, if we go back to January last year, while we were not locked down in place, I think that there were in many cases, with self-imposed lockdowns that we saw. So that perhaps explains some of the pretty significant increase. But any sort of further detail, I think we need to come back to you.

I might just add that the media release that actually breaks it down by month, and you can take January [indiscernible].

No problem. I'll have listen that in more detail. And then maybe some comments on the merchant growth number for the first 2 months into second half '23?

So we don't normally comment on merchant for the month of January. And the reason being, we report active merchants, which [indiscernible] any merchant that has invested at least once during the month. And a large number of our merchants actually are not active in the month of January, from a seasonal perspective. So while we monitor [ recurrently ] we effectively report merchants on -- from February onwards, which happens to be today. So unfortunately, we won't be able to you give you any more color to that yet.

Yes. Got it. And then maybe just one final one, maybe in a more general sense. I mean in the last 12 months, there's been some changes from default banks in terms of terminals offered and pricing. Has there been any change, I guess, on who you're taking share from across the big banks or some of the international competitors? Has there been a shift in where you're winning merchants, or is that largely unchanged?

So I would say it's largely unchanged. We do continue to take share from the major banks. We haven't seen any noticeable changes over the last 12 months in that.

Are there any banks that you can sort of call out, I guess, that just sort of taking more share from or ones that are performing better than others?

No, no, we're not able to provide any of -- that kind of color.

[Operator Instructions] Your next question comes from John Campbell with Jefferies.

Just one question from me, around the lending book. The loss rates versus originations obviously went up sort of significantly on PCP. It's obviously a very small absolute figure. But given the consumer environment and the macro environment you seem to be heading into, I mean, how are you feeling about that sort of loss rate to originations of 1.2% around that level, as it's sort of a go-forward assumption?

John, I think we're feeling very comfortable about that at the moment and, yes, I acknowledge that on a comparative period that it is well up, but it's certainly well within our risk tolerance levels. So while it's something that we won't be able -- that we are actively tracking and managing, there's no [ alarm ] building for us at the moment, and we're pretty comfortable with where we stand at 1.2% of originations.

I might just add to that as well. So while we are heading into to the [indiscernible] environment, the risk, we don't see it the same as a normal -- product as well. With the nature of it, we are taking upfront the balance actually reduced on a value basis, within the credit risk on a daily basis as well, and the [ loan ratio term ] monthly repayment in 6 months.

And are there any sort of learnings from -- in the past 6 months in terms of managing doubtful debts going forward? Or [indiscernible] pretty much as you want them to be?

I don't think it's something that we've watched continually and we're looking at ways we can improve, but there's nothing that we've learned over the last 6 months, which has had any significant impact on the way that we're -- the way that we're managing that. So we're pretty comfortable with where we're at.

There are no further questions at this time. I'll now hand back to Jon for closing remarks.

Okay. Well, thank you, everyone. Thank you for joining us today. We'll [ call that ] an end then.