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Edited Transcript of APT.AX earnings conference call or presentation 25-Feb-19 11:30pm GMT

Half Year 2019 Afterpay Touch Group Ltd Earnings Call

MELBOURNE Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Afterpay Touch Group Ltd earnings conference call or presentation Monday, February 25, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Mathew Eisen

Afterpay Touch Group Limited - Co-Founder & Executive Chairman

* David Charles Hancock

Afterpay Touch Group Limited - Group Head & Executive Director

* Luke Bortoli

Afterpay Touch Group Limited - CFO

* Nicholas David Molnar

Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director

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Conference Call Participants

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* Ashwini Z. Chandra

Goldman Sachs Group Inc., Research Division - Equity Analyst

* James Bradley

Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst

* Mark Bryan

Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research

* Phillip Chippindale

Ord Minnett Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the APT Half-year 2019 Results Presentation Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, February 26, 2019. I would now like to hand the conference over to your first speaker today, Mr. Anthony Eisen. Thank you. Please go ahead, sir.

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [2]

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Thanks very much. Good morning, everybody. As introduced, my name's Anthony Eisen. I'm Executive Chairman of Afterpay Touch Group and it's a pleasure to present our first half FY '19 results to you today. I'm joined by my colleagues, David Hancock, our Group Head; Nick Molnar, the CEO of Afterpay; and Luke Bortoli, our Chief Financial Officer. This morning, we'll work through our investor presentation, which was lodged with our accounts and our announcement to go with those accounts to the ASX this morning. And I'll turn to that now to kick off.

If you look at that investor presentation, I'll start on Slide 3 and by way of introduction it very much illustrates that Afterpay is scaling very strongly. In addition to our top line metrics, underlying sales, active customers, active merchants, revenue, et cetera, we're very pleased that losses have also substantially reduced from an already low level when compared to any comparator in the Australian industry or on the global industry.

And on Slide 4, we really summarized some of the other key highlights, which the team will take you through this morning. So in addition to the platform growth, financial performance and reduced losses, it's important to highlight that late fees associated with the Afterpay service have also very markedly reduced to well under 20% of total income in the first half, which is a very substantial drop since the last reported period. We've also done quite extensive work and are in a very good position in terms of our balance sheet, having extended facilities in Australia and progressing closer towards finalizing facilities in the U.S., which gives us a lot of runway to continue on accelerated growth path.

One of the most pleasing aspects, which we'll take you through today, is the way that our customers and our merchants are responding to our service. The engagement with customers has been really good in the sense that it has improved over time. And with that, we believe that our platform and innovation that we keep building into it is incredibly important ingredient to the way that we serve customers and merchants in the future and is really building on an important theme, which is customer lifetime value, which we can illustrate for you today. In terms of regulation, we've obviously had some important developments over the last few days. As a company, we strongly support progressing to a regulated environment. And you'll note that from our various releases in the past, we're supportive of the proposed ASIC product intervention powers and it was pleasing to announce that last Friday, the Senate Committee that's been looking into not just the buy now pay later industry but other nonregulated sectors really differentiated Afterpay and BNPL from other nonregulated sectors but also endorsed what we've been saying for a while in terms of ASIC's role in product intervention powers going forward.

So that is just by way of introduction and the highlights. We'll talk in more details to those things, but I might now pass over to Nick Molnar who will take you through Section 1, our mission and progress.

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [3]

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Thanks, Ant. Nick Molnar here, as Ant mentioned. So just on Page 6, from our perspective, our focus from day 1 has been the same as what it is today. The millennial cohort is really coming into its perfect point of power. At the moment, it makes up 27% of the global population. And by 2025, millennials will contribute almost half of all salary earned in the U.S. So from a retailer perspective, it's a very important cohort and what's been fascinating for us is that they're spending money differently.

So if you turn to Page 7, I'm looking at what's going to be the world's most loved way to pay. The way we've been able to build that love relationship with our customer is work with them through this generational movement away from traditional credit products. Millennials prefer to spend their own money. They have a preference towards debit cards. 85% of Afterpay customers use a debit card, not a credit card. And so from our perspective, we're making a purposeful long-term investment in a very powerful cohort that in the coming years is really going to come to its perfect point of power that is very powerful as it stands from a disposable income perspective today.

If you turn to Page 8, at Afterpay, we built our products to be purposely different from traditional credit cards and other players in the market and we did that as well from day 1. We get the majority of our income from the retailer. And as Ant said, like I said, the revenue has come down, which we're really proud of. Our product is free for customers who pay on time and we're not taking out a line of credit, so you can never kick the can down the road and exclude the transaction, one single late payment. And these key attributes, these 10 key attributes we highlight of Page 8 are really what has driven this passion for our customer base towards our product.

