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Edited Transcript of EML.AX earnings conference call or presentation 21-Aug-19 12:01am GMT

Full Year 2019 EML Payments Ltd Earnings Call

Adelaide, South Australia Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of EML Payments Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Shore

EML Payments Limited - Group CFO

* Thomas Anthony Cregan

EML Payments Limited - Group CEO, MD & Director

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Conference Call Participants

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* Garry Sherriff

RBC Capital Markets, LLC, Research Division - Analyst

* Killian Murphy

Petra Capital Pty Limited, Research Division - Head of Industrials

* Mark Bryan

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

* Nicholas Caley

Baillieu Holst Ltd, Research Division - Equity Research Analyst

* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

* Ron Shamgar

CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies

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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 annual results 30th June 2019 conference call. (Operator Instructions) I must advise you that this conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Tom Cregan. Thank you, please go ahead.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [2]

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Good morning, everyone, and welcome to the EML earnings call for the 2019 financial year. My name's Tom Cregan, Group CEO and Managing Director of EML Payments, accompanied by Rob Shore, our Group Chief Financial Officer. I'll take you through the highlights of the full year results and a general business update. Rob will take you through the financial details, and we'll then open it up for questions in the time remaining.

We are pleased to announce record financial results for the '20 (sic) ['19] financial year, including group GDV of $9.03 billion, up 34% on a prior comparative period; group revenue of $97.2 million, up 37% on a prior comparative period, exceeding both our original guidance of $82 million to $88 million and our revised guidance in February of $88 million to $94 million. We achieved group EBITDA of $29.1 million, up 40% on the prior comparative period. The EBITDA result included acquisition costs of $600,000 related to the acquisition of PerfectCard and Flex-e-Card, the latter of which didn't contribute to our financials during the financial year; and payment of the short-term incentive plan of $2.5 million. We exceeded our EBITDA guidance of $26 million to $28 million and our revised guidance in the upper end of that range of $27 million to $28 million. Statutory NPAT was $8.5 million, up 283% over the prior year.

Underlying operating cash flow was $22 million, which converts at a rate of almost 76% of EBITDA. That excludes the onetime benefit of $7.1 million in accelerated breakage cash, which we detailed in the first half results. If you included that onetime benefit, our GAAP operating cash flows were $29.2 million and converted 100% of EBITDA. We ended the year with $33.1 million in cash and a $31 million breakage accrual, which will convert to cash in the coming 12 to 36 months. The group entered into a $15 million debt facility with a major Australian bank to partly fund the acquisition of Flex-e-Card. Removing any dilution on that acquisition, our gearing ratio is less than half our current cash balance and less than 0.5 turn of EBITDA, so pretty conservative.

As we commenced during last financial year, we will issue formal guidance for the 2020 financial year at our Annual General Meeting in November 2019. But given our cash balance held at the half year, we advise shareholders that in the absence of acquisitions and accretive investments, the Board is considering various capital management initiatives, which we're continuing to do, and we'll provide a status on that at our AGM as well. We have made a number of very accretive transactions during FY '19 and subsequent to year-end, so that clearly remains part of our ongoing strategy.

On Page 3, you'll see our mission statement and on Page 4, you'll see the date for EML. CON 2.0, which we'd like you to put in your calendars. We did our initial EML. CON last year to bring our mission statement to life by having our customers talk to the investment community about what businesses they're in, what challenges they're facing, the programs that we work with -- we work -- we support for them, why they're doing that, why they choose to work with us, et cetera. I think that, that does a better job of explaining our mission and our technology and our product than we can in some respects. Initially, we'll have the CEOs of our regional business units, several members of our executive team. So it's a great opportunity for shareholders to spend time with our leadership team as well as our customers that are coming in from around the world.

Page 5 summarizes our key financial results during the year and our growing geographic reach, which now includes -- now extends to 23 countries and includes Poland and the U.A.E. We do have a little dot that there on the map for Dubai, the [actual] blue dot, looks like bigger than U.A.E., Dubai itself, but we have a bit of a furious debate internally about whether we could show all of the Middle East or Africa. So we just showed Dubai there. But we're pretty excited about the growth opportunities also within Dubai and some of the other Emirates.

Page 6 is the business re-update showing our segment performance and our highlights here. You can see I've put up the financials already. Acquiring PerfectCard was a key deal to get us self-issuance in Europe through our Irish e-money license. That acquisition really couldn't have gone better. It exceeded our acquisition case for year 1. We did spend $400,000 moving every program we had from third-party bank assurance programs across to our own self-issuance program. So you'll note that, that didn't really impact margin in that year because you got an expense flowing out to do that transition. You'll see the benefit of that this year and the year to come.

The acquisition of Flex-e-Card obviously confirms our position as the leader in that space. We entered U.S. gaming. We launched ECE. We had a very significant year in terms of both business development and nonbusiness development activities.

So looking to the following slide, you can see the performance of our core segments: Gift & Incentive, our General Purpose Reloadable, GPR; and VANS, which is our Virtual Account Numbers segment, formally known as commercial payments previously. Gift & Incentive segment, we grew GDV by -- revenue by 42%, reflecting pricing and margin stability. GDV growth was the same. We continue to grow our portfolio of key customers and including the acquisition of Flex with other major customers including ECE in Germany, which we've won previously into in the United Kingdom, Westfield in the United Kingdom, which was a large -- which was a key Flex customer; EMAAR, one of the largest mall operators in the U.A.E.; and Al-Futtaim in U.A.E. as well. Al-Futtaim is one of the -- for those who don't know, it's one of the largest conglomerates operating in the U.A.E. It employs over 44,000 people across 8 divisions, including retail and automotive. The example of the programs we run today, Al-Futtaim motor vehicle dealerships, which are located in the malls, and customers buying vehicles receive gift cards as an incentive to purchase a [vehicle.] So we're both providing gift cards through the mall as well as through the retailers within the mall.

In the GPR segment, we grew revenue at 10% year-over-year despite a decline in GDV of 15% with overall GDV decline coming from one program in the United States. Excluding LuLaRoe, GDV grew by $215 million, $220 million year-over-year. Revenues increased as higher-yielding programs such as those in gaming and salary packaging replaced LuLaRoe, which was our lowest-yielding program.

In our VANS segment, we grew GDV by 95% and revenue by 165%. We had guided for revenue growth at the AGM of $2.5 million to $4 million. We generated $6.4 million for the year. We've got 30-plus programs in operation on that segment. We've got almost 20 that are in the pipeline, so we're pretty well positioned out for future growth in that space, which reflects the strategy that our North American CEO put in place in early FY '19 to pursue scalable processing services and then what we would call processing plus services, which are transaction processing with some additional smarts and value add in the software.

