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Edited Transcript of OFX.AX earnings conference call or presentation 9-Nov-20 11:00pm GMT

·40 min read

Half Year 2021 OFX Group Ltd Earnings Call SYDNEY Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of OFX Group Ltd earnings conference call or presentation Monday, November 9, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Alexander Malcolm OFX Group Limited - CEO, MD & Executive Director * Selena Verth OFX Group Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Ashwini Z. Chandra Goldman Sachs Group, Inc., Research Division - Equity Analyst * Ian Munro * Joshua Hain ================================================================================ Presentation -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [1] -------------------------------------------------------------------------------- Thank you, Ari, and thanks, everyone, for joining the call. As Ari mentioned, I'm joined by Selena Verth, our Chief Financial Officer; and Mat Gregorowski, who leads our Investor Relations program with Citadel-MAGNUS. Selena and I will take you through the pages and then there'll be time for Q&A. We'll cover the first half result, what it is, what drove it as well as our outlook for full year '21. Let's move to Slide 4 and the pack. Over the first half, we saw unprecedented market conditions, especially in our consumer segment in the first quarter that contributed to weaker revenue and EBITDA. However, in the second quarter, we saw a good recovery across all segments. Notwithstanding the decline in consumer activity, we saw continued strong engagement from our corporate segment and good growth in our online seller segment. It leads us to observe that the underlying signals remained healthy. Transaction growth was good, margins were stable and risk outcomes were within acceptable levels. In addition to healthy underlying signals, it's encouraging to see our growth investments delivering. New corporate client growth and revenue from new corporate clients was excellent. Online seller revenue and client growth was strong, and our enterprise segment pipeline continues to strength alongside a terrific new strategic alliance we announced last Friday with WiseTech Global. In terms of the results themselves, over the full half, ATV's revenue, EBITDA and net profit after tax were down driven largely by soft activity from our consumer segment in Q1. However, as I mentioned, we did see a recovery in Q2, and whilst consumer revenue was down 16.3%, corporate revenue was up 2.9% over the half and up 11.6% in 2Q. North America, our key growth region, saw revenue increase of 14.5% in 2Q, up 30% on the first quarter. Beyond the overall first half results, we see healthy underlying signals. Transactions were up 10.1%, and transactions per active client were up 13.8%. Registrations were up 10.1%, and we continue to see very strong recurring revenue, with 79% of our revenue coming from clients who have been with us 12 months or more. And net cash continues to underpin a strong balance sheet. A sign of our health is that we have announced an unfranked interim dividend of $0.0081 per share. It's also very encouraging to see our growth investments delivering. We grew new corporate clients at the fastest rate in several years, up 10.6%, while new revenue generated from corporate clients that were onboarded in the first half was up 33% versus the prior corresponding period. Our investment in our online seller segment is paying off with revenue up 16.4% over the first half and recording very strong new revenue growth all over the world, excluding Asia. Finally, our investment in our enterprise segment is also bearing fruit with our Link program launched and live. And in addition, it was terrific to win a new strategic alliance with WiseTech, and I'll share more on that later. In enterprise, we have good traction now and great plans for the remainder of full year '21 and beyond. Now let's turn to Slide 5. Never waste a good crisis is a phrase that we've embraced at OFX. We've learned a great deal about our client base, our operating model, our competitiveness and more over the first half that we can use to compete going forward. Some of the bigger lessons learned are our consumer segment remains a very loyal and very valuable, especially during periods of high volatility, such as we saw in Q4 full year '20. For example, I shared in our full year '20 results that in Q4, we saw a 62% increase in revenue from active clients in March versus the year-to-date average through February and 132% increase in revenue from inactive clients. Whilst that meant their activity in the first half was low, we know they will bounce back and that we have the right infrastructure and value proposition to serve them sustainably. Our corporate segment performs well through the cycle. We saw a nice lift in March during the volatility and a small decline in April when it receded, but activity remained consistent as did revenue. That consistent activity and revenue is very healthy. In our corporate segment, we have a diverse range of sectors represented that helps prevent concentration risk, which tends to play out in a crisis. Nothing was clearer than what our clients value during the crisis our people and our platform being always available and our ability to understand and serve them in their hour of need. Our technology and banking partners are a big part of why we are sustainable. We work with partners who have the high standards and reputations who expect the same of us, and we performed well for each other. In a crisis, risks tend to materialize in ways one can't imagine. So having strong credit processes and a strong risk culture is invaluable and interestingly, highly valued by our clients. Having a strong defense is the basis to go on attack, and our investments in growth have been working. There is no question, our corporate portfolio, our online seller portfolio and our