On Page 9, you can see that Afterpay is out there as the leader in terms of the Net Trust Score as Roy Morgan's report and really it's the key dynamics that we've been able to work with in terms of millennials' preference towards spending money on a debit card, creating a product that fits their lifestyle and empowering them to spend money their own way and doing it at the same time in the opposite way to traditional credit cards. So we're making the vast majority of our income from our retailers and I'm really proud of that fact.

On Page 10, this gives a bit more of a highlight in terms of our focus toward lifetime value. So what we're seeing since launching the product is our engagement has continued to strengthen over time. So as the customer base continues to grow, these examples here are in Australia, and what you see is our retention rates or the number of active customers that transact each month continues to grow. So not only do they love us but they're continuing to use us and they're using us more frequently. And at the same time again, as Anthony mentioned, we're able to bring losses down even though our growth rates continue to trend upwards.

Page 11, I'm really proud of the -- it's an amazing snapshot of the world's best brands that we are fortunate enough to work with in the Australian market. Many of these brands we now work within the U.S. market as well. So it's been an amazing work by an incredible team over the past 3 years, including some of the best retail brands in Australia onto the platform and it's really enabled us to build our platform, which I'd now like to pass to David Hancock who'll take you through some more detail on that.

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David Charles Hancock, Afterpay Touch Group Limited - Group Head & Executive Director [4]

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Yes. Thanks, Nick. So if you go to Slide 12, I think that the key point that we really want to highlight is that Afterpay is a platform business. It's really based around connecting our merchants and customers together. So you'll see that we've now got 3.5 million customers. we've obviously got a huge amount of retailers and merchants, and they continues to grow.

On the merchant side, what's been really pleasing is to see that we're actually multichannel so we continue to get significant growth, year-on-year growth in regards to in-store. We are continuing to be one of the largest retailer lead referrers in ANZ and we continue to grow that, and Nick will talk about that a little bit more in the U.S. Really, we're now trying to develop and deliver our deep insights on what our customers are doing and just helping deliver that out to our merchants. On the customer side of the platform, we are now conducting over 10% of all e-commerce. As Nick has just described, 24% of all Australian millennials have been using the platform. And what we've been very, very pleased to see is a high return rate at 95% GMV from returning customers.

If you look to Page 13, Afterpay is definitely becoming a lifestyle. We've been empowering our customers to live their life their way and you can see how they do that by with us partnering up with some really amazing brands such as The Iconic, ASOS, MAC. If you look at health and wellbeing, it's really been -- it's a really neat development to do that for us and our customers have been around [associates] Primary Dental and moving into experiences. So what we are is definitely a lifestyle and we designed around our customers of who they want to be. If you look at going on by

(inaudible) we've been able to do that while [continuing to] grow underlying sales or GMV growth. I think the current mix will mostly be improvement of merchant margin, gross loss, net transaction loss and net transaction margin. If you look at merchant margin, which Luke can talk a little bit about a little bit later, we've seen the trending increase. Merchant margins going up 20 basis points. Seasonally, we have been able to drive out losses by.

(technical difficulty)

Net transaction loss once again, pretty decent 30 basis point and net transaction margin shown at segments.

(inaudible)

And we've made a lot of work over the last year around developing our private practice. Particularly, we welcome comments in the Senate report that Afterpay has brought important competition to the market and it has, in fact, refute the need for the use of traditional credit for many of our customers. We've got a very clear path to regulatory certainty and obviously look forward to our continued engagement with government regulators and a variety of different stakeholders.

So if we go onto the strategy section on Page 19. Our opportunity is significant. When we look at our immediate markets of Australia, the United States and the United Kingdom, you can see that the total pie is very, very large. I think what's interesting to note, once you break that down into segments, you can see that the online contribution of these 3 markets alone is sitting at just under $800 billion. Our trend success has shown the applicability of our product to penetrate and you can see very significant and substantial inroads already into the United States market. We'd be looking forward to obviously launching into the U.K. and over time looking at other opportunities, but in the foreseeable future, we think these 3 markets represent a sizable opportunity.