As we stated in our half year report, other than the direct revenue generated from the VANS segment, it is important strategically given the amount of volume we're processing with the payment schemes. And as our overall payment -- as our overall volume increases, we'll benefit from pricing improvements, which will be one of the several levers that led to gross margin expansion.

I talked about the highlights already some, but moving onto the next slide, really we have been on a journey in this business. And if you got that all the way to 2011 with basic incentive cards all the way through to self-issuance all the way through the launch of mobile payments, geographic expansion through Europe, through Scandinavia, Eastern Europe, Middle East, U.S., Canada, journey could be a kind of a cliché term, if you like, but it is a journey, and we only see that we're in the beginning of that journey. If you look at 2019, then you can see Poland, U.A.E., different technology use cases, delegated authority, instant mobile gift. We continue to kind of push the use cases for the technology, and that will continue in turn to drive revenue over a long period of time.

I'll talk about the evolving landscape of the U.S. gaming market later on in the call. Obviously, there's a lot of interest in that. We do see that as a long-term growth driver for many years.

The following page, we just need to spend more time on. Again, it's really just customers that we've continued to launch and bring across. They are large corporates, the Intus, the bet365s, the Auchans in Italy, the Al-Futtaims, the Smartgroups and so forth through to individual malls on the right-hand side such as Mall of America, which is the largest mall in the U.S.; individual malls and individual customers across the 3 different segments, point being that we're not releasing -- we're not announcing those details on those contracts when they're done. But there's a continuous stream of contracts being signed at EML, continuous stream of programs being launched that are all additive at the end of the day. So they're not all going to be as big as an ECE but collectively, they're -- they do add value.

If I go back to the previous slide just for a second, we mentioned delegated authority. So just to kind of explain what that is. In a typical transaction flow, when a card or mobile device is used in an ATM, POS terminal or online, the transaction routes back to us as the issuer. We approve or reject that transaction based on funds availability and the rules of the program. With delegated auth, we're working with providers across a range of different finance segments. That could be consumer loan providers. That could be peer-to-peer lenders. That could be SMB lenders and so on. And the credit provider's included in the transaction flow. So when the customer uses the card or the mobile device, it routes to us. It then routes to the credit provider who ultimately makes a decision on whether to approve or reject that transaction in real time. The reason that they'd want to be in this flow could include real-time management of bad debt exposure, real-time provisioning of loans to a mobile device. It could be to ensure compliance with responsible lending laws. So it's multiple facets. We have a program with Instabank in Sweden was the first of these programs that we launched during the following year.

We've entered into an agreement with a consumer loan provider in Australia, MoneyMe. We expect the launch over the next couple of months. MoneyMe is presenting at EML. CON; and really, the customer value proposition, if you can visualize it, is to have a customer in store apply for a loan online, have that loan balance provisioned to a mobile payments card within a mobile payments wallet and for that transaction then to occur within minutes of the point of sale. So that's the value prop that others in that space are seeing.

Our sales pipeline is building with opportunities in each of the regions. We'll keep you apprised on progress as we go. Actually, we don't want to build too inflated expectations into this vertical for FY '20. That's not the point of the commentary. The point is that it's just another example of the expansion of the use cases for our technology over the years that provide growth in following years.

Moving past the customer slide and onto the EBITDA slide. We've got a range of financial data we highlighted by GDV increasing from $0.5 billion in 2015 to $9 billion in 2019. GDV, for those who have followed us closely, is a proxy for revenue growth given that increased transaction volumes typically translate into incremental revenue albeit at variable basis points depending on the program. We've got programs that translate to revenue of 5 basis points and others at [650], which in FY '19 resulted in average weighted conversion of 108 basis points.

Page -- you can see the growth drivers in that -- on that slide, which, again, will be familiar with those -- for those that follow us. Certainly, North America and Europe have gaming; salary packaging continues to grow; gift & Incentive; delegated authority; VANS even in U.S. continues to grow and gain traction. So we're pretty excited about that. It's a -- I think it's a great track record over the course of time. I've added the $8.3 million year-on-year EBITDA growth. 70% of that was organic and 32% of that was acquisition, fairly reasonable as well and kind of in keeping with our model that we will continue to be acquisitive where the opportunity arise.

You look at the -- we put the June run rate there. Just again our -- we're not selling -- we're not a consumer goods company. We're -- the can of beans we sold last year is the same can of beans we're ready to sell to Coles to this year. Our ending run rate is a reflection of volume in the programs that are in market and volume for programs that have been launched during that 12 months that then drive growth in the following year. So in Gift & Incentive, we were $87 million for the month of June. And June is not a key period but clearly part of our volume in Gift & Incentive is December. It's seasonal. GPR was $225 million a month. It wasn't a particularly strong month for gaming over the last couple of months but still very solid numbers. VANS was $700 million a month so was a good -- we did $1 billion in GDV in June. That started to provide us with a, call it, a footprint for this year.

The next 2 slides just talk about the number of GPR programs we have in the gaming segment. While we feel we're on track for growth there, the gaming opportunity does provide a distinct opportunity for growth, there's no question about that. I think investors will follow that pretty closely. Numerous states have legalized and launched sports betting: Nevada, Delaware, Jersey, Mississippi, West Virginia, New Mexico, Pennsylvania. I mean those are pretty large states. Iowa last week took its first bets. Some of those states have legalized online, including sports betting, some in-store only. Some like New Jersey permit online registration; others like Iowa require an in-person registration for the -- initially. Many of those states have passed or are presenting legislation, and there are several more there, including again some pretty large states, Indiana, Tennessee, Illinois, which is already announced, North Carolina. I think you have a dozen states or so in some form -- progressing some form of legislation on sports betting.

Same time, tax rates vary across the board. Licensing fees vary across the board. And that would impact the timing that -- of when operators will service it. So we're always asked how soon do we think North American gaming will be a material contributor to earnings. It is difficult given those variations to predict that. All you can really look at is at a high level, and you look thematically at what the drivers are as they are -- as states move to regulate. And you get a fairly good feeling on where that's going to head. Out of interest, I think our program in New Jersey with 365 is days away from launching, so that will give us our second program in the U.S.

That said, gaming represented 7% of our overall GDV. And in keeping with our focus on diversification, we don't want to be reliant on a key customer, a key segment for future success. The beauty of EML is optionality and diversification, and we don't want 30% or 40% of earnings to come from gaming and have that business and have our share price be whipsawed by news of the day about regulatory change in one jurisdiction or another jurisdiction or another. It is one product for us, one use case. We expect growth out of it in the coming years, but we don't want it to be 100% of the business.

