The 2020 financial year will go down as one of the most challenging in history for many companies both in Australia and overseas. The COVID-19 pandemic has rocked the world and, as at the time of writing, no end is in sight. These times will test even the best managed companies and the challenge is to remain calm, resilient and resourceful under pressure…
“The management team led by Tom has excelled in very difficult circumstances.”
The 2020 financial year will go down as one of the most challenging in history for many companies both in Australia and overseas. The COVID-19 pandemic has rocked the world and, as at the time of writing, no end is in sight. These times will test even the best managed companies and the challenge is to remain calm, resilient and resourceful under pressure.
EML Payments has been hit hard along with many others but we have maintained our strong growth despite the serious headwinds in some segments of our business. Diversification of business verticals, geographies and customer solutions has been a key objective at EML since the early days. We’re seeing it pay off during this crisis. ‘In adversity lies opportunity’ is an old mantra but it’s never been more appropriate.
At EML we’ve seen the crisis as an opportunity to review our longer term strategy and fine-tune our business focus. We have recently reset our strategy and set our vision statement as ‘To offer customers a feature rich, fully embedded payment solution, via a simple, single touchpoint’.
To deliver on our vision, ‘Project Accelerator’ has been launched to take advantage of partnership/or investment opportunities with rapidly growing technology solution providers with whom EML can expand its global footprint and product offering. You’ll see the early signs of this playing out over the next few quarters as ideas become actions.
I am also delighted that we have recently launched ‘Change for Good’ social and environmental program which reflects our on-going commitment to mitigating the growing impact of Climate Change. Our first target is to reduce our issuance of plastic cards by 50% from a projected 50 million over three years. This is only the beginning and you’ll be seeing more as the program evolves.
The 2020 Financial Year was a story of two parts; for the first eight months of the year EML was trading well ahead of forward estimates and looking to significantly exceed market expectations. The last four months of the year when the global pandemic took off were tough, particularly in our Gift & Incentive (G&I) business where we sell gift cards through over 1200 malls in Europe and North America.
Given the circumstances, the FY20 results of GDV of $13.9 billion an increase of 54% over the year, EBITDA of $32.5 million, a 10% increase and underlying operating cashflow of $35.8 million was an excellent outcome.
When the crisis hit, EML was in the midst of our largest deal yet, the acquisition of Prepaid Financial Services (Ireland) Limited (PFS) based in the UK and Ireland. Subsequently, the deal terms were renegotiated reflecting the new environment. PFS was incorporated into EML results for the last three months of the year.
EML now has emerged with a rapidly growing subsidiary in the General Purpose Reloadable (GPR) segment and a highly diversified global business. At the end of FY20 we now support thousands of programs in approximately 28 countries with 47% of our global revenue derived from Europe, 35% from North America and 18% domestically in Australia. The GPR business is now the primary segment for the group.
EML has a substantial war-chest for future acquisitions as opportunities emerge. Our Balance Sheet is very strong with $118.4 million of cash and no secured debt at financial year end.
The management team led by Tom has excelled in very difficult circumstances. EML has a very strong ‘People’ culture and that has shown in the outstanding commitment of our executives and staff, most of whom are now working remotely.
I also feel fortunate to have such a strong and cohesive group of Board Directors in EML and welcome George Gresham to the team. George is US based and brings an impressive payments industry knowledge and business expertise to our Board.
My thanks also go to EML’s very loyal group of stakeholders including our staff, our clients, our investors and the communities in which we operate around the world. We are privileged to have your support and encouragement through these tough times. I’m looking forward to EML continuing its rapid growth in the global payments world next financial year and in the future.