So if we're going to Page 20, as I laid out, our greater opportunity is really ahead. We continue to grow in new verticals in Australia and in New Zealand in different areas, such as fashion and beauty. But we still think there is significant opportunity around in store. The U.S. opportunity is clear and now. Our growth has been beyond our expectations for the last 6 months. We've got a very solid pipeline of integrated merchants. And we continue to co-market the brand with enterprise retailers, which is yielding very strong results for both the retailer and obviously bringing on customers onto our platform. So you can see that the U.S. is continuing to scale and most significantly, when you compare it to where Australia was scaling, it is scaling at a much, much more rapid pace. U.K., we're obviously excited to be welcoming a number of partners to our platform. And we've got a commitment from Urban Outfitters that's been built off the back of a very positive engagement in the U.S. And they want to be our launch partner over in the U.K., which is fantastic development for us. We've got technical setup. We've got people in the market. We're operating in Manchester. We've got a sales team in London, and most importantly, we've got real engagement with our merchants. At the same time, what we're seeing is we're starting to measure our lifetime customer value. We're seeing that through the platform and through innovation that every week, every month and through the year, that actually, the lifetime value continues to grow and we want to continue to promote that because that's real value to shareholders.

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [5]

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Thanks, David. Just to elaborate a little bit more on strategy, I just want to point your attention to Slide 21 and then I'll go onto 22 and 23. The key point I'd like to make is that while we've grown rapidly, I do believe it's been iterative and we really have been able to firm up our view on what the opportunity actually is based on the actual results and insights that have led along the path to this point. And one of the reasons why that is very important is that when you look at new markets, you do so with a confidence level based on experience that you have. While we've been in the U.S. for 6 months and it isn't a very long period of time, we see the opportunity as being very clear. We see how strongly we're resonating with merchants and customers. We see how strongly we're differentiated from other participants in the market and why our model has advantages. So in addition to those headline metrics of growth in the U.S., there's a couple of other dynamics which we see playing out just as it played out in Australia and New Zealand but they're playing out at a faster rate. So things like the consequences of investing with your partners, large, well-recognized brands in markets yield very high return on investment. We see that immediately through customer engagement, and that gives us the ability for customers to be highly engaged on our platform. And I think what we have been able to illustrate through Australia or New Zealand and now in the early stages of the U.S. is that once customers are on our platform, they enjoy the experience, they return, and we have the ability through our existing collateral and innovation we're bringing to bear to really enhance that relationship on a customer lifetime value perspective. We see that very strongly.

The other thing that we're already seeing in the U.S. but we've got a very good track record of experience in Australia or New Zealand now is how to work with small to medium businesses as well as those large enterprise customers and the importance of small to medium businesses in terms of margin mix and profitability over time. Obviously, the programs involved in building up small to medium businesses in our portfolio take longer, but they're like a freight train in the background that has an important mix dynamic over time and we have seen that come through in the Australian business and we think we're well positioned to develop that in the U.S. as well. In terms of platform innovation and global capability, we're seeing the results from our customer, Net Trust Scores, our engagement and the increase in repeat customer activity. So investment in that area is what we feel is important and will build long-term shareholder value.

If we move on to Slide 22, I'd like to make the point which I think you've already perceived from the earlier part of the presentation that while we've grown in Australia or in New Zealand, we are growing much faster in the U.S. And we are confident that our ability to enhance that growth can be done in a way from an understanding of the key dynamics and drivers in our business and how we can work those dynamics over a midterm plan. When you're scaling quickly, you're obviously dealing with large key retailers in a greater proportion earlier on. You're dealing with more first-time customers earlier on. So that is going to change some of the mix dynamics in terms of enterprise versus SMB. It's going to change some of the mix dynamics in terms of first-time customers compared to returning customers. And as we've indicated before, we see a very high return on investment in marketing or co-marketing activities with our key brands, particularly in those early, formative parts of our relationship. We've seen how that return on investment builds over time. So we're confident that is absolutely the right strategy.

The other thing that's occurring is we're becoming more relevant on a global scale. Afterpay now in Australia and New Zealand is one of the largest processors of transactions overall, and we're quickly building that scale in other locations as well, which means we're more relevant to the payment industry generally. We do believe that we have an opportunity to achieve step change performance improvements in some of our cost base over time. And that isn't just a presumption. That's based on work which we are doing with relevant third parties at the moment and we think that will influence over time as well. This midterm strategy will come with some investment, but we feel that, that will be the right investment to maximize shareholder value not necessarily over the long term but absolutely as well over the midterm.

And on that point, we'd just like to share with you, I guess, on Slide 23 really some of the high-level internal targets, which we believe are achievable. And based on the experience to date, we feel confident in ourselves and our team to reach these aspirations, which is to do well over $20 billion of GMV by the end of FY '22 and do so in a way that preserves very strong margins in the business, circa 2%, at that stage post obviously the accounting changes, which Luke will talk a little bit more to. So on that note, I'd just like to say we feel very confident in our strategy going forward based on the experience that we've had. But it's important we do go through the results for the half, which really sets the framework for this next phase of our journey. Luke?