enterprise program will deliver the substantial growth for OFX going forward. And as you can see on the chart on the right-hand side, we also saw some interesting shifts in trading patterns. In particular, we saw a spike in activity relating to offshore share purchases and disposals. Whilst these transactions may be at lower ATVs, they are generated from valuable clients by our referral program. The end clients are very much our target segment, and we will continue to enhance our offering in this wealth management vertical. Moving to Slide 6. We saw our net operating income decline in both Q1 and Q2, which although disappointing, was better than what we saw in the market in Q2. I will talk in a moment about what we saw in terms of competitive outcomes. But I do want to emphasize that whether it's our total revenue declining at a lower rate than the market or our NDCs growing in corporate at a record rate or our enterprise pipeline being in very healthy shape, we are confident we are out competing. For example, in September, OFX spot turnover was up 8.7% on a reported basis and 15.3% on an FX-adjusted basis, outperforming all market measures. On the right-hand side, you can see that whilst our transactions are up over 10%, ATVs were down more than 11%. So turnover was stable and revenue was down. And it had a flow-on effect to EBITDA. We do not expect ATVs to remain low, and indeed, we've seen them grow in Q2, and ATVs, excluding offshore purchases were, in fact, in line with prior period ATVs as shown on the previous slide. Moving to Slide 7. Whilst we saw consumers less active in Q1, we continue to grow engagement overall in our active client base. The number of active clients overall were slightly down, reflecting our pivot to grow corporate clients, but transactions per active client were up 13.8%. This transaction growth means we are winning the types of higher value clients we are targeting. It reflects deeper and more engaging customer relationship management programs, more pricing tests, and the strength and ease of our human plus digital service delivery. ATVs, as mentioned, were skewed by offshore share purchases, meaning overall turnover was stable, though trending well. As I previously stated, in September, turnover was up 8% versus prior corresponding period. Moving to Slide 8. Our global footprint continues to be a source of competitive advantage. Whilst the world experienced the crisis in different ways and in different times, our Asian and European clients were the hardest hit, and GDP shrunk in both regions substantially. In Asia, COVID and political unrest created headwinds. In Europe, the combination of Brexit and COVID-19 created even stronger headwinds. Nevertheless, the teams have worked exceptionally hard and notwithstanding these headwinds, we saw some green shoots. For example, in Asia, our NDCs are up over 31% in the first half. And in Europe, the team grew revenue in our online sellers segment by 33% in the first half. We saw a good recovery in our North American region and across our corporate and online seller segments everywhere. In North America, revenue was up 2.5% for the first half, but momentum has been building, with the U.S. growing 14.5% in the second quarter -- sorry, that's North America, 14.5% in the second quarter and that momentum continues. The standout segment was online sellers, which grew over 65% in the first half. In Australia and New Zealand, we are seeing good momentum in our corporate segment, particularly. While overall revenue was slightly down in the first half, it grew over 16% in corporate. And new corporate revenue from clients onboarded in the first half was up 57% versus first half '20, a record in my time at OFX. Furthermore, online sellers revenue was up 43%, reflecting the focus we are now paying in every region to grow this segment. And of course, we are delighted to have won the WiseTech enterprise strategic alliance here in Australia. Now let me hand over to Selena to walk us through the financials in more detail. -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [2] -------------------------------------------------------------------------------- Thank you, Skander. Moving to Slide 10. We have delivered positive outcomes in our key growth areas in a highly uncertain operating environment. Our fee and trading income is down 5.6%. Although we saw a good recovery in the second quarter, up 16.6% in 2Q compared to 1Q, every region has been impacted by the unusual trading conditions, experiencing negative growth in the first quarter and a recovery in the second quarter. For the half, North America continues to deliver with fee and trading income up 2.5%, ANZ was down 3.7%, Europe was down 20% and Asia down 27%. All regions improved in the second quarter with North America posting a positive growth rate of 14.5%. While the activity in the underlying portfolio is good, with transactions up 10%, our fee and trading income is down 5.6% due to lower ATVs of $18,600 compared to $21,100 in the first half of '20. The increase in transactions have increased our fee and commission expense of $7.9 million, up 24% from the first half of '20. This has resulted in an NOI, or net operating income, of $53.9 million, down 9.4% on the first half of '20. Operating expenses of $43.2 million is up 0.3% on the first half of '20 and down 1.6% on the second half of '20, as we continue to manage our cost base while still investing in enterprise and our online sellers segment. The lower revenue for the first quarter, down 11.1%, has impacted profitability. Underlying EBITDA is $10.8 million, down 34.8%, and statutory net profit after tax is $2.9 million, down 65.6%. While overall underlying EBITDA was down on the first half of '20. It was pleasing to see North America showed EBITDA growth of 17.6% to $1.8 million. Our effective tax rate is 21.1%, which is lower than our guidance range of 25% due to increased R&D benefits from our intangible assets as we