The following slides talk about our progress in the mall space and the Gift & Incentive area. We don't need to dwell too much on that. The following slides certainly talk about salary packaging, where we ended the year with 175,000 benefit accounts, and we announced late in the year that we signed an 8-year agreement with Smartgroup to transition an additional 100,000, of which 25,000 have already been transitioned. So we expect that -- the rest of those to move to EML in the coming 12 to 18 months.

When we add any the state government salary packaging programs, we believe the market potential is close to 350,000 accounts. So despite this segment generating approximately $7.5 million in revenue for us, which again [about 8%] of revenues, we do think this has the potential to double over the course of the next few years driven largely by Smart but also some state government wins.

The following slide talks to delegated authority, which I spoke about already. Just another exciting use case for us as we go through the next few years.

And then really, the following slide to me is almost the most important one because those results over the years are being driven by our staff and the people who work incredibly hard in this business. So it's their effort, it's their resilience, it's their creativity which has driven those results for us.

For the company with 275 people now, we really needed to invest in our people and culture to ensure that we continue to be a destination employer. So we did a number of things in 2019. We launched inaugural employee engagement surveys, where our staff and our team are really giving 360-degree views about the company all the way up to Board. We launched value statements we take really seriously. We launched formal communication plans. We launched a revised remuneration plan where really a lot of work there and a lot of investment. Really, it's not work, it's an investment in the future of the business. But it's important to note I think that whilst our employee expenses went up by about $7.1 million over the year, $2 million came as a result of the PerfectCard acquisition. $2.5 million came in the form of a short-term incentive plan, and the vast majority, the remainder, came from hiring senior executive roles, which we did in the first half, including our Chief Commercial Officer, General Counsel, Chief Legal Officer and so on.

As Rob has said, employee expenses are 2/3 of our expense, so outside of these 3 items, our employee-related expense really was de minimis relative to among those things. We don't anticipate the same pace of senior exec hires in FY '20. And obviously, the payment of our STIP will be based on performance. So we've been able to deliver our 40% increase in EBITDA, a bit over our guidance whilst continuing to invest in the platform and the people is a very positive outcome for the future of the company.

I'll now hand over to Rob to take us through the remaining slides.

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Robert Shore, EML Payments Limited - Group CFO [3]

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Thank you, Tom, and good morning, everyone. I'll take you through the financial results review and start on Slide 20 of the pack. In all aspects, FY '19 was a record year, I mean, as shown by the highlights on that slide. If you start with group gross debit volume, FY '19, up 34%, $9.03 billion. But probably most pleasing that we closed the year and start FY '20 with a run rate significantly ahead of our first half volumes, which sets us up nicely for next year.

Record gross debit volume growth contributed to -- converted to record revenues that are up 37% to $97.2 million, with a full year impact of our 2 acquisitions on the cost base. The due diligence cost is $600,000 and leverage on our overhead [considering] that, the group's delivered record EBITDA of $29.1 million, which is ahead of our full year guidance.

Moving to the detail on Slide 21, all 3 of our segments, Gift & Incentive, General Purpose Reloadable and Virtual Account Numbers grew strongly. And those are consistent really, with half 1 that there's only one North American customer, LuLaRoe, that proved a headwind for the year. We're pretty proud of our ability to grow GDV over the long term and demonstrated by a 5-year CAGR of 94% and I want to call out.

Looking at the Gift & Incentive segment. It demonstrated stellar growth in the year. Volumes are up 44% to $1.1 billion. There were 3 main drivers of that: the launch of nearly 100 malls in Germany; GDV growth of 5.6% on North America malls and that reversed some of last year's declines and had a good second half that followed the first half trend; and finally, GDV growth from acquisitions in the Nordics and PerfectCard contributed over $120 million as well.

Our acquisition of Flex-e-Card completed on 28th of June did not contribute to FY '19 volumes. Those will be pointed out later. It is included in the consolidated balance sheet for the group.

So the segment [EBIT] growth, the Gift & Incentive segment converted GDV to revenue, an average of 627 basis points yield, and that's in line with the prior period. There's no impact on full year results, full year revenues from the introduction of AASB 15.

Looking at the GPR segment. At the headline level, gross debit volumes fell $609 million, and that's due to lower volumes on LuLaRoe, but most of that decline was in the first half. You might recall that we called out then that gross debit volume was down $448 million in the first half. We flagged the second half would be a better comparison and it was. So excluding this single customer for the year, the segment grew by about $220 million. As we highlighted previously, LuLaRoe is a low-yielding customer. Much of the GDV is respent with the merchant and doesn't earn EML any revenue. So we earn revenue off the amount spent at POS, withdrawn ATM or balances transferred off the card back to bank account. So whilst the cardholder spend amount did decline in the second half, it did so at much slower rate.

Excluding LuLaRoe, the segment converts GDV to revenue an average yield of 114 basis points, which is -- are fairly stable. We've flagged that for some time now. And since we're the mix that moves the overall segment yield around, we did see strong growth in our salary packaging vertical and particularly strong growth in the last quarter, group GDV about 18% to just under $1 billion, [$900 million] and the closing run rate of 175,000 accounts in market in June 2019 will annualize through in FY '20.

We'll also benefit from the transition of Smart's 100,000 or so benefit accounts over the next several years. And as Tom flagged earlier, looking at the gaming payout cards, they've grown to approximately $700 million per year. We got 13 programs in market now across 4 countries.

Looking at the VANS segment, we saw pretty rapid organic growth, particularly from process and plus customers. This is a focus of the new leadership team in North America, and they've done -- delivered some great results. Growth accelerated significantly in the second half and then leaves us an exit run rate of about $700 million per month in June 2019 on a yield of about 12 basis points.

So as Tom mentioned, whilst the VANS business is a small part of the group's revenue, because of its high GDV, it's very important to provide scale to the business, particularly in relationships and credibility with the schemes [masked by other reasons].

Moving on to Slide 21 (sic) [Slide 22]. And this slide, we flagged previously. The adoption of new revenue accounting standard, AASB 15, had no impact on the full year results. So the -- it's a direct comparison to the prior year. It was only an impact in the first half. For the full year, revenues are directly comparable to FY '18, and they were up 37%, a slightly higher rate than GDV. And we reached $97.2 million, which is ahead of our guidance range.

About 87% or the vast majority of our revenues were classified as recurring. And even those that don't, the establishment fees really mostly relate the sale of plastics to customers, which are sort of expected to recur as plastics needs to be replaced as a regular line item.