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Luke Bortoli, Afterpay Touch Group Limited - CFO [6]

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Thank you, Anthony. Turning now to Slide 25. Please note that in this report, all financial results are presented in Australian dollars unless otherwise noted. Any reference to pcp refers to the prior corresponding period or the first half FY '18. Also shown on our FY '18 results presentation, a number of new accounting standards were required to be adopted in first half FY '19, specifically AASB 9 and AASB 15. In order to provide like-for-like results with the prior comparable period, pro forma financials are therefore presented throughout this presentation, which remove the impact of those accounting standard changes.

Moving on to the results themselves. As mentioned earlier, first half FY '19 represented a period of strong growth while also continuing to invest, scaling up the platform in our existing and new markets. For the combined Afterpay Touch Group, pro forma operating income improved by 91% on first half FY '18 to AUD 116.1 million, reflecting both continued strong growth in Afterpay and the contribution from Pay Now. Pro forma Afterpay total income increased by an even stronger 124% to AUD 107.1 million, relative to the pcp, driven by growth across all key Afterpay platform metrics. Net transaction margin, which is an aggregation of Afterpay net transaction margin and Pay Now growth margin, increased by 104% to AUD 57.1 million driven by strong growth in Afterpay merchant fee income and supported by stable margins.

Moving to profitability metrics. Group pro forma EBITDA, excluding significant items, was AUD 17 million for the half year. This result is particularly pleasing in light of the continued investment previously flagged to the market to establish the U.S. and U.K. platforms. Further detail on the performance of each of the Afterpay segments and Pay Now segments is provided later in the presentation.

Turning now to Slide 26. As mentioned previously, the group was required to adopt another new accounting standard in the first half FY '19 period, specifically AASB 9 and AASB 15. These accounting standard changes impact with a number of line items, including income and receivables impairment expense, which flow through the net transaction loss. The impact on Afterpay total income in first half FY '19 is AUD 3.7 million, which is revenue that will now be recognized in the following accounting period. The impact on the receivables impairment expense in net transaction loss is AUD 1.8 million as a result of recognizing losses using the expected loss impairment method in AASB 9. The combined impact of these 2 adjustments is a AUD 5.5 million reduction to EBITDA on a like-for-like basis. It's important to note that these accounting standard changes have no impact on the actual cash received from merchant fees or the group's actual repayment or loss experienced in the period. They reflect timing differences only. Assuming that Afterpay continues to grow underlying sales and its receivables balance period on period, these accounting standard changes will continue to result in timing differences each period in a similar manner to that shown today.

Turning now to Slide 27. Slide 27 provides a summary of the group's statutory profit and loss statement. On the previous slide, I spoke to income and profitability down to pro forma EBITDA, excluding significant items. On this slide, I'll provide some more detail in relation to below-the-line expenses. Starting at D&A. D&A increased by AUD 6.4 million on the prior comparable period to AUD 11.2 million. AUD 3.8 million of this increase related to the amortization of acquired intangibles from the merger of Afterpay and Touch and the acquisition of ClearPay. The remainder largely related to depreciation and amortization of investment in Afterpay technology. Salaries and wages grew by 129% on pcp to AUD 21 million in first half FY '19. They will be in line with the growth in Afterpay underlying sales and income, reflecting in particular the investment made to establish the U.S. and U.K. Afterpay platforms. The increase in salaries and wages reflect investment in industry-leading talent across technology, risk, product development, sales and shared services that support the growth of the Afterpay platform. First half FY '19 shows share-based payment expense of AUD 18.1 million. Approximately AUD 11 million of the share-based payment expense relates to an option granted the group had approved by shareholders at the company's 2018 AGM. These share-based payments have been predominantly noncash in the period. The group's operating expenses increased from AUD 10.4 million to AUD 25.4 million, principally by -- driven by marketing, technology and platform expenses, again incurred to support the group's global expansion and merchant onboarding. The improvement in the group's receivables impairment expense or gross loss period on period, is outlined later in the presentation. The increase in finance costs is directly associated with the material growth in Afterpay's underlying sales, which is partially debt funded. The group recognized an income tax expense in first half FY '19 down on the pcp, reflecting a tax benefit on the U.S. and U.K. tax losses, partially offset by tax expense related to ANZ operations. Please refer to the appendix of this presentation for a reconciliation of the statutory loss for the period of AUD 22.2 million to pro forma EBITDA, excluding significant items of AUD 17 million. Significant items included one-off costs and FX gain and the share-based payment expense referred to earlier.