Managing Director and Group CEO
Despite the impacts of COVID-19 on our Gift & Incentive segment, particularly in mall gift cards, EML generated record revenues* of $121.6 million and an increase in EBITDA to $32.5 million, with underlying operating cashflow** at 110.2% of EBITDA.…
“We see an increasing pace of disruption in the FinTech industry”
The Strength to grow
Despite the impacts of COVID-19 on our Gift & Incentive segment, particularly in mall gift cards, EML generated record revenues* of $121.6 million and an increase in EBITDA to $32.5 million, with underlying operating cashflow** at 110.2% of EBITDA.
The 2020 year was an extraordinarily challenging year for EML, one that will present a mix of opportunities and risks in the 2021 financial year and one that has shaped our longer-term strategy for sustainable success.
In November 2019 we announced the acquisition of Prepaid Financial Services (PFS) in Europe, an acquisition that we considered to be a transformative one in terms of pivoting our business to derive the majority of revenues and earnings from the General Purpose Reloadable (GPR) segment.
Our first half results were ahead of our forward estimate and up until the end of February 2020, the business was continuing to perform strongly before the onset of COVID-19 and the immediate impacts on our Gift and Incentive segment, which generated 65% of group revenues in the first half of the year. Gift and Incentive (G&I) Gross Debit Volume (GDV) declined by 26% in March, 53% in April and 39% in May with signs of recovery in June to be in line with pre-COVID-19 run rate.
Putting that in perspective, for every $100 million of GDV in the G&I segment we generate approximately $6 million in revenue and $4.9 million in Gross Profit, so the reduction in GDV in the March to June period of more than $200 million had a material negative impact on earnings for the year. Unfortunately, we would expect COVID-19 impacts to continue into the 2021 financial year, given a combination of factors, including lower foot traffic in retail malls, social distancing measures resulting in customer service kiosks having limited or no staff in attendance, the possibility of mall closures and macro-economic impacts on retail sales.
Whilst it is not possible to predict how this segment will perform in the 2021 financial year, it’s fair to assume that the negative impact will continue to be significant.
At the same time as COVID-19 was starting to impact our G&I segment, and creating significant broader economic uncertainty, we made the decision to re-structure the terms of our acquisition of PFS to reduce the need for the group to borrow funds. We were able to work collaboratively with the vendors to close the transaction on March 31, with nil debt and $120 million in cash, putting us in a very strong balance sheet position to withstand continuing impacts of COVID-19 and to invest and grow.
COVID-19 also impacted the financial performance of PFS in April to June, given social mobility restrictions in France, Spain and the United Kingdom. We have been encouraged to see GDV in June 2020 return to pre-COVID-19 levels. This reflects our pre-acquisition views that the key GPR verticals supported by PFS, including Banking-As-A-Service, Government payments and Welfare payments, are non-discretionary and therefore resilient.
Following the completion of the acquisition, those views have been reinforced. Group Revenues from the GPR segment in June 2020 were 70% of group revenues.
We have also undertaken a strategic review, Project Accelerator, which was endorsed by the Board in June and went into effect on 1 July. COVID-19 has driven a significant spike in digital payments issuance and acceptance, which is aligned to our GPR focus, and we have seen evidence of this in our contract signings and program launches since the onset of COVID-19.
We want to work with those companies to integrate our payments solutions into their businesses and help to drive transformative change. Project Accelerator will see us invest several million dollars over the next two years to enhance our platform and technology to position us to take advantage of this shift. We will be making investments in other FinTech businesses where we believe our product focus can be enhanced and our sales reach expanded. We will not be abandoning the G&I segment in any way, but the recovery of the malls segment in particular is outside of the control of management. Whilst we wait for that recovery, we will be investing in driving growth in our GPR segment and digital banking in particular which will continue to be in the best interests of our shareholders.
There is a litany of examples of companies whose businesses have been disrupted by others, and to avoid that we now have a sharpened strategic focus. We have the balance sheet to execute on it, and I look forward to leading this initiative with the executive team.
On behalf of EML, I’d like to thank our employees, customers, and suppliers for their support in what has been an extraordinary year. To our team, who have made a seamless transition to remote operations and have continued to work incredible hours to support our customers, sign new customers and launch new programs remotely, the Board and I would like to extend our thanks and gratitude.