The group earned revenue through a multitude of fees that include transaction fees, activation fees, ATM fees, interchange, breakage. It's a very diversified source of revenue. We refer to it collectively as recurring operating revenue, and they represent sort of the yield on the volumes that we process. Breakage revenue, in particular, to call out, is the amount of unspent from our single-use nonreloadable gift, incentive cards. And in the period, it was 33% of group revenues. So it was down from the prior period. It was 37% because some of the new contracts have a more favorable mix towards transaction revenues as opposed to breakage. And as a comparison, 2017, it was up at 52% of breakage. So you can see that, over a couple of years, the group's really had a meaningful impact in diversifying this with other revenue streams.

We also earn interest on the stored value float that we hold on behalf of our customers and cardholders. Much of the growth in the Gift & Incentive segment was actually driven from the European region. So whilst the float did increase materially about 20% up on the prior year, interest rates in that region are 0 or very low, and so this did not flow through to the revenue line.

Whilst we're in a low interest rate environment by historical standards, recently we've seen Australian rates fall even further. There's some degree of a hedge in the impact that has on the foreign exchange rates. With excess of 80% of the group's revenues generated offshore, we generally will benefit from a low Australian interest rate and generally improves the FX rates and we'll benefit.

Looking to Slide 23 now, gross profit margins. We're guided in February that second half margins would be higher than the first due to timing of breakage recognition. That was the case. The second half margins came in at 77% as opposed to first half at 73%. Overall for the year, the group continues to operate at very healthy gross profit margins. The margins have been quite consistent. They've been growing over the years around about 75%. We have 2 main cost of sales, firstly, plastic costs from cards because we use external supplies. And the second is external bank sponsor fees we incur where we operate in country we don't have our own self-issuance capabilities; and finally, our scheme transaction fees.

So we're focused on improving margins a couple of ways. Firstly, we want to see improved economics that reflect the group's scale. So during the year, we signed new agreements with our major banks in North America and Australia which reduce transactional costs and reflect the volumes that we're now processing. They benefit us in the year, and they'll continue to do so in future periods.

Secondly, the group's grown, and where the regulation allow us, we've become a principal member of Mastercard and we've gained e-money licenses to self-issue, so we can now self-issue in Europe and in Australia. What's happening in the year is we really managed to move all of our European business over to self-issuance. We incurred costs of about $400,000 to do that. And that's going to benefit us into FY '20. And it was really the strategy from when we acquired PerfectCard. So that project's now complete, and we'll see the benefit of that in future years.

The move to self-issuance in Australia is underway, but it will take longer to complete because we're currently using BIN sponsors to issue a large number of Visa cards. So it takes us longer to move them over to Mastercard to recard them onto another scheme, so about a year to a 3-year plan. And as we stated previously, we sort of expect to see margins lift towards the 80% level over several years, and we'd expect to see margins move upwards in FY '20.

Looking at overheads now on Slide 24. The headline level, overheads fell as a percentage of revenue to about 46%, which demonstrates, as we grow, we're leveraging our cost base effectively. Investors who followed the company for some time recognize that EML is not a capital-intensive business. Majority of our cost base related to employees, which are about 66% of overheads, about 2/3 of overheads. We closed the year with 275 employees, which included 52 who joined us with the Flex-e-Card acquisition on 28th of June.

As Tom mentioned, FY '19 did see some significant investments in people. Full year impact of that $2 million for the cost base -- the employee cost base coming on with the acquisitions in Nordics and Ireland, new executive talent, and then we spent about $2.5 million on short-term incentive plan and bonus scheme, which is formalized based on the impact on profit target at the moment.

These are all important. They're necessary steps in the group's development. We aren't going to continue to grow the business if we don't retain the team we've got around the world -- talented teams around the world, but it did impact the cost base in FY '19. So we also called out the cost of due diligence on acquisitions, which came in about $600,000 for the year, and that was principally on PerfectCard and Flex-e-Card.

Wrapping up the income statement on Slide 25, we're calling out a couple of other items. Firstly, EBITDA hit a record of $29.1 million, including the due diligence costs coming in ahead of our guidance range for the year, which was $26 million to $28 million, was up 40% on prior year, which was a great result.

Group receives research and development credits around the world. They're pretty much in line. And overall corporation tax payable is about $600,000, was relatively low, and that really reflects the timing of deductions and deferred tax movements in the U.S. for options vesting in May and will vest in August 2019. So group's got significant tax losses available for use in future years, which were included in our deferred tax asset on the balance sheet, and those losses are mainly in Australia and the U.K.

So we're instituting NPATA for the first time on Slide 25, and we reconcile how we get there. Looking at share-based payments, they're down 15% to $4.2 million. You'll see that fall further in FY '20 because options are starting to vest related to the acquisitions in the U.K. and U.S. Fall further in next year. The last grant related to the U.S. acquisition vests in August 2019. So the total share-based payment expense in relation to acquisitions is $2.3 million.

Depreciation, amortization is up, full year impact of the 2 acquisitions in Nordics and PerfectCard. Depreciation, amortization both from acquisitions was $7.5 million of that. So it was above the depreciation, amortization.

Other noncash charges was for the unwinding of a discount on the contingent considerations. So the net impact for those acquisition items brings us to an NPATA of $20 million in the year, which was significantly up from $12.7 million in FY '18.

Looking at the balance sheet on Slide 26. Again, the group headline is that the group's got closing cash of $33.1 million alongside a $31.8 million breakage accrual and some debt. The contract asset, which is the breakage accrual, it represents the remaining portion of funds on Gift & Incentive cards where we sold the cards, we've received the funds and they are sitting in our float, but we expect the breakage to remain -- we expect the amount to remain unspent and convert to cash in future period. The contract assets up on last year by about $12 million, and that's driven by growth, particularly in Europe, the acquisition of PerfectCard and Flex-e-Card, which added $10 million of breakage accrual and offset by the restructure and conversion to cash of breakage in North America, which we spoke about in the first half. We expect about 60% of our breakage accrual to convert to cash within 12 months, and we've also, as we mentioned, drawn down on debt in relation to the acquisition of Flex-e-Card. So overall, very healthy position.

Intangible in our books mostly relates to 6 acquisitions we've made in 2011. The businesses we buy are not capital-intensive, so you typically end up with intangible assets and goodwill making up a significant portion of the acquisition price. Deferred tax assets, I mentioned, is largely tax losses of about $15.6 million. That's tax losses and then mostly in Australia and United Kingdom.

Trade and other payables include the contingent consideration of $11.8 million relating to the 2 acquisitions. Both have earn-out components, and we expect both to be successfully met and paid out in future periods.

