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Edited Transcript of TYR.AX earnings conference call or presentation 21-Feb-21 11:00pm GMT

·48 min read

Half Year 2021 Tyro Payments Ltd Earnings Call Feb 22, 2021 (Thomson StreetEvents) -- Edited Transcript of Tyro Payments Ltd earnings conference call or presentation Sunday, February 21, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Praveenesh Pala Tyro Payments Limited - CFO * Robert Michael Sean Cooke Tyro Payments Limited - MD, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Anagnostellis * Ashwini Z. Chandra Goldman Sachs Group, Inc., Research Division - Equity Analyst * Bob Chen JPMorgan Chase & Co, Research Division - Research Analyst * Brendan Carrig Macquarie Research - Research Analyst * Elijah Mayr CLSA Limited, Research Division - Research Analyst * Michael R. Aspinall Jefferies LLC, Research Division - Equity Analyst * Garry Duursma ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Tyro Payments Limited H1 FY '21 Results Call. (Operator Instructions) I would now like to hand the conference over to Mr. Robbie Cooke, CEO and Managing Director. Please go ahead. -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [2] -------------------------------------------------------------------------------- Thanks. Good morning, and welcome, everybody, to Tyro's half year results call. I'm here with Prav Pala, our CFO, who will be presenting with me this morning. Our plan today is to focus on our published results for the first half of FY '21. We'll also provide an update on our trading in January and February to date, and we'll talk about some of our key areas of focus for the balance of the year. Prav and I will spend about 30 minutes running through our results, and we'll then take questions. We'll talk to the slide pack circulated earlier today, which is also available on our website. And just for noting, a recording of this morning's call will be posted on the Investors section of our site shortly after this session to ensure those who are not able to dial in live can listen at their convenience. With the formalities out of the way, we'll get started. And if you could turn to Page 2 of the pack, please. So before I talk about our results, I just wanted to reinforce what Tyro stands for and our position in the market. We are a technology-focused and values-driven company. We provide close to 37,000 Australian merchants with payment solutions and complementary banking products largely developed on our core proprietary technology platform. We are creating an integrated ecosystem with payments at its core, enhanced by value-adding features and products designed to attract new merchants and to retain existing ones. The majority of our customers are small and medium-sized enterprises operating in the core verticals of health, hospitality and retail. Our purpose-built solutions have been designed with both merchants' needs and preferences in mind. Turning to Page 3 and just looking at the half in a glance. It definitely remains a challenging 6 months for many of our merchants in our core verticals with COVID still impacting trading, this being exacerbated by the sudden and sometimes unpredictable lockdowns occurring around the country. As was the case last year, we continued our focus on actions and initiatives to assist our merchants in navigating the COVID impacts. Despite these headwinds, we're proud to have processed a record $12.1 billion in transactions for our merchants. And considering the challenges faced, our performance in the half year was strong. At a high level, we still achieved record transaction values, record gross profit and a record EBITDA result. In summary, our transaction values were up 9.5%. Our revenue was down 2.1% at $114.8 million due to a COVID-caused card mix shift, which I'll discuss in a bit more detail shortly. Our gross profit was up 21.6% to $61.2 million. Our EBITDA was a positive $8.5 million, a 464% improvement on the same period last year. Operating leverage was demonstrated in our results, with our operating expenses increasing a well-controlled 8.1%, whilst our EBITDA margin expanded from 3% in half 1 FY '20 to almost 14% in the reporting period. And finally, our merchant numbers were up 13.2%, with almost 37,000 merchants choosing to work with us. We've been particularly focused in the half year on pre-integration work required to commence our alliance with Bendigo Bank. I'm pleased to report that these activities are tracking well. We expect to achieve commercial completion by the end of the second half. And at that point, we'll commence the rollout. We are also soon to become the payments platform for me&u, a business we invested in, in November 2019, which provides hospitality venues a tap, order and pay solution, perfect in today's COVID world. We've also invested in Paypa Plane in the half year. Paypa Plane is a payments platform which is transforming recurring payments. It has developed a proprietary solution focused on removing known pain points in recurring payments for banks and businesses alike. We will integrate the Paypa Plane technology to provide a recurring payment solution for our Tyro Bank Accounts. And finally, our Tyro Connect platform is building up its position in the market with 10 leading apps signed and 71 active merchants on the platform to date. Turning now to Slide 7 and our payments operation in a little bit more detail. As mentioned, the value of transactions processed in the half year lifted 9.5%, reaching a record $12.1 billion. This growth was assisted by a 13.2% increase in merchants selecting Tyro as their payments provider with 36,720 active merchants on the books at the end of the half. Transactions processed in the half were impacted by COVID lockdowns, which dampened transaction volume growth for our merchants. The half year commenced well with transaction values lifting 11% in July 2020. However, these gains were taken back in August when Victoria entered a hard lockdown. Growth returned in September, and consistent improvement is experienced through to the end of the half year. In fact, December 2020 delivered a 19% growth with transaction values reaching $2.6 billion, an all-time record month for us. Merchants in our 3 core verticals, health, hospitality and retail, represented 86% of our merchant count and made up 91% of the transaction value for the half year. Our strongest growth was delivered in our retail vertical at 17%, with hospitality growing at 6%, whilst our health vertical was down slightly due to fewer elective procedures in the COVID environment. Geographically, all states other than Victoria and New South Wales experienced double-digit transaction value growth and collectively grew 29%. Victoria was down 16%. And New South Wales, our largest state by transaction value, was up 7% on the pcp. At the end of the half, we lifted merchant numbers 13% on the same period last year. COVID restrictions had limited impact on new merchant applications. And specifically, in July, we attracted 1,019 new merchants. In August, that number was 924; in