Turning now to Slide 28. Slide 28 provides an overview of the Afterpay segment key financial metrics. Afterpay's revenue and margin performance in first half FY '19 was underwritten by very strong growth in underlying sales to approximately AUD 2.3 billion, 2.5x the prior period. To put this into perspective, underlying sales of AUD 2.3 billion in this half was higher than the total underlying sales for the full year of 2018. Growth in underlying sales occurred across all channels and regions. It was also driven by positive movements across all key platform metrics, including increased active customers, increased frequency of use, increased number of merchants onboarded, increased share of cards for many merchants, a strong contribution from the U.S. in its first full 6 months of trading and the largest month on record in December 2018. Pro forma Afterpay income or merchant fee income increased by a very strong 140% in first half FY '19 to AUD 88.9 million, driven by the underlying drivers I referred to earlier. Pro forma merchant income margin remained strong at 3.9% and reflected our performance by key enterprise merchants driven by the in-store channel and the U.S. business, both of which are enterprise-led in their early stages. Pro forma NTL percentage improved significantly period on period from 0.7% in the prior period to 0.5% pro forma for first half FY '19. Pro forma net transaction margin was AUD 52.2 million in first half FY '19 with very strong growth of 145%, broadly in line with underlying sales and reflecting the performance of the above-mentioned items. Pro forma NTM percentage remained stable period on period at 2.3% even with the rapid scaling of the U.S. Afterpay platform. Merchant income margin, net transaction loss and net transaction margin percentage will be discussed in further detail in the following slides.

Turning now to Slide 29. Afterpay has achieved success in scaling the Afterpay platform and particularly merchant and customer growth, which will maximize customer lifetime value and profitability over time. Slide 29 summarizes Afterpay's key platform drivers in the growth in first half FY '19 and today. As mentioned above, underlying sales in first half FY '19 increased 147% on the prior period to approximately $2.3 billion. The U.S. business processed AUD 264 million of underlying sales in its first full half year period of trading with annualized underlying sales now in excess of AUD 500 million, based on first half performance. By comparison, in the first 8 months of operations in Australia, the Afterpay business generated approximately AUD 560,000 of underlying sales versus AUD 264 million for the U.S. platform. Total active customers more than doubled to 3.1 million as at 31 December and is approximately 3.5 million today. In the U.S., the Afterpay customer base grew by approximately 40% in the 8 weeks since 31 December to approximately 900,000 customers and, as Nick mentioned earlier is on track to reach 1 million customers in the month of March. Growth in active merchants is broadly similar to customer growth with over 20,000 -- with over 23,000 merchants on the platform as at 31 December, increasing to approximately 25,000 today and a strong pipeline to come. Customer growth in the U.S. and the fact that the U.S. is only approximately -- has only approximately 1,900 merchants today relative to 23,000 in ANZ, highlights the incredible runway available for the U.S. platform. Finally, we're also gaining very strong traction in the in-store channels in Australia, which is a market opportunity that we previously stated is 5 to 8x larger than online. The number of the shop fronts have increased by 228% in half-year FY '19 to approximately 18,000 as at 31 December 2018 and 19,500 today.

Turning now to Slide 30. Slide 30 provides additional information on Afterpay income margins and merchant margins. As discussed previously, on a like-for-like basis, Afterpay income margin was 3.9% in first half FY '19 relative to 4% in the pcp. Afterpay income margin percentage reflects a mix change and, pleasingly, significant outperformance in enterprise sales, new markets and channels in line with our strategy. In particular, the U.S. is scaling rapidly, driven by our strategy of partnering with key enterprise merchants, such as the Urban Outfitters, to accelerate new market entry. In-store is growing rapidly with anchor enterprise merchants, such as BIG W, Target and Rebel 4 and we also saw very strong enterprise performance over the Christmas period in all regions. Our strategy, supported by our Australian and U.S. experience, is the enterprise partners drive customer acquisition and SMB inbound activation. As the mix of SMB increases over time, we anticipate a positive impact on Afterpay's income margin.

Turning to Slide 31. In first half FY '19, we've achieved a significant reduction in net transaction loss percentage relative to the prior period. Net transaction loss percentage declined by approximately 20 basis points to 0.5% pro forma from 0.7% in the prior period. Pleasingly, this reduction in NTL was achieved by reducing gross losses from 1.6% to an all-time half year low of 1.1% and despite a targeted reduction in late fee income. Late fees fell by 40 basis points and have declined to well below 20% of Afterpay total income. The reduction in the group's gross losses and late fees is a reflection of Afterpay's proprietary risk management system's capability that has been continuously refined and improved.

Turning to Slide 32. This slide provides some longer-term context around our improving loss performance. Afterpay has demonstrated consistent improvement in its net transaction loss percentage while also rapidly scaling underlying sales. The declining net transaction loss percentage highlights the continuous evolution of our proprietary risk management systems and increasing proportion of orders from returning customers and an improving customer repayment profile. Pleasingly, these reductions have occurred while expanding into new geographies, new industry verticals with both generally having higher losses in their early growth phases.