The $244 million asset, which [we charged as a] receivable from financial institutions. This is the money held on deposit with banks on behalf of our customers, is directly offset by the liabilities of stored value account holders, which is the amount we owe to those cardholders. And as we continue to increase self-issued elements of the business principally in Europe and Australia, these amounts have grown and they'll continue to grow significantly in future periods.

Slide 26 (sic) [Slide 27], looking at the underlying cash flows for the period. They came in at $22 million. Given our EBITDA for the year was $29.1 million, we've got an EBITDA-to-cash flow conversion of 75.6%. That's exactly the middle of the range we've guided to of 70% to 80%, which is sort of the long-term cash conversion we expect. We still see no reason for this to change moving forwards. But this is before the one-off cash benefit we received in the year of $7.1 million. And that related to North American breakage restructure where we accelerated breakage conversion to cash.

Finally, in terms of investing cash flows, we paid out $44 million for PerfectCard and Flex-e-Card. We spent $4.5 million on capitalizing internal development to build some innovative products, including delegated auth around the world, and then we spent about $1.3 million on computer and office assets, which rounds out the cash flows.

So I'll now hand back to Tom to sum up before the Q&A.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [4]

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Thanks, Rob. Just really, in summary and we can certainly open up for questions. I think we're very pleased with the results in 2019. But really, in our business, one set of results is just the start of the next year. So really, we're kind of looking forward to another positive set of results in 2020 based on the results in 2019. We're generating revenue and earnings growth in each of the 3 segments. I think we've demonstrated pretty clearly that we're not reliant on a single customer or a program for driving future success. We've got several drivers for revenue and earnings growth. And some of those are obviously we've got a GDV run rate of $12 billion as we start the year.

Now that math isn't that complicated if you look at VANS, we're doing $5.5 billion and we're doing $700 million in June, so you got an annualized run rate of $8.5 billion at 11 basis points. So it's not rocket science to work out the revenue accretion that's likely to come from that VANS segment. And the Gift & Incentive segment as well. So we're started the year in a very healthy position in terms of GDV growth. We've got a full year contribution from ECE in Germany given that program didn't launch until kind of October, November last year, and now we're expecting to launch into other European countries within -- for the Christmas season this year, which provides additional upside to us.

When we acquired Flex-e-Card, what we guided, I think, to $4 million of EBITDA. The business is performing really well, very, very solid growth in Eastern Europe and the U.A.E. So that certainly won't underperform relative to that $4 million. We've got expansion of our GPR segment in all forms, even more programs through on the salary packaging segment as we bring more programs on U.S. gaming, European gaming, et cetera, we'll see revenue growth and earnings growth out of that. As some would have noted, late in the year, we restructured a couple of our agreements with 2 suppliers in our salary packaging award, one of which was managing the fund merger coalition loyalty solution, and basically getting rid of those input costs, buying out those contracts saving about $1.25 million a year in direct expense. So that -- also that helps increase our margins -- in our gross profit margins in salary packaging and in turn that will help the group gross profit margins as well.

So there's a lot of optionality in the business in the way it's currently built, which is positive. We are benefiting from our ongoing investments in product development. We're showing good signs in cross-sell across each region. [Gaming and law] is just the latest of those. And again, I don't want to understate it, we've got a lot of work to do in front of us to make that materially significant. But we have launched 1 program in Sweden, we'll have another launch soon. We signed on with 3 contracts outside of Australia. And so we've been telling you for the best part of 6 to 9 months, and this now starting -- I think in the next year, we'll start to have that, some optionality from that as well driving growth in future years. And then finally, with $33 million in the bank and a pretty conservative gearing ratio, again, we've got optionality. We can use that for accretive transactions. We can use that for investments. We can use that for capital management.

So that's probably my summary actually. The year was built off a lot of the diversification and a lot of contributors across multiple parts of the business. I think as we enter into FY '20, we'll benefit from the same. So that will be -- that's it for me. So I'll open the floor to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we've got our first question from the line of Mark Bryan from Wilsons.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [2]

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You've given us hopefully quite a lot of data points in terms of framing out 2020 given the exit rates you've given us. Just wanted to drill into a couple of those, if we can. Just around the revenue mix, obviously you have good sight into the contracts coming in. But the 108 basis points of revenue conversion, is that likely going to be stable percentage into 2020?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [3]

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I think that would decline, Mark, just because of the -- I mean VANS is -- in June was 70% of GDV, converting it at 11 to 12 bps. So I think that number will come down. But it's an outcome number really relative to our initial number. But it does help the modeling to be able to just -- probably, if you -- the easy way to do it would be if you took $8.5 billion as the VANS run rate at 11 and the GPR run rate which converts at 115, 120 basis points and then the Gift -- and you add in 50% for Gift, at the same conversion rates for Gift, it will give you the number for what that average weighted conversion will probably be.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [4]

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Perfect. That's really helpful. And then, just one other -- or a few things together. Just on the OpEx side. Obviously, you said you hedged some investment into the business. If I take your second half 2019 OpEx rate and I add in what you disclosed FEC has in terms of cost, I'm getting to sort of the low 50s on OpEx. Is that -- Rob, is that [a plausible sense of] assumption?

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Robert Shore, EML Payments Limited - Group CFO [5]

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In a broad sense, well, it's probably going to depend on -- obviously, we've called out the $2.5 million of bonus. Bonus accrual is obviously based upon achieving the budget, so it sort of self funds. And so yes, [if you don't see it,] that's probably the big swing factor, but yes.

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Operator [6]

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And your next question comes from the line of Owen Humphries from Canaccord.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [7]

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Can you hear me?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [8]

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We can.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [9]

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Well done, and stellar FY '19, particularly that second half. Maybe this is more of a broad-based question just to learn more about your business. Can you just explain or provide color around your go-to-market strategy? Obviously, you're B2B. Obviously, you're large, you're selling to large enterprise customers around the world. Can you just maybe talk about how you find them? Is it RFPs, cold calling? Is it relationship channel partners? Can you talk about how many sales guys you have on the ground, how many in each region? And just obviously, we're all looking how you can scale this business, excluding acquisitions, [you've got $95 million] to where you think you can take it, just to learn more about how you -- your go-to-market strategy.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [10]

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Yes. Owen, great question. Certainly, we have hired more people in the regions, now in kind of sales and peak development but not [of talent.] I mean in Australia now, we would have 4 people in development with deals would be account management are growing revenues from existing customers as well as targeting new business. But I would say 50% of leads are typically inbound leads. There's not a plethora of providers in Australia who can do what we do. So typically, you can have a company who's got a Mastercard or Visa saying, I'm looking to do this, and that's forwarded to us.