invest in our client experience and reliable scalable systems. Net cash held is $52.8 million, up $1.3 million on the first half of '20, but down on the second half of '20. First half is always a higher cash outflow half than the second half due to bonuses and dividend payments. Net available cash, which is the net cash held less collateral, is $27.3 million, up on both the first half of '20 and the second half of '20. Our collateral requirements have reduced by $11 million since the second half of '20 due to successfully renegotiating collateral agreements. As we have seen trading patterns improve, we have announced an unfranked interim dividend of $0.0081 per share. Moving to Slide 11, you'll see that the underlying operating expenses of $43.2 million, up 0.3% on the first half of '20, so down 1.6% on the second half of '20. In our full year results, we highlighted that we continue to manage our expenses while maintaining the flexibility to group. We have managed our expenses while investing in enterprise and online sellers. Excluding this growth investment, our costs were down. Promotional expense is stable at $6.9 million, down 2.7% on the first half of '20. We've continued our improved mix of promotional spend, spending less on search and more on brands. Brand now represents 63% of the spend, which is both paying off now in terms of brand awareness and lower cost per registrations that positions us well for the medium term. Our OFXpert campaign is now global and resonating well. The TV advert in the U.K. has been viewed end-to-end over 1 million times. In addition to the reduction in cost per registration, we have driven an increase in the first 3 months of revenue we've seen from new dealing clients, a measure we have deployed to ensure every marketing dollar is well targeted. Technology expenses are both our infrastructure and software as a service costs. These are $2.8 million, which are flat to the first half of '20. We're expecting these to increase in the second half of '21 as software as a service components go live. These investments are customer management and enhancements to our risk and fraud control technology, some of which are listed below. Other expenses of $4.1 million, down 15.3%, which largely relates to lower costs due to limited travel and other expenses as we manage our costs. Like all ASX-listed companies, we are seeing an increase in insurance premium, in our case, $0.9 million, up 59%. We continue to expect this to rise in the coming year. Bad and doubtful debts are $1.2 million, flat on the first half of '20 and down $1 million on the second half of '20. We discussed at the full year results, a large portion of these bad and doubtful debts come from our North American portfolio. And we continue to invest in fraud detection systems and controls. We have identity verification and facial recognition software implemented to help detect and prevent fraud. Further, we use behavioral software and electronic bank account verification to further strengthen our defenses. We continue to invest in this area by partnering with some of the world's leading companies in this space. Our goal here is very aligned with these companies with regulators and our clients to prevent the fraud. Our fraud prevention rates are at over 98% for the half. Turning to Slide 12. We continue to invest in our client experience and reliable scalable systems. In the last 6 months, we have invested $5.5 million, which is consistent with the spend in the second half of $5.7 million. Firstly, let me cover our progress in improving the client experience. In the last half, there has been some exciting developments. We've implemented a new onboarding experience for clients, and it has had a 20% improvement rate in completion rate. The web experience has improved with limit orders being able to be booked through the web, which has been really popular, driving up limit orders 15%, and it will be deployed to the app soon. Link Australia is now live, and we are onboarding clients and processing dividend payments. Building out our product portfolio, we have launched a receivables product, global currency account for business, which allows us to pay and get paid in multiple currencies. We've already onboarded clients in both the U.K. and North America. For our online sellers, we've improved functionality through an API integration with Amazon that speeds up payment delivery. We've also improved the process by which clients can easily complete intra wallet transfers. Secondly, we're continuing to invest to make our systems more reliable and perform at a lower cost because investing in risk management is also very valuable and essential. Our payments engine continues to deliver, with banking cost per transactions down 4%, as we grow transactions, this value will grow. We have invested further in our fraud management, introducing new electronic identity verification in North America, with good adoption rates at 55%. This is also reflected in our bad and doubtful debt of $1.2 million, which is flat to the first half of '20 despite a growing North American portfolio and down on -- $1 million on the second half of '20. We continue to invest in risk management as it is a critical part of the business. Our behavior-based transaction monitoring systems has reduced our false positive by over 50% and ensuring the team are focused on the critical transactions. Turning to Slide 13. We have a strong balance sheet, no debt and generate good cash flow. That has always been valuable, never more so in these uncertain times. Our net cash held position which includes cash for own use and deposits due from financial institutions is $52.8 million, up $1.3 million in the first half of '20. Note, we held $25.6 million of this balance as collateral and bank guarantee. Collateral is down $11 million from the second half of '20 as we have renegotiated collateral agreements. Net available cash of $27.3 million, up $2.8 million on the