Turning now to Slide 33. This slide shows the calculation of Afterpay's net transaction margin percentage. Pro forma net transaction margin for first half FY '19 is 2.3%, in line with the pcp. This strong result was achieved notwithstanding the contribution of the U.S. Afterpay platform, which would naturally have lower NTM percentages in its early growth phase.

Turning to Slide 34. Slide 34 provides a summary of segment results for the Pay Now segment. Pay Now's contribution to total revenue and EBITDA declined in first half FY '19, largely driven by the sale of e-services EU in October 2018 for AUD 7.5 million in cash and a AUD 1.3 million gain on sale. We remain focused on optimizing the performance of the Pay Now business but due to the continued strong growth of Afterpay, it is now a small proportion of total income at less than 8%.

Turning now to Slide 35. This slide provides a summary of our cash flow statement for the group and a calculation of underlying operating cash flow by removing the impact of the change in receivables. First half FY '19 underlying operating cash flow was positive at AUD 33.5 million, reflecting strong growth in Afterpay income. This underlying operating cash flow improved investment in talent, technology and processes to establish the U.S. and U.K. operations and losses in the U.S. in its early growth phase. Other material cash flow item for the period include payments for intangibles related to investment in Afterpay's technology platform, the equity capital raising completed in September 2018, and a drawdown on the warehouse funding facility to partially fund underlying sales.

Turning to Slide 36. Slide 36 shows a summary balance sheet for the group. Afterpay has a strong balance sheet position, with AUD 44.5 million of total cash, broadly in line with the prior period. Total assets increased from AUD 392.2 million as at 30 June 2018 to AUD 585.8 million (sic) [AUD 585.9 million] as at 31 December 2018 primarily driven by the 70% increase in trade receivables related to the growth in Afterpay underlying sales. Total debt increased by approximately AUD 20.6 million, primarily reflecting the funding of underlying sales.

Turning to Slide 37. The Afterpay capital management strategy focused on ensuring the business has the flexibility to support both its talent and future growth aspirations. Today, the group has diversity of funding by both source and maturity. It also has material funding headroom. The group has a AUD 500 million total receivable funding capacity in Australia, which can fund well in excess of AUD 5 billion of annualized underlying sales. This facility is currently undrawn in the amount of approximately AUD 134 million. Importantly, as at 31 December 2018, the group had AUD 212.4 million of total liquidity in the form of cash or available funding, which also increased by approximately AUD 88 million on the pcp. This liquidity can fund in excess of AUD 2 billion of annualized international underlying sales over and above the receivables balance outstanding as at December, which is our peak sales period. During first half FY '19, Afterpay delivered on several capital management objectives, including successfully completing an equity capital raising and share purchase plan, diversification of funding sources receiving into the $500 million Australian receivables warehouse facility, extension of average maturity to approximately 2 years through extending the maturity date of the Australian receivables warehouse facilities to late 2020 and term sheets signed with 2 major investment banks for a $300 million warehouse receivables funding facility -- that's U.S. dollars. Please refer to the appendix to this presentation for further detail on the group's debt metrics.

To conclude, in first half FY '19, Afterpay reported strong results across its key platform metrics of underlying sales, customers and merchants as well as income and profitability. The performance of the U.S. is in particular exceeding expectations and highlights the popularity and potential of the Afterpay product when supported by the right execution plan. These results validate the success of our investment strategy today and we're excited by the opportunity that lies ahead.

This concludes the formal part of our presentation and we're now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Phillip Chippindale from Ord Minnett.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [2]

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Three questions from me. Firstly, the additional $10 million of cost in the second half for the FY '19 period, can you just provide a bit of an indication of the split between the geographies? How much is dedicated to the U.S. versus the U.K., et cetera?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [3]

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Phillip, Anthony Eisen here. Look, we're not going to provide a precise split but we can certainly say that it's weighted heavily towards the international part of the business and really the immediate opportunities we've seen with retailers in the U.S. The other part of that is really just around building the capabilities to support that higher-than-expected scale, but it's primarily weighted to revenue-increasing opportunities that we immediately see in the market.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [4]

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And just to clarify, this is in addition to that guidance that you gave a few months back, about the $20 million loss for the U.S. and the $10 million to $14 million loss for the U.K. Is that correct?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [5]

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Correct.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [6]

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Okay. Just moving to the U.K. launch. You've made a comment regarding the launch time frame still the same, it's the second half of this FY period. We're obviously 2 months in. Just wondering if that is going to be in the near term or should we expect that to be out later in the half?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [7]