So at least half the prospect in Australia across all segments is inbound. And then the other half will be done by our guys prospecting in all the different verticals. So we've got 4 in Australia. That makes sense because gaming is an established vertical, salary packaging will be an established vertical, Gift & Incentive is an established vertical. So we'll have to uncover other verticals, for example, and delegated authority is one of those. So you're looking at new channel opportunities, new products you can create. I mean you're going out to market selling through cold calling, direct approaches, that kind of thing.

In the U.K., we've got about 3 people as well that we hired, a couple from the industry, from competitors, who had been in the market for over 10 years. So they've been in a large kind of roller mix of clients and a lot of knowledge about companies and what they're willing to do in the coming years. But again, half -- at least half the volume if not more would be inbound inquiries. As with anything else, as you do more gaming, you become known for gaming. As you do more malls, you become known for malls. So we become the clear kind of provider of choice and so people would call us for that.

In the U.S., we probably got 5 or 6 as well, a couple that are on the VANS space, so targeting large processing companies. Most of them are cold call, most of those are hard grabs. We've got to pick up the phone, setting it up, doing the work. [They're not trying to woo us.] We've got a couple in the gaming space. We were just targeting legal, specifically we've got a couple in Gift & Incentive space. So -- but again, I'll probably tell you, half of it's inbound and half of it's outbound. So I hope that kind of explains the story a little bit.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [11]

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Yes. Sure. And I guess, are you hiring from competitors in that space? Like is there an opportunity to accelerate the growth in this business? Or is it steady as she goes? You guys have another place you're targeting and it's just beating down those doors?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [12]

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I think in -- look, if you get a call from competitors, on the good people in the odd jobs, that does help. For example, we hired a guy who's running our head of sales, for example in, the U.S. who was the President -- was the General Manager of a large Gift & Incentive business. So we approached him, and he understands who the players are, he understands what the programs are and what the economics are. So he's a clever guy who can go on half the business. But if you start your job on day 1 and you've got a Rolodex with 100 contacts, it doesn't guarantee you success, but it's sure better than starting with 0 in the Rolodex. So where we can find people from the industry, we do. We're going to be a better culture for the right people versus -- just because they happen to come from the company industry.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [13]

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And maybe a couple of questions I could ask from the investor community, it's 2. The first one is around the M&A strategy and where that could be. Are you guys thinking about a great balance sheet? You guys are cash generative, obviously you're growing the margin, but where will you target the acquisitions? Would it be -- if you guys can divide it to specific verticals you've been after or specific regions or you're agnostic depending on the multiple and what kind of business?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [14]

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Yes. It's largely agnostic, to be quite open about it. I think for years, we don't see that there is a product deficiency or there is some poor tech that we need to in-source or we need buy that we could build. So companies like Flex -- the PerfectCard had its own rationale, which was e-money issuance and given the complete fiasco that [Visa] has become, the logic of that deal should better every day that we did it. And so that actually has rationale we think we'll be self-issuing in Europe, so we went and acquire that asset specifically for that purpose.

In our Flex, to be honest, we had the business for probably 2 years. It's just a question of when the timing was right. Really what we acquired there was customer base and kind of pretty strong position in a given vertical. So they've also (inaudible). There's no one that we're chasing that we think we need to be in countries or we need to buy a company. Why? Because we need more revenue in a given segment. It's not really -- it's not that way. We're not out there chasing acquisition opportunities. Largely they're just coming to us so we're doing that in the flow, so to speak.

I said before there won't be a week or 2 that go by where there's nothing that comes across our table for potential acquisitions. We tend to look at them all, and we tend to disregard the vast majority of them. I think the annual report, for example, I think we made reference to another $400,000 of acquisition costs that -- because we didn't -- we were looking at another transaction and we just didn't close it because it wasn't the right deal for us. And so I guess should expect we're out looking at companies all the time. There's a part of our cost base that should just be implied, meant to be working on BD and acquisitions. But we are bloody choosy. I'll tell you, the pain of doing a bad one is tenfold of not doing one at all. So it's an acquisitive market. There's plenty of opportunity out there, and we're going to continue to be pretty selective about what we look at and when.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [15]

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Got you. So largely opportunistic. And then the last question I tend to ask is obviously on salary packaging and the play there, and Gift & Incentive is one of the largest in the world as you can see and obviously gaming is scaling now. What about other verticals, are you guys targeting new opportunities? Where could that be? In what regions? And how large? Is the business going to diversify from those 3 core verticals?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [16]

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Probably, not the vertical, I just think probably different use cases. For us, the whole [value-add] often working in the financial sector, if you like in the loan sector, it's just a different application, just a different use case for our GPR business. So I wouldn't call our business a segment [but] rather it's just a product of a use case that are relatable. So I think all those existing drivers you mentioned are known. [And gaming and law] is just an example of one we're working on for 1 year -- probably longer than that, probably 1.5 years.

We're now in market and hopefully, [if we use the company kind of yield, the yield will be better.] We're a company, cliché as it may sound, there is not a day when we sit around wondering what product we can do next week, we're thinking about that all the time, right? Because I think even as we said in terms of our folks internally, even we're the largest in Europe, for example, the largest in the world when it comes to malls, our enemy is just complacency. Our enemy is not innovating, not offering expanded products opportunities to our customers. And a company comes along in a year [sends a couple emails, gotten lazy] and they should be working because they're more innovative, they're more nimble. So that's what we have to guard against.

So we will continue to invest in product innovations and different concepts all the time. It's just par for the course. And gaming and law just happens to be one launched in Sweden and we think it probably makes sense and we went live in Australia shortly, went in Europe that are kind of working with us as well. Does that mean in 3 years we've got 10 customers in that segment or 20 or 40 but remains to be seen? But just the next evolution I mean in two or three years, there'll be a different one as well, I mean we just go with the rhythm.

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Operator [17]

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And your next question comes from the line of Nick Caley from Baillieu.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [18]

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Just to say, I'm a little bit confused by the VANS, I know you've sort of made some comments, but I thought that strategy was sort of focused marketing in the U.S. on sports and the data being doubled. Can it double again? Or is it...

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [19]

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I think the strategy you heard is wrong, obviously, we had a strategy of moving into like a full-service model with VANS which we've known, we were in suppliers. We were doing a lot of customer service. And it would've been about 60, 80, 100 basis points, but we would have gotten a lot of cost associated with that as well. Really when our North American CEO came in a year and a bit ago, he said that the strategy is wrong. What we need to be doing is partnering with existing companies who need processing services and need processing plus which is kind of a few bells and whistles on top of the normal coverage style and I think that, that strategy is right.