second half of '20 and $3.6 million on the first half of '20. Cash flows from operating activities remained strong at $8.7 million. From our underlying EBITDA of $10.8 million, we converted 81% of this to cash flows from operating activities. In the first half of '20, this was a 49% conversion rate with $16.5 million delivering, $8.1 million of cash from operating activities. Of the $8.7 million of cash from operating activities, we have invested $5.5 million of this in our client experience and reliable scalable systems. We've also paid a dividend of $3.3 million and our rent obligations. Overall, net cash held, which is the addition of our cash held for own use and deposits due from financial institutions, is down $8.2 million from the second half of '20. The first half is typically a higher cash outflow half than the second half. We have declared an unfranked interim dividend of $0.0081 per share, which is consistent with our dividend payout ratio of 70% of statutory net profit after tax. Due to our tax rate and expected tax refund in the second half of '21, the dividend will be unfranked. Going forward, we will pass on what franking credits are available to shareholders. I will now hand back to Skander to take us through the fiscal year '21 outlook. -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [3] -------------------------------------------------------------------------------- Thank you, Selena, for that excellent coverage of our financial performance. And moving to Slide 15, the uneven market has created, not surprisingly, different competitive outcomes. The chart on the left is a forecast produced by McKinsey of total cross-border payments revenue over calendar year 2020. As you can see, they forecast it will be between 12% and 15% down versus prior year. The World Bank has a forecast of volumes being down between 13% and 15%. And this is supported by recent results. Both Visa and MasterCard, who contribute very significantly to cross-border payment flows, have seen volumes down substantially. For example, Visa reported that cross-border volume, ex intra-Europe, were down 47% and 41% for the 3 months ended June 30 and September 30, respectively. The major remittance players are seeing revenue flat or down. On the right-hand side, we summarize what we can see. Those providers who focus on remittance cash and travel have been hard hit, especially if digital payments are just seen as a replacement for cash, not incremental. In the corporate space, we've seen some substantial losses incurred by players who suffer from concentration risk and/or weak credit processes. The largest single loss we're aware of is a USD 90 million loss on a single client. Finally, some neo banks that we compete with are stating that revenues are significantly below costs that net interest margins are unsustainable and one, even stating to shareholders that there may be doubt about their ability to trade as a growing concern without raising further capital. Conversely, companies that had invested in digital and e-commerce and that provided service and support for cross border trade are well positioned to benefit from a substantial acceleration of behavior supporting e-commerce. The marketplaces and companies that support the marketplace ecosystem, including payments, are reporting substantial increases in volume as we have with online sellers. The social giants have seen valuations rise substantially as investors see substantial future earning potential. And here in Australia and in some cases, globally, rapid digital customer growth is driving very strong valuations of the buy now pay later players. So where does that leave OFX? Moving to Slide 16, we're very encouraged with the combination we've put in place; valuable and clear client segments, a global platform and a very strong value proposition of human plus digital that resonates with our target client segments. We have 4 main client segments that we target; high-value consumer clients, corporate or SME clients, online seller clients and enterprise clients. Our clients have a lot of different needs, but what we do very well, and therefore, why they choose us is summarized by the needs we solve by segment. For consumers and corporates, we largely help them transfer funds internationally. Managed volatility risk and FX exposure and do that in their way, either digitally or through human support. For our online sellers, we help them collect and use their money wherever they sell or buy. And of course, we work very hard to make their integration with the major marketplaces, seamless and valuable. For our enterprise clients, we make the movement of funds on behalf of clients, easy, safe and fast as well as great value. Our consumer and corporate segments are very strong foundations for us, and we will continue to invest and grow them whilst our online seller and enterprise segments represent very strong growth opportunities. Recognizing this, we have separated online sellers from corporate, and we'll report it as a separate segment going forward. In summary, we are very well positioned for the global competitive environment that we are seeing emerge from COVID. Moving to Slide 17. I want to touch a little more on why we are so excited by our investments in online sellers and enterprise. Firstly, online sellers. Clearly, e-commerce and marketplaces selling is a huge and growing market. $3.3 trillion was an old estimate. We have grown from $0 to $1.6 billion in turnover in a little less than 4 years. And whilst that growth is encouraging, we've also learned some very valuable lessons about clients, marketplaces, technologies, what our banking partners need, regulatory requirements, commercial programs and so on. And we have inherent advantages, licenses around the world, service delivery around the world, a single global operating platform, a very strong compliance program and great people. We intend to continue to invest in this segment and grow