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Look, I think we're not going to give a specific date, Phil. But what I can say is that it's progressing well. In terms of the technical elements to bring the platform live, in terms of having the team in place and in terms of our initial engagement with retail, I'll just say that it's going more or less according to our plan. And yes, we're going to maintain the view that we'll obviously formally launch when all those various ducks are in a row, but we'll stick to that second half time frame.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [8]

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Okay. And just finally on the in-store opportunity, you've spoken about it very positively in the Australian and New Zealand context. Presumably, you've had positive feedback in terms of the U.S. retailers that you're dealing with. And so that leads me to just wonder when, if you're looking to launch in-store opportunities, is that sort of an FY '19 sort of expectation there or perhaps the next financial year?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [9]

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I think your assumptions are correct but I'll hand over to Nick to elaborate.

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [10]

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Yes, absolutely. I mean, Phil, we work with other substantial omnichannel businesses. And obviously, the success they have seen online similar to Australia, means that there's definitely demand for our in-store product to be rolled out. So it's similar to Australia and we'll look to roll out soon after online. But given the operational execution of the in-store is a different execution to online, and we're focused on online first, we'll bring off-line in the short term.

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Operator [11]

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Your next question comes from the line of Ash Chandra from Goldman Sachs.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Can I just ask with respect to the longer-term targets you disclosed or the $20 billion in sales at a 2% net transaction profit margin, with that sort of trajectory, by when would you expect U.S. and U.K. to kind of hit a EBITDA profit type level? Just trying to get a sense of is breakeven 12 months or 24 months or 36 months in these markets with that sort of target in mind?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [13]

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Yes, thanks for the question, Ash. It's Anthony here. What we absolutely are targeting internally is profitability in all the markets, which we participate in. It's not a case of one market subsidizing the other. We do think given the natural dynamics around mix and those other elements that we went through earlier in the presentation, the time lines and the blend will obviously be impacted over the next couple of years. But we're absolutely focused in the relative short term over that strategy, having all markets positively contributing.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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Do the reports that have come out that Visa or MasterCard are supposedly considering increasing fees that they're charging. Does that in any way, shape or form materially impact how you see the unit economics in the U.S. maturing over the next couple of years?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [15]

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Thanks for the question, Ash. Maybe I can deal with that also. Look, these changes occur quite regularly. The way that we're looking at that -- or in short answer to your question, we don't think it will impact our long-term margin opportunity. In fact, we think we have an ability to instigate more strategic related deals, if you will, as it relates to various elements of our processing cost, which will bring about a step change. We think we can do that over the next year or so by virtue of the fact that we're now at a scale which is materially larger than obviously where we were a year or so ago. And that gives us the capabilities to look at some of these deals on a global basis. Our team is engaged on that now.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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And I think at your AGM, you said you would expect that to start to deliver some benefits in fiscal '20 onwards. Does that still stand? Or has there been any slippage in that?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [17]

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Correct.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Okay. Just one last question. You haven't specifically called out your sort of net transaction profit margin in the U.S. Would that be sort of net transaction profit as in profit margin or a small loss? Could you provide some comments around that even if qualitatively?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [19]

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Qualitatively, I'd like to say that we don't segment our results on that basis, obviously. But what I can say qualitatively and what gives us confidence in this acceleration strategy which we've outlined today, is that we've seen the various metrics or key drivers actually improve over the 6 month period. Obviously, we think about risk first and growth second. Obviously, losses will be higher in the U.S. because we're dealing with more first-time customers. But it has been quite pleasing to observe that the first time customer loss rate in the U.S. is now lower than that of Australia or New Zealand and that the risk team that we put in place and invested significantly in is performing quite well. So we do see mixed impact and improving loss position as quite already changing the profile of the P&L. And we expect that to continue, Ash.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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So if you're experiencing like sort of better first time loss rates in the U.S. than, say, even ANZ, does that mean you're sort of coming towards the end of the good user base in ANZ?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [21]

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Not at all. We've seen those metrics improve...

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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Because U.S. is actually is that good?

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [23]

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We started from a more sophisticated or capable position, if I can put it that way, in the U.S. by virtue of the significant investments we've made in the prior years, in our team and our systems.

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Operator [24]

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Your next question comes from the line of Mark Bryan from Wilsons.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [25]

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Just a question, if I may, around U.S. merchants again. Obviously, the U.S. business has had a very strong start both in terms of customer numbers and merchant acquisition. Are you able to basically provide an indication as to where some of the merchant rates are coming out for those larger retailers that are in the pipeline? The reason being is obviously when you first branch out, you have to have some beachhead sites to try and build the business. I'm just wondering if that early success is enabling you to potentially have fewer of the honeymoon deals that were there in the first place. And within that, Anthony, I'm also really interested to understand what the competitive reaction has been to Afterpay over the course of the last 6, 9 months in the U.S.