So a lot of what we did in the first half of the year was to sign customers. We're not announcing them in VANS because that don't mean a thing to anybody, right, we're not consumer nice. So if we said we signed company X, that doesn't mean anything to an investor. So they're not names that are going to be necessarily put [in vex.] But we'll continue to sign them, launch them and the ones that has come onstream particularly in the second half of the year are so significant, both in terms of volume and volume growth. So we would expect that continues on the top line, similar risk, similar companies. But I think we're in the right track now for that. So that -- we've got a little bit about – we've got 11, 12 bps business, but it's still money that falls to the bottom line pretty easy.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [20]

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There is nothing about those clients that you give any seasonality to GDV, should they?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [21]

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No.

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Operator [22]

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Your next question comes from the line of Garry Sherriff of Royal Bank of Canada.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Tom and Rob, a few questions on the U.S. sports betting opportunity. I just want to clarify, the major global gaming companies that you've signed up with, can you just clarify, are they exclusive? Specifically, can they only use just EML for those sports betting card programs in the U.S.? Or are they free to use other players out there in the market?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [24]

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It's a good question. And I'll answer that. I'll answer it. I'll say the intention is for it to be exclusive, which it is. The reason it can't be worded that way is that, in each market, such as New Jersey, for example, EML has to go through a regulatory approval process with the Department of Justice and the Department of Gaming Enforcement. So EML has to get a license as a service provider to the industry and the operators, SportsBet, bet365, et cetera. So the intent is that they are exclusive, yes. So as bet365 rolls into the different markets, they will be using us. The reason the contract won't say that is, it can't say that because if for some reason the state of Pennsylvania did not approve EML, then that would leave 365 high and dry, right? So hopefully that answers that question. I would expect it [package] terms if it is exclusive but contractually, it's not. And what was the second part? (inaudible) in that as well. In the event that we couldn't provide a solution for them then they would be, yes.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay. And I know it's early days, but could you try and set us through how the revenue model would work for sports betting in the U.S. in practice? And the follow-on question from that is can we get any sense of the rough revenue yields you expect or that you can expect to, I guess?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [26]

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Yes, I think probably the AGM is probably the time we'll do that. We're in the sports betting market for 9 months and we started with a customer base of 0. So I think the more recent data will be the more relevant data, if it makes sense, come November. The first 2 or 3 months are literally kind of ground zero. The revenue model is -- if we're earning 110, 115, 120 basis points all up in that segments, and then there's probably just 180 basis points, and then you benefit from [part of the] change when the cards are used at POS devices, and we do facilitate the movement in money into the gaming account. So we are not the acquirer. We don't want the acquiring risk. That's a riskier business with our appetite. So we work with an acquirer and we earn a markup effectively to facilitate money being moved into the account and net-net, you'll probably going to end up 180 basis points as opposed to 110, 120.

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Operator [27]

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And your next question comes from the line of Killian Murphy from Petra Capital.

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Killian Murphy, Petra Capital Pty Limited, Research Division - Head of Industrials [28]

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Just a question for me, just in terms of looking at in terms of early wins for EBITDA for next year. And if you look at Slide 7 of the presentation, you give revenue for GPR and 31% of that came from salpack which kind of nets off about $7.5 million and then 175,000 cards gives you about $42 per card per year. I think you disclosed $60 being your target in the past and then pursuing that kind of shortfall is largely driven to the timing of Smart Salary coming onboard. So simple math, 175,000 cards times $60 should be about $10.5 million. And most of that increment should drop then at about gross margin levels, about 75%. So is there a couple of millions of easy wins in terms of EBITDA that you've already banked for this year?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [29]

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I can see you're putting up your guidance already.

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Killian Murphy, Petra Capital Pty Limited, Research Division - Head of Industrials [30]

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(inaudible)

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [31]

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The short answer is yes. I mean I think our fee structure is a monthly fee in that industry, and then we certainly benefit from interchange which is we're doing north of $1 billion now in kind of volume in that segment. And even our interest is declining. We're still sitting interest. So roughly we're doing $60 per card per annum. So yes, I think we had kind of 25,000, 30,000 cards come onto the platform kind of later in the year. And that will only count as transactional if that actually did the loaded ones. And so most of those would have come in May and June. So they really wouldn't have added much at all to the full year results. I think that's a fair amount. I think that starting run rate is 175,000. There is a couple of million dollars of margin in the bag as we get into next year before we start to run other incremental programs on top.

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Killian Murphy, Petra Capital Pty Limited, Research Division - Head of Industrials [32]

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Okay. Great. And in terms of maybe other wins, so you mentioned that Flex is going quite well in Eastern Europe and U.A.E. and that the $4 million you discussed previously wasn't likely to be missed? Can you maybe give us a range for that? Or is it too early?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [33]

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Probably, we'll do it in November. I would say, I mean it's not $4 million to $7 million or $4 million to $8 million or anything like that. But I mean the growth in Poland and U.A.E. is north of 50% on a year-over-year and kind of a GDV basis, so we're really pleased. I could see there being sort of an upside there. There's no upside opportunity and downside risk for sure. Before we become comfortable as a baseline, maybe $4 million becomes $4.5 million or $4.75 million or something, but I'm sure it will be over $4 million.

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Killian Murphy, Petra Capital Pty Limited, Research Division - Head of Industrials [34]

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Okay. Perfect. And just quickly for me, in terms of the issuance benefits we'll see coming through in FY '20, Rob, you mentioned 80% is still the target for a couple of years. How should that scale up? Like should we be thinking 77% maybe next year? Or is it smaller moving than last?

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Robert Shore, EML Payments Limited - Group CFO [35]

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Yes. In ballpark of where we're expecting, I mean that is 76%, 76.5% and then 77%. And then you'll see that sort of creep towards the higher end, creep up towards 80% in 2 or 3 years, I suppose.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [36]

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I mean we're at 75% now on the full year kind of basis. But if you took out $400,000 for the transition costs and add it into that issuing agreements and you added that kind of back in, and then you at salpack and you look at the cost we're paying out for the contracts that we've exited to remove those kind of input cost and you kind of add that back in, it amount to about $1.25 million a year, and that'll get you to kind of 76.5%, 77% just the base. That doesn't include self-issuance from salpack because we really don't do that yet, that will take a couple of years. But if it does, that will take you to about $1 million-plus EBITDA out of the cost base. So I would think 76.5%, 77%, 78.5% following year, I think it takes 2.5, 3 years probably to get there. All those little things are important.