it. Secondly, enterprise. This is not a new segment. Indeed, it represented 12% of our revenue back in 2014. However, what is new is the landscape. Today, technology makes integration and delivery for large enterprise clients available at a fraction of the cost and with very substantially more resilience than it ever did. What has also changed is the risks enterprises see in working with large, diverse global banks, their traditional providers. These banks are very diverse, and as such, they struggle to maintain investment in the risk management programs that are required to support cross-border payments and receivables. As a result, they have been fined record amounts, which has meant their clients have seen less investment and appetite for further improvements. This is where we step forward. Our combination of a single global platform, global licenses, a strong risk management program and extraordinary service in multiple locations is very appealing. So not only can we look after these clients in a far better way, we save them a lot of money. The WiseTech strategic alliance is an example of us winning a large enterprise client through our ability to help them serve their clients better. As is Link, and there are more to come. Let's examine the WiseTech strategic alliance in a little more detail on Slide 18. Firstly, the basis for the strategic alliance is that OFX can help WiseTech deliver a simpler, safer and better value cross-border payment solution for their 17,000 plus SME and corporate clients. We are going to do that by integrating into CargoWise, their proprietary software platform, that enables their clients, which are logistics companies to manage the seismic changes in global trade from increasing tariffs, regulation and taxes to surging e-commerce volumes and margin pressures. It brings together 2 companies that have similar client bases, have similar philosophies in deploying digital programs to make their client experience better. And of course, we both serve global SMEs. It's also nice that we're both Australian competing globally. As Richard White, their Global Founder and CEO, has said, productivity is at the center of everything and providing better visibility, automation and simplicity are key to productivity and drives customer value and makes strong commercial sense. Our strategic alliance will run for an initial term of 3 years from when our full rollout is complete. And we'll get underway in Q4 by marketing an improved payment option for WiseTech clients whilst we build a fully integrated proposition. We expect that to be complete ahead of a full rollout in Q3 of fiscal year '22. As part of the service, we will onboard all WiseTech clients as OFX clients for the purposes of cross-border payments, taking on all know your customer and anti-money laundering obligations as well as payments and service. We expect the alliance will start generating revenue in fiscal year '22, but will start to reach its potential through fiscal year '24, where we estimate it will generate at least $5 million per annum in revenue. We're delighted WiseTech has selected us, and we will not let them all their clients down. Moving to Slide 19, our outlook remains unchanged. Our focus areas in building a more valuable business by investing in growing our North American region, in growing our corporate segment everywhere, in executing both our Link and WiseTech programs in the enterprise space and in growing our online sellers segment globally. We will maintain our financial discipline, investing where we see opportunity, but remaining prudent when necessary. Given market conditions remain uneven, we cannot commit to positive annual operating leverage on an underlying basis this year, but we remain convinced that it's a good discipline. We will continue to manage our net operating income margin to being stable for the full year. In summary, whilst markets were uneven, we are pleased with progress. The underlying signals confirm we have a strong and sustainable model, and we see our growth investments delivering. All of this positions us well for the second half and beyond. Thank you for listening. And now let me hand back to our facilitator, Ari, to handle questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ash Chandra of Goldman Sachs. -------------------------------------------------------------------------------- Ashwini Z. Chandra, Goldman Sachs Group, Inc., Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Just a question on the WiseTech contracted by CargoWise. You've indicated that the ramp-up profile will take a few years. Do you mind just sort of running through how this is a sort of different sort of to say, Link, which seems to be a more immediate kicker? And then I think in your release, you mentioned it will require about $1 million of specific investment. Could you give some sort of clarity around what that will be spent on? And how that might also be able to use for subsequent enterprise contracts if it, in fact, could be? -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [3] -------------------------------------------------------------------------------- Sure. Thanks, Ash. Look, let me just start by saying our release was an ASX release. It's not a media release. And we take the obligations under ASX guidelines very seriously. And so under those guidelines, we have to come up with a reasonable estimate. Clearly, this is a new program. So it hasn't been done before. We have to work on a range of different assumptions. So the figure that we've put in there is management's view and the Board's view at this point in time. Clearly, if the ramp-up is faster, and we form a view that we are materially understating it. Of course, we'll update the market on that. And of course, vice versa. So the first thing to say is it's ASX standard, not media release standard. The second thing I'd say is that the good news is we can actually start marketing the program to existing clients. And