We are centred around our vision & purpose
“In 2020’s new Coronavirus-era, cash and coin usage worldwide has declined at unprecedented rates.”
The VANS segment continued to deliver organic GDV growth of 62% to contribute total GDV of $8.47 billion in FY20, up from $5.23 billion in FY19 at a yield of 13 bps converting to revenue of $10.7 million (FY19: $6.4 million).
Group Revenue* increased by 24% to $121.6 million, a yield on GDV of approximately 88bps down 20bps from the prior year due to a greater volume mix from the lower yielding VANS and GPR segments. 85% of the Group’s revenue is from recurring revenue sources, the continued increase reflecting a low customer churn rate and the Group focus on GPR segment growth. During the year we incurred $671,000 of non-cash amortisation of fair value uplift on the PFS bond portfolio due to AASB3 acquisition accounting. This is added back in arriving at underlying performance measures.
Gross Profit margins were down on PCP at 73% (FY19: 75%) due to a mix shift away from the G&I segment and dilutive margins in PFS who outsource the majority of their processing costs. Excluding impact of PFS, Group margins rose to 82%. The Group continued to transition programs in Australia towards self-issuance which will benefit margins in future years.
Other cash overhead expenses increased 22% to $15.5 million as the Group’s operations have expanded with two European acquisitions including the UK regulated business and higher spend on marketing to support continued growth offset by savings as a result of a global travel ban to protect the health of our employees.
The acquisition of PFS in the year was a complex acquisition of a dual regulated European group which necessitated material external advisory costs. The Group incurred acquisition costs of $15.8 million primarily in relation to the acquisition of PFS and associated funding.
As discussed above, the Group is pursuing an exit from the UAE operations in June 2020 which led to an impairment charge of $0.8 million in Q4 of FY20. Operations in UAE did not fit with the Group strategy due to the investment requried to diversify our offerings outside the G&I segement.
Share-based payments expense of $6.1 million includes $2.5m million related to the amortisation of the performance options connected with acquisitions and $3.6 million related to staff incentives. As noted above, the EML Board has elected to conserve cash and pay an FY20 STIP of $1.6 million in equity to 263 employees to recognise the exceptional performance in the year. The grant will vest at the end of the FY21 year and serves to retain talented employees who will be a key driver of the sustainable success of the Group. This is discussed in more detail in the Remuneration report on page 35.
The contract asset (breakage) of $31.8 million (2019: $31.8 million) represents the residual portion of funds on Gift & Incentive (G&I) accounts that the Group has previously sold and expects to convert to cash. The Group expects approximately 70% of the contract asset balance to convert to cash within 12 months.
Cash inflows from operating activities totalled $22.1 million due to the Group generating EBITDA of $32.5 million, and payments of $13.7 million for acquisition expenses, tax and interest expense which are excluded from EBITDA. Operating cashflow was supported by the continued conversion of the contract asset to cash as breakage is realised on cards loaded in prior periods. Excluding the cash impact of items not included in EBITDA, the Group converted EBITDA to cash at 110% ($35.8 million; 2019: $22.0 million 76%).
Cash outflows from investing activities included $147.3 million for the acquisitions of PerfectCard Minorities (payment in July 2019) and PFS in March 2020 (Note F6). We continued to invest in software development including EML Connect (an integrated mall system), EML Control Pay, the mobile Pays product in North America, salary packaging solutions for web portal access in Australia and General Purpose Reloadable programs worldwide (Note E2).
Cash inflows from financing activities included a Non-Renounceable Entitlement Offer of $240.8 million (net of costs), repayment of a debt facility from a major domestic bank of $15 million and payments received upon exercise of share based payments vested in the year.
It means that 25 million plastic cards will not enter the payments industry. The move, backed by our entire team, sends a passionate signal to fellow FinTechs to follow our lead.