September, 1,133; in October, 1,182; November, 1,121; and in December, 879 new merchant applications were secured. Our e-commerce solution grew strongly, albeit from a low base. This solution enables merchants to work with us both for their in-store and online transactions. This solution simplifies the day-to-day for our merchants providing -- by providing one point of contact together with single settlement and reconciliation, removing the need to manage multiple payment providers. While still very much a work in progress, at 31 December, we had 379 merchants utilizing our e-commerce solution with $14.8 million generated in transaction value. Our integrated Alipay offering also remains in the rollout phase with more than 31,000 merchants now enabled to switch on Alipay as a payment option. Our Alipay offering has been significantly impacted by the lockdown of Australia's international borders with only $1.8 million in transaction value generated in the half. We are, however, confident this payment type will return to growth once international travel resumes. We introduced a payment and rebating solution to facilitate telehealth in our direct response to COVID. It enables health practitioners processing Medicare benefits schedule bulk bill telehealth clients through their Tyro terminals and gap prepayments through either the Tyro terminal or our e-commerce solution. $178.6 million was transacted through this channel in the reporting 6 months. It is our belief that telehealth will continue to be offered by health practitioners even after the risk of COVID passes, as it is popular with patients and health care professionals alike. Whilst transaction values and merchant numbers were up, our payment revenue was down 5.2% to $107.7 million. This is reflective of the change in our card mix and arose from a significant drop in international credit card usage due to COVID's impact on travel and an increase in debit card usage. International credit cards attract significantly higher merchant service fees, and a mix shift away from transactions via these cards negatively impacts our revenues. These international cards, however, carry significantly higher interchange and scheme fee costs. And thus, a mix shift away from transactions via these international cards positively impacts our profits. International credit cards represented 0.7% of our transaction value in the reporting period compared with 4.4% in the corresponding half. The converse applies in relation to debit cards. In the period, we've processed more lower merchant service fee debit card transactions, which attract lower scheme fees and interchange fees and as such, have a more positive profit impact. Debit cards represented 61.5% of our transaction value in H1 FY '21 compared with 56.5% in the corresponding half. Prav will talk to our merchant service fee and merchant acquiring fees later. But of note, this change in card mix, whilst impacting revenues negatively, positively impacted our payments operation gross profit, which lifted to $54.3 million, up 15.9%. With the close to 68,500 terminals now in the field, we remain the fifth largest merchant acquiring bank in the market sitting behind the 4 major banks. Our focus on brand, customer satisfaction and retention continued to shine through in the half. Our most recent Net Promoter Score at 31 December reached 44, up from 43 a year ago. Our prompted brand awareness has lifted to 17%, up from 12% a year ago. And our customer retention rates remained very strong with customer churn measured by transaction value 7.7% in the half compared to 8% a year ago and our churn rate metric by customer number reduced from 12% a year ago to 10.2%. Turning now to Slide 10 and our banking products. Although our banking operations still only represents a small part of our overall business, it presents an alternative to the major banks and has strong prospects for continued growth. Our products are focused on providing our customers with innovative ways to meet their transactional banking and unsecured lending needs. Our Tyro Bank Account is a fee-free, interest-earning transaction account. 4,150 Tyro merchants were actively using the Tyro Bank Account, up from approximately 3,100 a year ago, with $99.3 million on deposit as at 31 December 2020, up from $39 million the same time last year. Our new term deposit offering, which is available through the Tyro app, totaled $4.7 million in term deposits as at 31 December 2020. Our cash flow-based unsecured loan product is designed to assist SMEs in growing their businesses. Our business loan is repaid from a merchant-selected, predetermined percentage of card transaction volumes that's generated by the individual business and is offered on the basis of an upfront fee. The innovative feature of this product is that repayments cycle up or down in accordance with the merchant's daily card transaction volumes. Prior to the onset of COVID, our loan application process was streamlined, giving all Tyro merchants the ability to check their eligibility for a loan through the Tyro app. If eligibility was not automatically satisfied through the app, a manual review could be initiated, with our loans team collecting additional information and assessing the application with the benefit of this data. Post-COVID and from 1 April 2020, our assessment process was adjusted making use of this manual assessment path rather than our automated functionality. This proactive step was implemented to ensure our credit risk in the COVID operating environment did not exceed our internal risk appetite. As expected, this decision to adjust the credit assessment process saw originations fall sharply in the half year. Originations in the half reduced to $2.6 million, down 93% versus the $37.4 million in the corresponding period. Additionally, we managed the risk within the portfolio closely over the period, resulting in lower write-offs than provided for at 30 June 2020. In combination, these factors saw lending income for merchant cash advances decline 20.5% to a net $2 million. The average loan size in the year was around $23,000, lower than the $31,000 average a year ago. We are returning to a higher-limit, automated loan assessment process currently and are hopeful that this loan offering will start to progressively return to levels experienced pre-COVID. Prav will talk in more detail on our banking operations' financial performance shortly. Turning now to Slide 11 and our Tyro Connect solution. In recent years, there has been much growth in a number of customer-facing apps participating in and around the payments ecosystem. These include loyalty, booking and order-ahead apps. These apps typically seek to integrate with multiple point-of-sale systems to distribute their services in a merchant's operations. This can create duplication, costs and other inefficiencies to POS suppliers, merchants and the app providers. Tyro Connect is a solution to this friction point. It's designed to be an integration hub for apps and POS systems, a plug-and-play solution designed to address merchant pain points