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Operator [37]

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And your next question comes from the line of Ron Shamgar from TAMIM Asset Management.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [38]

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I'll try to go quickly. Just a couple of questions. So you're EBITDA was $29.1 million, and then you had $600,000 of acquisition costs, $400,000 of transitioning to self-issuance in Europe cost. So really, the underlying EBITDA was $30.1 million, is that correct?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [39]

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Yes. You can look at it that way. We thought people would -- we'd give it away if we did that. But that's right. We report it as it is, but I think that's the right kind of outlook is looking at it in terms of underlying numbers here.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [40]

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And so that implies $16.5 million of EBITDA for the second half, which if we annualize it, sort of gives you a $33 million EBITDA base, sort of starting base, for FY '20. Is that another fair assumption?

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Robert Shore, EML Payments Limited - Group CFO [41]

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It's reasonable, yes.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [42]

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Okay. And in terms of the EBITDA margins, I mean second half sort of roughly, it was 32%, I think, on an underlying basis, EBITDA margin. So where do you see -- I mean obviously, you've given the gross margin sort of target, 77-ish next year and then 80% into 3 years, where do you see over that same time frame the EBITDA margins heading to as your gross margin heads to 80%? Is this like a 30% -- is this like a 40% EBITDA margin business or 45% or 35%?

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Robert Shore, EML Payments Limited - Group CFO [43]

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It depends on the time horizon you look out on. If you look out on the 1-year horizon, then you will be thinking it's in sort of the 32%, 33% kind of -- I mean, generally, we don't have to spend -- have to have significant leaps in the cost base. You see those leaps when we acquire a business and before they sort of get fully integrated. This year was a bit different for the reasons we've spoken about. So as I said, I'd expect next year to be 32%, 33% EBITDA, and then you've got to keep that trend going and grew probably a couple of percent every year, and that's really what we try to do is leverage the cost base we've got to remain a low cost business.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [44]

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Okay. That's great. And then to the VANS business, if we sort of annualized the run rate of June, we sort of get $8.4 billion and 12 bps, that's sort of $10 million revenue in the VANS sort of starting base for next year. And what sort of gross margins are we looking at? Is it sort of 80%, 90%?

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Robert Shore, EML Payments Limited - Group CFO [45]

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No. The entire business gross margin are broadly the same. Obviously, there's no plastic cost in VANS. Germany will be a higher, higher margin. But it's also the VANS business in the U.S.A. segment, and so it's all sponsored issued. So overall, you'd be seeing it sort of in line with the rest of the group's margins, on the average, it's about 75%.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [46]

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Okay. And you mentioned scale benefits of Mastercard. I mean is that basically getting a discount on your COGS with them? Is that...

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Robert Shore, EML Payments Limited - Group CFO [47]

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Yes. And the more volume you process, the lower fees you pay.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [48]

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If I look at that, all schemes look at that in the aggregate. So from a Mastercard perspective or a Visa or a Discover or whatever it might be, $10 billion, $12 billion is $12 billion. For them, just $1 of volume is the same. So they not really care for where it comes from. So when they look at EML, they're not looking at us as a gift card company or a reloadable business or a VANS business, they looked at us as a company doing $12 billion, and so the more volume we do, the better pricing we get. We are talking basis points, we're not talking extreme [variations] in our cost base. But 1 basis point, 2 basis points, 3 basis points, on $20 billion becomes pretty significant, right? So they're small increments, but they're additive for sure.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [49]

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And then the new sort of merchant delegation authority that you mentioned, so just looking into that and looking at some of the global players in the buy now, pay later space utilizing sort of a similar solution with other providers, is sort of the buy now, pay later play in the market, is that solution applicable to them as well?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [50]

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Yes, it is I think from a different -- it solves a different problem now. For Instabank, for MoneyMe, for consumer lenders that have interest rates that would mirror consumer lending rates, right? So the headline rate is higher, therefore the amount that we can get paid for them is higher. I think we're solving a bigger issue, for example, for MoneyMe because you're allowing that person who's in IKEA who might have a choice of credit or debit or I think Flex is in IKEA, I'm not sure if -- is it IKEA that you could do a couple of buy now, pay later options? You could do credit, debit or you could [now use them]. And that's really what they're trying to do.

If I was just to originate a customer in a store, produce on their own, lock it to IKEA, and off you go. So their rates are higher, which means the economics for us will be better. Buy now, pay later, [what that really] solves I mean, if you are really giving you the authorization of those transactions. What it really solves is just retail connectivity, right, in Australia, (inaudible) a lot of -- has barricades in retail. So that just takes time, a lot have done it already but it has taken time for me to do that integration. I could say that they're never going to have that time, so I would expect that they'll use buy now, pay later companies, will use companies like us, but really what they'll be doing is just using us as a gateway to put in a Mastercard to solve the product retail -- to solve them maybe even doing a integration with a retailer for bar code.

So they're a much, much simpler solution and materially less accretive rate. So it's applicable, but I think you've got a little bit of economics on these things. If I'm a buy now, pay later company and I'm making 400 basis points. I'm not going to be able to pass 600 on to the merchant by adding [unit] charge. So someone like us would earn unit charge and basically be rebating their charge back. Otherwise, the merchant wouldn't be forward in the first place because the merchant's cost base just went up by 1/3. So I think it will apply in all different folks of ours from small business lending to one of the deals we've signed on the peer to peer space. In Europe, I can see buy now, pay later as being one of them but the solution being provided is simpler. And so the basis, the conversion will be much lower.

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Ron Shamgar, CTSP Funds Management Pty. Ltd. - Head of Australian Equity Strategies [51]

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Okay. Okay. And then last one for me, just with the U.S. gaming. William Hill is a partner of yours in Australia. They're already doing $1 billion of taking bets in the U.S. And is there any reason why they're not looking to partner up with you in the U.S. sooner?

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [52]

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So I think we're talking about the U.S., but we have William Hill here in the U.K. So individual -- I mean William Hill (inaudible) U.K. offers a different [run rate]. I think most of what we're seeing really the U.S. businesses are being driven pretty independently. They've got [CEOs,] and I'm not seeing a lot, to be honest, capital in Europe that are being driven by -- so European companies with the U.S. gaming companies sort of being driven those in Europe. They're building their teams in the U.S. are making operational decisions.

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Operator [53]

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There are no further questions at this time. Please continue, speaker.

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Robert Shore, EML Payments Limited - Group CFO [54]

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With that, we're going to close the call.

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Thomas Anthony Cregan, EML Payments Limited - Group CEO, MD & Director [55]

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Yes, thank you very much for attending, everyone. Appreciate it.

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Operator [56]

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And that does concludes our call for today. Thank you very much for participating. You may all now disconnect.