indeed, we already have over 1,500 SME clients who are in freight forwarding and logistics. Some of those who were already WiseTech clients, and that was actually part of the reason we're actually able to show WiseTech how they used us. They did some research with those clients and those clients were very enthusiastic about using OFX and the service they received, which I think greatly helped us position ourselves with WiseTech. So we'll get started on the marketing of that program right away. But the CapEx investment, to your point, is to help integrate us with CargoWise. And that is their platform that allows their freight forwarding logistics companies to execute what they need to do. And what we're basically going to do is by integrating in there, we'll reduce the number of steps that one of their clients' needs to take in order to complete cross-border payments and I'm talking very materially. That's why WiseTech were particularly enthused about the partnership. The build will commence right away, and as I mentioned, we expect to have that complete by Q3 of next year. And again, as far as the ramp-up in revenue and take up goes, because it's untested, we've come up with a range, and that's our view. In terms of how it's kind of different to Link, in many respects, there are a lot of similarities. So both Link and WiseTech work with clients who are fulfilling a particular job. And our role is to make that job a lot easier. In the case of Link, of course, it's people receiving dividends and in time share sales. In the case of WiseTech, it's SMEs who are carrying on the business of freight forwarding and logistics. I'd say secondly, what we've been able to do for both companies is really take over the servicing of all of that. So to the extent that, that service had been performed by incumbents or multiple parties or no one in particular, we can actually provide a very consistent service for the end client, and that's another similarity. Clearly, the big difference is that in the case of WiseTech, it's SMEs. And it's the first but not the last of opportunities in the pipeline where we're going to be targeting SMEs. The development itself is very much in the context of integrating into a platform. Some of that will also mean that existing payment processes that we have internally are upgraded, but really, most of it is making sure that we integrate perfectly into CargoWise. And therefore, provide that seamless experience. So to be blunt, the CapEx is really largely to drive that CargoWise experience not more broadly. I hope that answers your question, Ash. -------------------------------------------------------------------------------- Ashwini Z. Chandra, Goldman Sachs Group, Inc., Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- No, no, that's very helpful. Could I just do a couple of follow-ups on this then. With respect to margins that you might anticipate, a contract like this can deliver, would it be in the vicinity of what you've publicly disclosed about Link in terms of the high 40s? Would be part one of the question. And then part two would just be in the competitive dynamics of this particular contract, can you talk us through -- were you up against anyone or any other parties? And yes, how this sort of conversation with WiseTech evolved? -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [5] -------------------------------------------------------------------------------- Yes. Selena, I can answer some of those for you. So the profile of the Link versus WiseTech. They're similar in ways and different in other ways. So Link, for example, is dividend payments with lower ATV. WiseTech is going to look probably more like our regular corporate customer when it comes to an ATV size. When we look at those enterprise deals, and you can see in our segment reporting, International Payment Solutions segment. EBITDA over fee and trading revenue is kind of the measure to take when you're looking at profitability, and you'll see that, that is actually accretive to the portfolio. So we will get good fee and trading income. It will be nice because it will drop down to the EBITDA level and be accretive versus a regular consumer corporate for trading one to one. So we expect that to be really nice and positive for the business. But obviously, that will build over time as we onboard more of their customers. The other part of that question, the interesting one is when we look at these propositions, obviously it's never been done before. One of the biggest conversations or one of the early conversations we had with WiseTech is we actually service some of their customers in this industry today because we do that direct. And we could actually go out to them and say, "Hey, what do you think? How does this work? We've served these customers before." So we knew that it was a great combination, and it was really just talking to them about that in making this happen. -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [6] -------------------------------------------------------------------------------- Yes. And just to your point on competition, Ash, this was not an RFI process in a traditional sense. We certainly approached WiseTech. And to Selena's point, we have done a bunch of homework in selecting them as a prospect. We're very clear about who we think are the right types of prospects, and I've spoken publicly about you won't see us onboarding in some sectors, types of enterprise funds who don't fit our criteria for what the target end client is or the job that we can solve for. And so I can tell you, over the first half, there were several enterprise opportunities that candidly, we said, we're not going to participate in that because they don't make sense for us. We are typically working competitively where we are prospecting at the C-suite level, working with them around their kind of client objectives as well as obviously financial and technical objectives to simplify and make their client experience better and, of course, better value. So this one was not a giant RFI with 15 rounds or anything like that. It was us prospecting very, very thoughtfully around which types of companies might fit our eye, and that's what our pipeline looks like. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question is from Ian Munro of Ord Minnett. -------------------------------------------------------------------------------- Ian Munro, [8] -------------------------------------------------------------------------------- Skander, maybe just a quick one on North America, please. It looks like you're, as you know, generating decent market share gains. Just keen to understand the level of planned investment in North America and perhaps where we'll see some pockets of operating leverage? -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [9] -------------------------------------------------------------------------------- Yes. Look, the North American progress is really encouraging. And there was a pretty uneven half, as we said, and to end up net positive with second quarter going as well as it did, I mean, up basically 29% on the first quarter, 14.5% overall. And the U.S. was better than that in the second quarter. The investment question, Ian, is we had an envelope that we see. As we've talked about in the past, if we see particular markets where there's tremendous opportunity, we tend to move money there. And North America is a good example of that. And so for example, as Selena mentioned, the OFXpert campaign launched in North America that's live, and there's good spend going in there. The cost per registration, the cost per NDC is all very, very healthy in North America. So we'll keep spending. In addition to that, more investments in North America are around our online sellers vertical. That is now a global segment for OFX. We've got a dedicated team. It's actually based in North America. So the leadership sitting in San Francisco, and we're doing a lot of work, prospecting, product development, marketing, commercial development, not just in San Francisco but all around the world, but that's where it's led as examples of how we think about it. And as Selena touched on, to see kind of regional EBITDA progress in North America. We've always said, look, it's an investment phase. We're going to continue to grow in terms of our investment there. And we'll see those returns. And as we've said in the past, relative to its stage compared to Australia and New Zealand, for example, it's ahead in terms of paying that back in terms of EBITDA, but we don't split those EBITDA, positive operating leverage and targets by region. So what we do is we say, look, we'll do it at a group level and some regions deeper in investment mode than others. So that's kind of the way we think about the investments in North America. I hope that helps. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Joshua Hain of REST Investments. -------------------------------------------------------------------------------- Joshua Hain, [11] -------------------------------------------------------------------------------- Guys, can you hear me okay? -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [12] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Joshua Hain, [13] -------------------------------------------------------------------------------- Yes. Fantastic. So I just had a couple of questions. I guess just on the financials quarter-on-quarter. And I appreciate you don't want to get into the sort of habit of being too prescriptive on a quarter-by-quarter basis. But just given the -- I guess, the unprecedented change present in nature the June quarter versus September quarter, perhaps you can help us out a bit. So I guess, referring to your comment, about fee and trading income down 5.6%, but improvement second quarter plus 16.5%. So if I sort of try and back of the envelope that it looks like the exit run rate is about $66 million, which is about in line with first half '20. Is that sort of the right way to think about it? -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [14] -------------------------------------------------------------------------------- I think that improvement that you're quoting there in the second quarter is for North America. So if you look on maybe Slide 6... -------------------------------------------------------------------------------- Joshua Hain, [15] -------------------------------------------------------------------------------- Slide 10. I was on Slide 10, top point there. -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [16] -------------------------------------------------------------------------------- Yes. So the first top point is fee and trading income is down 5.6%, okay? And there was an improvement in the second quarter. The second quarter though, versus the first quarter, was up 16.6%. But versus last year, so you know, it was down 0.4% versus last year. So the first quarter was down 11.1%, the second quarter was down 0.4%. Therefore, you get to the 5.6%, but it was lovely to see that, that second quarter when you compare to the first quarter, was up 16.6%. -------------------------------------------------------------------------------- Joshua Hain, [17] -------------------------------------------------------------------------------- Right. Yes. Okay. So sorry, so sort of saying the same. So broadly, the second quarter was broadly in line with PCP? -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [18] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Joshua Hain, [19] -------------------------------------------------------------------------------- Yes, yes. Okay. Yes, yes, that's fine. And then -- yes, that's fine. And then similarly, I mean, I guess one of the things that's noticeable in is the continued investment in people and promotions spot that weak first quarter income number, which is completely understandable. But I'm just trying to get a sense