around counter clutter and manual processes. It also aims to make it easier for POS system partners and app providers to meet customer needs. Tyro Connect went live in February 2020 with its first integration partner being me&u, which, as I mentioned, provides hospitality venues with a tap, order and pay solution. Today, Tyro Connect has 10 industry-leading apps signed up to the platform and 71 active merchants. Tyro Connect seeks to reinforce our value proposition to merchants whilst embedding us more deeply in the commerce ecosystem and enhancing our ability to capture data and insight. I'll now hand over to Prav, who's going to step through our financial performance in more detail. And I'll then return to discuss our second half and our outlook. Thanks, Prav. -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [3] -------------------------------------------------------------------------------- Thank you, Robbie, and a very good morning to all. If you could all please turn to Slide 13 in the pack, and I'll go through a summary of the financial performance for the half year ended 31 December 2020. As mentioned earlier, the results are pleasingly strong in what continues to be quite a challenging environment for our merchants. We transacted $12.1 billion in transaction value, a growth of 10% to the comparative period. The 6-month growth was due -- largely due to the Victorian lockdowns. We have been reporting our transaction value weekly, and you would note the negative 4% growth in August when the lockdowns had their full impact. Adjusting for Victoria, the growth in transaction value for the 6 months was 18%. December 2020 was a record month when we processed $2.6 billion in transaction value, representing an exit rate of 19%. As mentioned in our June results call, transaction value mix changed significantly in the last quarter of the 2020 financial year, and this trend continued into the first half of 2021. We processed less than 1% in international card transactions in the 6 months compared to over 4% in the prior comparative period, while debit cards increased from 56% to 61%. For the 6 months, the schemes changed their cost structures for debit cards significantly to compete effectively in the least-cost routing space. As a result, our direct costs dropped. And with our portfolio structure being 47% cost plus and 53% either blended or other, our revenue dropped. However, our gross profit margin increased for the half year. This was a positive result, considering we provided proactive terminal rental fee waivers of circa $1 million to COVID-impacted merchants during the period. Additionally, we continued to support our merchants who are in hardship and had borrowed from us. You would recall that at June 30 last year, 30% of our loan portfolio was in a repayment holiday of up to 3 months with 0 additional interest. The extension did not attract any additional fees by the merchant and represented actual relief to those impacted. Pleasingly, most of the merchants on the repayment holidays settled their loans as they overcame their economic challenges. Loan balances declined over the period as we tightened our credit policies. As the portfolio is small, we were able to manage these loans at an individual level. While total lending losses for the 6 months was $0.5 million, we released $1 million in provisions in the form of fair value gains during the period as a result of better-than-expected portfolio performance. In summary, the payments business gross profit, therefore, grew by 16% given the improved margins, while our banking business was negative 23% off a small base. Together with JobKeeper income of $4.5 million, our half year gross profit of $61 million was a growth of 22% and a new record. In comparison, our operating expenses, which largely comprised employee expenses, grew 8%. The operating leverage we have talked about previously was demonstrated perhaps earlier than expected. This was, in no small part, due to the support of our team, which continued to deliver despite the strict measures in place such as a freeze on new hires since March 2020 and no remuneration reviews in the period. We continued to balance our decisions between building on our core value propositions and buying where it makes sense. This explains an increase in administrative expenses from $8.2 million to $9.6 million and is mainly to do with license costs as well as contracting specialized skill sets to complement our internal capabilities. Marketing expenses are an area of focus, as we had mentioned previously. For the half year, however, marketing costs were deliberately controlled and, in fact, were lower than the prior comparative period given the external environment. We spent $2.5 million for marketing in the half year compared to $2.7 million in the first half of 2020, a decrease of $0.2 million. However, prompted brand awareness was up at 17% at December 2020 compared to 14% in June. I would expect our marketing costs to increase in the future as we target merchant growth. As a result of gross profit growing by 22% and operating expenses growing by 8%, we achieved an EBITDA of positive $8.5 million for the half year compared to $1.5 million in the prior comparative period, a greater than fourfold increase. Excluding JobKeeper income, our EBITDA was $4 million or an increase of 167%. The return is consistent with our growth strategy, our continued close management of margins and investing in future value creation, some of which Robbie has already spoken about. All our other expenses decreased, other than depreciation, which is in line with our growing fleet of terminals and a small loss recorded from an investment in an associate. In summary then, our total expenses of $64.6 million for the 6 months compared to total expenses of $69.5 million in the prior comparative half. The comparative half, however, included $9 million in IPO costs. Adjusting for this, the growth in total expenses was 7%. Of the $64.6 million, $52.7 million are operating expenses, of which 70% is staff-related, and that grew 8% on the comparative half. Permanent head count was steady to the prior comparative period, increasing by a net 1 to 482. The half year had strict cost controls. However, project resourcing will increase as we move towards completing the Bendigo alliance in the second half. Breaking this down in a different way, 38% of our total operating costs related to product development and management. Around 21% was in sales and marketing, with the remainder in product delivery and general overhead. Of the noncash items, share-based expenses were $4.3 million, down from $5.3 million in the prior comparative period. Of these, $2 million relates to general accruals for 2021 short-term incentives, while $1 million relates to performance instruments issued in prior periods. These instruments will only vest on meeting specific growth and profitability hurdles prior to the expiry, and the expense assumes 100% probability of vesting. The remaining expenses comprise the tail of the liquidity events, performance rights and various