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [26]

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Yes. Thank you. look, we remain quite disciplined in relation to merchant rates and they've been improving. But why don't I hand over to Nick to add some color to that question.

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [27]

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Yes. First of all, thanks for the question, Mark. So yes, I think look, the answer is that our leverage is definitely improving and the rates that we've been able to negotiate with enterprise retailers have been coming up over time. What's also really encouraging is that our SMB contribution and midmarket contribution is representing a significant portion. So the actual blend of rate is strong. So I mean, I can't give the specifics because, as Ant said, we don't segment our results. But the blend of SMB to enterprise is in line with what we're already seeing in Australia, which is very encouraging being it's at such an early stage.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [28]

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And just competition, any reactions there?

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [29]

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Yes, I think competition has been very similar to Australia. I think that credit-based products whether it's the traditional credit businesses or online credit businesses have reacted very similar to the credit market in Australia in the U.S. but what's been very encouraging from our perspective is that U.S.-based retailers are far more in tune to the differences between the 2 models and the preferences towards debit card over credit cards in the millennial cohort, which is then why we've been able to acquire some of the best millennial retail brands in the country so quickly. So I think the competitive landscape has been very similar but I think the retail market just clearly understands why we're different and what our brand stands for.

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Operator [30]

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Your next question comes from the line of Ash Chandra from Goldman Sachs.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Can I ask, in the U.S., is the debit-credit card mix in terms of what your consumers over there are providing you any different to over here?

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [32]

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Very minor.

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Ashwini Z. Chandra, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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Very minor. And again, the funding of the U.K. market whenever that launches, that's broadly still within the basket of everything you've got in terms of your own equity plus the debt facilities you've announced? Or will the U.K. eventually also have a similar stand-alone debt facility for the U.K. market like you're gradually building here and in the U.S.?

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Luke Bortoli, Afterpay Touch Group Limited - CFO [34]

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Ash, it's Luke here. Yes, over time, we'll put in place a funding facility to support receivables in the U.K. as well.

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Operator [35]

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Your next question comes from the line of James Bradley from Wilsons.

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James Bradley, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [36]

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Just one from me. So on Page 20, you flag the recurring revenue metrics in the U.S., which looks to be tracking ahead of Australia at the same time. I'd just be interested on some color around why this is tracking ahead of Australia and also whether we can expect the same trajectory to continue.

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [37]

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So we're very happy to hear your question. Can you repeat it?

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James Bradley, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [38]

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Sorry. So I'm just asking about on Page 20, the recurring revenue metrics in the U.S., which look to be tracking very well. I was just wondering if you can give some color on why that was tracking around ahead of Australia at the same time and whether that can -- you expect it to continue at the same trajectory.

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [39]

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Ant, you want me to field that question? So, yes, I think the reason why our repeat customer rates have been so strong is because of our laser focus on our execution. So in terms of the retailers that we work with, what our focus is, is acceptance within particular verticals. Whether it's fashion, beauty, homewares, et cetera, we've been able to achieve a very narrow focus go-to-market, which has further differentiated ourselves from other players in the ecosystem. Versus Australia, when we started, we went a lot broader from a retail perspective and then came narrower later. So what we're seeing is our consumer base shopping across multiple retailers as our acceptance level and retailers we bring on to the platform grows.

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James Bradley, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [40]

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That makes sense. And do you feel there's any opportunity in the future decision pricing power given that you experienced some good recurring customers in both Australia and sort of nascently in America?

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Nicholas David Molnar, Afterpay Touch Group Limited - Co-Founder, CEO & Executive Director [41]

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Yes, I think from my perspective, our focus has always been how do we leverage our enterprise retailers to drive small business at very high margins. What we're seeing in the U.S. even just in the first 6 months is the direct, positive correlation between enterprise GMV that we bring onto the platform and inbound volume that subsequently comes through. So in terms of the GMV mix between SMB, midmarket and enterprise already, largely replicating what Australia has today, that's been driven from the influence that we've been able to have. So I think the platform dynamics are playing out as it stands at the moment and it's not from our perspective about how we juice the lemon. Are there opportunities for other revenue streams and how we expand over time? I think that's what we're exploring at the moment.

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Operator [42]

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(Operator Instructions)

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Anthony Mathew Eisen, Afterpay Touch Group Limited - Co-Founder & Executive Chairman [43]

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Thank you for your attention this morning, we really appreciate it. We're absolutely committed to continuing our positive path. We feel good about our strategy and the capabilities of our team. And I'm sure we'll speak to a lot of you in the days to come. Thank you again for your attention, and have a great day. Thank you.