of the how significant the EBITDA split was. Was the business EBITDA positive in the first quarter? -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [20] -------------------------------------------------------------------------------- Yes. So what -- as you know, employment expenses tend to run -- you make those decisions they're in the first quarter, they're in the second quarter. As you add people, it will tick up. If you decrease people, it will tick down, but it's a base that runs through. Promotional expenses relatively steady through the first and the second. Now what we did do and despite the revenue not being there in that first quarter, is we still wanted to build our brand. And also make sure that if there was volume in market that we were able to go and get that. So you would have seen actually in that promotional expense, a large portion of that is that brand win. So we launched the OFXpert campaign. We actually launched in Australia last year. In this first half, we've launched it in North America and the U.K. and it's resonating exceptionally well. And what's nice to see is that should help us through the second half as well through trading line. -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [21] -------------------------------------------------------------------------------- The other thing just to build on Selena's comment there about the people and the expense on the people, Josh, is that the investments in commercial teams is really mostly directed at corporate. And if you look at the split of our promotional expense, we're increasingly spending more on corporate acquisition relative to consumer acquisition. And what we really liked was that had a really nice payback. I mean, we mentioned that corporate dealing clients was up at a record rate. We also saw new corporate revenue. In other words, the revenue that we generated in the half, again, up 33%. That tells you that as a proportion of all revenue, it's not a large number, but let's say that the variable or the choice that we had around do we spend the money, do we not spend the money has really paid off for us because that we know that, that corporate client is very sticky and they grow their revenues. So -- and then even on the consumer side, we don't publish the number, but we -- one of the data points we look at is first 3 months' revenue per new dealing client. And we're trying to basically drive that up through targeting, and that has actually improved over the half as well. So it also would point to better targeting consumer clients without promotional expense. -------------------------------------------------------------------------------- Joshua Hain, [22] -------------------------------------------------------------------------------- Yes, yes. No, that makes sense. So just to clarify, the promotional expense would have been broadly flat sort of quarter-on-quarter versus the employee expenses, it sounds like they increased over the half. Is that the way to think about it? -------------------------------------------------------------------------------- Selena Verth, OFX Group Limited - CFO [23] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Joshua Hain, [24] -------------------------------------------------------------------------------- Yes, yes. Okay. Okay. And then just lastly, and you mentioned that I just didn't quite -- I couldn't quite hear earlier. You when talking about the lower ATVs and understand impacted by that offshore purchases. But did you also mention that the ATVs had started to recover towards the end of the period? And if so, what's the drive behind that? -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [25] -------------------------------------------------------------------------------- Yes. Really, the overall ATVs were skewed down substantially by those offshore share purchases. What we've seen is that as they've reduced, and if you take them out, ATVs were kind of largely in line with prior periods. And what you've seen since the half is that they have -- offshore share purchases have declined as a proportion of all and ATVs have gradually worked their way back up as a result on an overall basis, not that they were ever particularly down excluding share that made sense. -------------------------------------------------------------------------------- Joshua Hain, [26] -------------------------------------------------------------------------------- Yes, yes. No, no, sorry, then just the last one then. Does that imply then that, that transaction number in the first half '21 would also be skewed by those offshore purchase. So you might -- as we might see that number come down, but ATVs come up for net-net. -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [27] -------------------------------------------------------------------------------- Yes. That is right. And you can see on Slide 5, we actually break that out to show you transactions, and we highlighted the different categories for that exact reason, yes. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- (Operator Instructions) Mr. Malcolm, there don't appear to be any further questions at this stage. I'd like to hand the call back to you for closing comments. Thanks. -------------------------------------------------------------------------------- John Alexander Malcolm, OFX Group Limited - CEO, MD & Executive Director [29] -------------------------------------------------------------------------------- Okay. Thanks, Ari. Look, thanks again, everyone, for dialing in. And just to reiterate, we certainly saw an unprecedented mark in the first half. And frankly, the decline in consumer revenue accounts for pretty much all of the decline in revenue and EBITDA. It's come back in the second quarter and beyond. Notwithstanding that, the health of the underlying business is good. We're very, very encouraged by the growth investments, and we look forward to discussing more with you individually over the next week.