annual and monthly linear vesting instruments issued in prior years. Share-based expenses decreased 19%. As a result of all of the above, Tyro recorded a statutory loss of $3.4 million before tax compared to a statutory loss of $19.2 million in the prior comparative period. On the next slide, we provide an update of our key operating metrics, which graphically summarizes our profitability trend on one page. If you could now please turn to Page 14. Over the last 5 years, our merchant service fee, or MSF, has been relatively stable, and that's including up to February 2020, when the MSF for the 8 months was 91.4 basis points. As reported in our June results, the last quarter of the 2020 financial year changed dramatically in terms of card mix, partially from international border lockdowns, which carried on into this half. As I mentioned earlier, the expensive international card volume dropped from over 4% to less than 1%. Debit cards increased in proportion from over 56% in -- of total transaction value to 61%, while the costs of the debit cards came down. As a result, the MSF dropped 280 basis points as 47% of our portfolio by transaction value is on a cost-plus basis. The drop in the underlying cost, which you can see in the gray line dropping from 56 basis points to 40 basis points, was passed straight through for these transactions. For the remaining 53%, the decrease in the underlying costs increased our unit margin and compensated for the lower transaction value as well as providing us the ability to support our merchants in any ways we could. There are other cost changes that may come through later in 2021, and I expect the weighted average cost to gradually rise again. Notwithstanding this, the results for the half year are pleasing, as the 15 basis points drop in direct costs more than outweighed the 11 basis points drop in MSF and improved our unit margin for the first time in over 4 years. We manage our payments business as a portfolio. And with the pricing composition of our portfolio, we are well placed to work through any structural cost changes in the near future. Achieving operating leverage with scale is a key takeaway from this page again. The red line is our operating expenses as a proportion of transaction value. As mentioned previously, we are on a trajectory to profitability as we leverage the scale of the business, demonstrated by the positive jaws between the green and the red lines. Admittedly, this leverage has come earlier than expected, both due to the changes in the debit cards' cost structures and our strong cost management in the last year, including hiring and remuneration freezes. As we move back into a business-as-usual mode, you should factor in some one-off distortion in this line over the next year. The half year graph, nevertheless, demonstrates our ability to manage the business profitability at short notice, where required. Please turn to Slide 15 for a summary of our financial position. The IPO in the 2020 financial year saw a net capital injection of $109 million, further strengthening our balance sheet and positioning us for growth even under challenging conditions. This was never truer than in 2020. Our capital ratio was a healthy 143% at balance date. The drop from June's ratio of 162% is as a result of our investment in Bendigo and Paypa Plane in the half year as well as an increase in cash from merchant deposits, which ended the year at $104 million. As we complete Bendigo, under the accounting standards, we will recognize significant assets and payables upfront being the present value of the transaction, and you will see the ratio drop to a more efficient level by 30 June 2021. More details on these have been provided in our capital commitments note. Our loans balance reduced significantly to $4.4 million. We originated only $2.6 million compared to $37.4 million in the comparative half, given the downturn in the economy. Whilst small, our loans book performed better than expected, and we recorded lending losses of only $0.5 million. As a result, we were able to release $1 million of provisions reflected in the form of fair value gains and loss in the income statement for the half year. In terms of other investments, we booked $3 million in intangible assets being the upfront deposit for our alliance with Bendigo and acquired shares in Paypa Plane for $1.9 million. On the other side of the balance sheet, our deposit account balance more than doubled from June 2020, closing at just under $104 million. This has been a very successful product for the company. We moderated the interest rates in the half year as the growth in this book is not required until our loans book starts building up again. At 31 December 2020, the balance comprised $99.3 million in the Tyro Bank Account, up from $49.6 million at June, and $4.7 million in term deposits, up from $0.9 million at June. Tyro has continued to capitalize projects as appropriate. At reporting date, $5.2 million was carried on the balance sheet from internally developed assets. These assets relate to developing our capabilities to offer new payment types and enhancing our core technology platform. Finally, we capitalized the new term deposit product, which was piloted last year and, since launch in July 2020 to active banking customers, has demonstrated its attractiveness in the first half, as mentioned just now. Tyro's cash flows are provided on the next slide. Notable cash items other than our EBITDA included $53 million in inflows from our retail deposits, net $8 million in repayments from our loan product, investments in associates and the Bendigo alliance of $4.9 million, purchase of $3.7 million of terminals. Our CapEx will ramp up significantly for terminals in the second half as we complete the Bendigo transaction. Those are the key financial call-outs for the half year. In summary, payments was the predominant business for Tyro and the main driver for its results. While COVID impacted our top line growth, the underlying business performed strongly with improved unit margins. Gross profit growth of 22% in the half year, combined with expenses growth of 8%, returned a positive record EBITDA of $8.5 million. The banking business was small in the half year. Deposits grew strongly. However, loans were deliberately paused and are expected to provide an ancillary income stream as it grows in line with economic recovery. Expenses were slightly controlled, and the results showed strong operating leverage achieved earlier than expected. Most importantly, our capital position remains strong. It allowed us to continue investing in our people, our customers and our products despite the challenges of 2020. Finally, in considering our second half FY '21 performance for your modeling, you should consider potential changes from the first half, for example, any remuneration reviews and removal of hiring freezes, no contribution from JobKeeper, any costs associated with the terminal connectivity issue, CapEx and costs associated with the Bendigo alliance commercial completion. That is the financial update for the year -- for the half year. I will now pass back to Robbie for a trading update. Thanks, Robbie. -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Prav. And look, maybe just starting with the terminal connectivity issue. So clearly, our ambitions for the second half of the year were interrupted by this event, which we experienced on the 5th of January. The incident impacted approximately 30% of our merchants, either fully or partially. And I've got to say, it did not sit comfortably with me nor the team at Tyro. Notwithstanding 18 years of operation with no similar issue, we are now building a fail-over solution. This will see us provide all our merchants with a dongle device in combination with their standard terminals as an extra level of redundancy. This is an industry first move. So whilst we continue at pace with our planned initiatives to drive growth and to build our payments ecosystem, our key priority over the next 6 months is to do all that we can to rebuild trust with those of our merchants who were impacted. To this end, we have proactively contacted and requested all impacted merchants who have suffered financial loss to register with us. We are also closely monitoring merchant terminations. And to date, we've not seen any material changes to normal termination rates. We paused on-boarding of new merchants during the course of the incident to ensure all our efforts were deployed on reestablishing normal operations for those impacted. Pleasingly, we've now seen new merchant application rates return to near-normal levels, with the last 3 weeks delivering 224 merchants in the week ending the 7th of February. The week ending the 14th of February, we saw 185 new merchant applications come through. In the week ending the 21st of February, we saw 190 new merchant applications come through. Our transaction value for the second half commenced with a growth rate of 3% for the first 2 weeks of January, impacted by the terminal connectivity issue. Growth rates returned to between 14% and 18% for the remainder of January and into early February. The third week of February, though, fell to an 8% growth rate as a result of Victoria reinstating lockdowns. Our financial year-to-date growth rate is sitting at about 10%. In terms of outlook, whilst we're not providing specific profit guidance for the full year, we do take this opportunity to discuss some early trading indicators beyond what I've mentioned for the second half, and noting these data points are unaudited. The highlights are: we've maintained our customer acquisition momentum, as I mentioned, with 818 new merchant applications received since 1st of January. Also, as mentioned, our transaction value to 19 February grew 10.1% on the prior corresponding period to $15.4 billion. And our payments gross profit to January was $8.1 million, down 0.7% on January 2020. So with that, that ends the formal presentation, and we'll now move into Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Ash Chandra with Goldman Sachs. -------------------------------------------------------------------------------- Ashwini Z. Chandra, Goldman Sachs Group, Inc., Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Just a couple of quick ones for me. The normalization that you referred to or some degree of normalization in that gross profit margin due to more normalizing, I guess, card mix, is there anything in that by way of assumed repricing or anything you might need to do by way of PR or remediation for merchants? Or is this a reference purely to mix shift of card volumes? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [3] -------------------------------------------------------------------------------- Ash, it's Robbie here. Look, that's just the mix shift. It's got -- there's no factoring in there of remediation or anything of that ilk. -------------------------------------------------------------------------------- Ashwini Z. Chandra, Goldman Sachs Group, Inc., Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Okay. Terrific. And with the churn that you've indicated in January being 10.3%, is it fair to assume that, that skews to the smaller end of your merchants, i.e., the merchants that would be perhaps most affected and susceptible to churn and those that might have been just sort of 1-terminal operators? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [5] -------------------------------------------------------------------------------- Yes. Look, as the terminations we've seen to date have been very consistent with what we saw before the event. And typically, that is, yes, the smaller merchants, so not the bigger end of town. But look, I think I'd just call out and make it clear, the -- yes, I think we've got a -- we're in a good position. We haven't seen any dramatic changes. But I would err on the cautious side of things. I think we need to wait probably 2 or 3 months of just settling down. How we actually handle this next phase with merchants who have been financially impacted will be very important. So I do think it's one of those things where we just need to spend a little bit more time to see how everything settles down. -------------------------------------------------------------------------------- Ashwini Z. Chandra, Goldman Sachs Group, Inc., Research Division - Equity Analyst [6] -------------------------------------------------------------------------------- Okay. Terrific. And sorry, I'll just squeeze in one last question before I jump in the queue. The Bendigo commercial completion that's expected by the end of the second half of fiscal '21, does that mean like, just to be clear, we shouldn't be assuming anything or much by way of transaction volume coming through from this and that, that really becomes a full fiscal '22 [issue]? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [7] -------------------------------------------------------------------------------- Yes. Ash, depending on when that completes, it happens relative to the end of the half. I mean, there is a -- on completion, the transaction values do move to us. There is obviously cost associated with that whilst we rotate our terminals in and the Bendigo terminals out. But I would be working on the basis that it's later in the half for the impact and not be particularly material. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Bob Chen with JPMorgan. -------------------------------------------------------------------------------- Bob Chen, JPMorgan Chase & Co, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Just a few questions from me. Just in terms of that MSF sort of coming off pretty strongly over the first half, I mean, aside from the card mix, was there any sort of pricing or competition sort of impacting that as well? -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [10] -------------------------------------------------------------------------------- Yes. Bob, it's Prav here. So it's a double whammy, probably just also to -- in answer to Ash as well. So it is an increase in the card mix, which went from 56% to 61%. But also, as I mentioned, with the schemes coming out competitively in the debit card space, you see the underlying costs have actually gone down. So our portfolio being 53% blended or normalized, that added to our unit profit margin. -------------------------------------------------------------------------------- Bob Chen, JPMorgan Chase & Co, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Okay. Great. And then just in terms of the outlook on sort of cost investment in the business going forward now that it's sort of back to higher again. Like how should we think about that, given that you said that 8% over the first half? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [12] -------------------------------------------------------------------------------- Yes. Look, Bob, on that front, and as we've said before, pre-COVID, I mean, the things that we did in the period that we've called out in the body of the call, we've put in place hiring freezes. But we have said in the past, we do have the bench that we need to do the key initiatives we've got in place. But there are some areas, and we've talked about this before, such as e-commerce, where we do want to invest more. So they are areas where we will bring more head count on board, but that will typically be involved in a project which would more likely than not be capitalized. So there will be some increase in head count, but how that actually gets treated from a financial point of view will depend on the project's -- the head count it's allocated to. The other thing, as I think Prav mentioned or I did mention, was with Bendigo, there will be additional head count brought on as part of that project in terms of customer servicing. -------------------------------------------------------------------------------- Bob Chen, JPMorgan Chase & Co, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Okay. Great. And then just on the new merchant application perspective. Can you talk a little bit about the channel mix between merchants coming through from and also the types of merchants that they are skewing towards, the largest sales for the merchants or the smaller? How does that sort of compare? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [14] -------------------------------------------------------------------------------- Yes. Look, Bob, the channels that the applications are coming through are our typical channels, so through our direct, through our online channels, through our ISOs, our independent sales organizations and through our POS partners. So there hasn't been any particular change in the mix. And as is normally the case, the lion's share of applications coming through tend to be in the SME space. We obviously still have live conversations going on with larger merchants, which our key account team typically source. So no real change in the application mix. -------------------------------------------------------------------------------- Bob Chen, JPMorgan Chase & Co, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Okay. Great. And just a final one for me. Just on me&u, you've sort of mentioned earlier that some of those volumes or those volumes are coming on to the Tyro platform. I mean, can you provide an estimate of how material those volumes would be? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [16] -------------------------------------------------------------------------------- Yes. Look, we haven't put any numbers out there yet, Bob. But it's a significant channel. The me&u team has been very successful in deploying their solutions. Particularly with the advent of COVID, their solution has been particularly attractive in the hospitality space. So it will be a meaningful client, if I put it that way, in the terms of our book. It has been in our top 20. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Brendan Carrig with Macquarie. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [18] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [19] -------------------------------------------------------------------------------- Yes. Brendan, loud and clear. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [20] -------------------------------------------------------------------------------- Yes. Great. Just a couple from me. Just in terms of the CapEx of $1 million, do you think this might be a little conservative just given the terminal issues? And is there potentially a need to maybe refresh a larger proportion of the terminal network? And in the absence of the Bendigo transaction, would you have been more proactive in maybe directing more CapEx towards your terminal fleet? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [21] -------------------------------------------------------------------------------- Brendan, the issue we had, the connectivity issue actually had nothing to do with the hardware. It actually had to do with the source code on the device. So there's no issue with needing to acquire more terminals. As we have called out in the pack, there were, in the fleet, a limited number of very old terminals, which we've been attempting to encourage some of our merchants to [fire the lot]. The thing with those units, when they've had ages between 7 to 10 years old, and we definitely talked about 1,000-odd units, they were owned by those merchants. So they weren't under our typical rental model. And so we've been trying over the years to get those retired from the fleet. So they are the ones we actually had to replace as a result of the incident because they were not capable of actually having a software -- a new software injection put into them. So -- but otherwise, there's no issue with the hardware of the fleet we've got out in the field. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [22] -------------------------------------------------------------------------------- Okay. That's clear. Next question was just in terms of the estimated financial impacts from the connectivity issue, the $3 million of costs and the $15 million of claims. So is there costs to review claims incorporated in that $3 million, and then the $15 million is just more remediation for lost revenues with merchants or something along those lines? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [23] -------------------------------------------------------------------------------- No. So what we've called out there, Brendan, in the note, we've called out the actual cost we've incurred, which is that $3 million line item, which a significant portion relates to harvesting in, from the field, the impacted terminals. So that was a significant portion of that cost. The $15 million approximation is put there as a indicator of where we think things may land in terms of claims. But they do not include just the processing costs of handling any claims that come in. But we are doing that internally with existing resources. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [24] -------------------------------------------------------------------------------- Okay. And then I might touch on mix later because I've already asked a few questions, but I'm going to take that offline. My last question is just in terms of the current merchant numbers of 36,720. How many inactive merchants are included in that, given that there was 3,200 or so in the inactive merchant column last half? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [25] -------------------------------------------------------------------------------- The number we've put out, Brendan, is our active merchants. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [26] -------------------------------------------------------------------------------- Yes. So -- sorry, have you provided what the inactive number is, just given that it's quite important just given you're talking about merchant growth in active? And so I guess there's a redirection of, I would assume, some inactive merchants have switched to active during the period. -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [27] -------------------------------------------------------------------------------- So we don't normally call out the inactives, Brendan. So we've given you the active, and you can compare that active number with the same from pcp. We always have a number of inactive merchants on the books. I mean, it's normal. And so that's not unusual. So I'd suggest you just focus on the active merchants because they're the ones that are generating revenue. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Your next question comes from Michael Aspinall with Jefferies. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [29] -------------------------------------------------------------------------------- Just some from me. Just starting on the financial impact of the connectivity issue. The Jan gross profit number was impacted by waivers on the terminal rental. Can you give us just some context of how many of your customers that's over and for how long that will continue? -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [30] -------------------------------------------------------------------------------- We can probably give you the amount that we waived in January. I think we're working through the remediation process as we speak, so I probably wouldn't give any guidance other than the total number that we've included in the pack. But in January, if you look at the total number of merchants impacted, we provided rental relief -- or rental waivers, rather, of about $0.8 million. And that's included in the $3 million that we have already quoted as the cost of the incident so far. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [31] -------------------------------------------------------------------------------- Okay. So that $15 million that you've called out is effectively terminal rental relief and potentially some MSF reduction for some (inaudible). Is that right? -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [32] -------------------------------------------------------------------------------- No. The $15 million is an indicative number that we put as a bucket, and it could be a combination of however that comes through. I'm just calling out the actual cost that we incurred in January, where we waived $0.8 million in fee waivers to merchants. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [33] -------------------------------------------------------------------------------- Yes. Okay. So just that $15 million would include something like terminal rental this [period]. -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [34] -------------------------------------------------------------------------------- Michael, the $15 million will depend on what actions we take in relation to the next wave in terms of remediation. And that could be deployed in a number of different ways. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [35] -------------------------------------------------------------------------------- Okay. Great. And so on -- you mentioned your reduced remuneration reviews after 18 months. Does that mean there hasn't been any reviews in the last 18 months? And then with wages, 75% of OpEx, what drove the 8% increase? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [36] -------------------------------------------------------------------------------- So a couple of things. So as Prav mentioned, we have frozen any salary increases. So it is correct that none of the team has had an increase for 18 months. The increase has been driven by the annualization of head count that we onboarded during the course of the year. So if we hired somebody midyear, you'd get the full annual impact in the following year. So that's where that increase has come from. So new head count, pay increases, et cetera. So new head count that might have come in the prior year, you get the full impact in the FY '21 period. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [37] -------------------------------------------------------------------------------- Yes. Okay. And you showed the Tyro Connect. Do you charge for that product? Or is it being pitched as coming out of the part of your offering to your customers? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [38] -------------------------------------------------------------------------------- Yes. No charge for that product and no foreseeable charges being deployed for that product. We're very much looking at it and have looked at it as just a -- it's a value-add proposition. It cements people in our ecosystem. And it provides yet another reason why, as a merchant, you'd choose Tyro. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [39] -------------------------------------------------------------------------------- Okay. Great. And then just one in -- Prav, in your comments, you mentioned that you're well placed to adjust to any upcoming structural changes in costs. Can you just provide us with a bit more color on what you might have been referring to there? -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [40] -------------------------------------------------------------------------------- Yes. Sure. So I think I've spoken about this previously. So our payments business, we manage as a portfolio. So in the last 6 months, there was an example of where costs dropped significantly. So we were able to actually benefit from that, given, say, roughly half of our portfolio is on a cost-plus basis, which gets passed through. The other half is on a normalized basis, so it improves the gross profit margin. If it were the converse, we manage the whole portfolio pricing in an aggregate, and we do pricing reviews at least once a year to make sure that the costs are in line with what we're incurring and what we're passing on to our merchants. So I think an increase in costs, we would be looking overall with changes in cost structures and any pricing reviews that we might have to do. -------------------------------------------------------------------------------- Michael R. Aspinall, Jefferies LLC, Research Division - Equity Analyst [41] -------------------------------------------------------------------------------- Okay. Great. And I mean, just while we're on that, just can you quantify what the impact to the average interchange and scheme fees were then from that structural cost you mentioned versus debit cards? -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [42] -------------------------------------------------------------------------------- Yes. Probably not in too much detail because the scheme fees are quite confidential. I think on a weighted average basis, our margin actually improved by 4 basis points. Now a higher amount of that was skewed towards the debit cards. So you have to probably do the multiplier effect of the full average, together with the mix of the value changing from international to debit cards as well. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from Elijah Mayr with CLSA. -------------------------------------------------------------------------------- Elijah Mayr, CLSA Limited, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Just firstly, I just wanted to touch on the -- just on the performance of the verticals, just specifically on the other vertical I do not understand. Can you just sort of maybe just talk to specifically what was driving that sort of going into the trades and the accommodating sort of side of things and maybe just talking about the prospects of that going forward? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [45] -------------------------------------------------------------------------------- Elijah, yes, look, that -- the other includes quite a mix of industries. And so it's sort of hard to draw out any particular theme. It does pick up some accommodation venues. It picks up -- transportations are in there. For example, CabFare, one of our big clients, sits in that area. So that -- so it's actually hard to draw any particular themes because it is quite a diverse group of merchants. -------------------------------------------------------------------------------- Elijah Mayr, CLSA Limited, Research Division - Research Analyst [46] -------------------------------------------------------------------------------- So there's no single sort of area that's larger than the others? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [47] -------------------------------------------------------------------------------- No. Look, the transportation one's significant in there, but it would get muted out with other industries in there, as I sort of said. So it's hard to draw any themes. -------------------------------------------------------------------------------- Elijah Mayr, CLSA Limited, Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Yes. Understand. And then just on the churn, I guess specifically, the churns are going to come from, I guess, merchants going to competitors or sort of going out of business. Have you sort of seen any change in that mix or that competition of churn, I guess, through the start of this year with the trading update or through the first half '21? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [49] -------------------------------------------------------------------------------- No. Look, definitely not in the start of this half. I mean, it's sort of too short to draw any real conclusions. But look, in the 6 months to the reporting period, it's -- no real change in the dynamic there. As we've said in the past, the biggest component of our churn rate is businesses going out of business. Unfortunately, it's just the nature of the SME space. There's no losses of any major clients in that mix. So it really comes down to -- the larger portion is businesses going out of business, and then there is always, and it's always been the case, that we do, on occasion, lose some merchants to other competitors. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Your next question comes from Garry Duursma, private investor. -------------------------------------------------------------------------------- Garry Duursma, [51] -------------------------------------------------------------------------------- Robbie, can you hear me? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [52] -------------------------------------------------------------------------------- Garry, I can, loud and clear. -------------------------------------------------------------------------------- Garry Duursma, [53] -------------------------------------------------------------------------------- Good stuff. Right. I understand that the business now has a direct cost recovery surcharging solution when the actual cost of the card is surcharged directly to the cardholder, which I suspect delivers essentially a 0 cost acquiring solution to the merchant. Could you comment on that, what percentage of the base is using that? And how does the margins look for that part of the portfolio versus other parts of the portfolio? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [54] -------------------------------------------------------------------------------- Yes. Some of it, it's absolutely true. We do offer an ability for our merchants to surcharge, and that is a merchant-by-merchant proposition. So it's up to the merchants to make the decision whether they want to offer that product. And it is a product which, for more and more merchants, they're seeing it as a -- something that they wish to do, and we provide a really convenient way for that surcharge to be done in a compliant way, which is important. In terms of the split out as to portions of merchants surcharging, not surcharging, Garry, it's not something we put out in the public domain. We've obviously got those stats, but it's not one we'd put out there. -------------------------------------------------------------------------------- Garry Duursma, [55] -------------------------------------------------------------------------------- Can you comment on the profitability of that part of the portfolio, those merchants that do choose to invoke that feature versus those that choose not to? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [56] -------------------------------------------------------------------------------- From our point of view, really, it doesn't make any difference. I mean, it's just whether they would cover that cost or not. So it's an attractive feature in merchant acquisitions. So having that product in market is a good feature, and there's others that are pushing that offering quite aggressively in the market. So us having that feature is important. So it works very well from a merchant acquisition point of view. The profitability is not -- there's no differential there. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Your next question comes from Andrew Anagnostellis from Umgeni Investments. -------------------------------------------------------------------------------- Andrew Anagnostellis, [58] -------------------------------------------------------------------------------- Look, I just wanted to go back to the connectivity issue firstly just to say congratulations on the disclosures, very timely and comprehensive. My question really goes to your initial point where you were -- said you were very concerned about the issue itself, the first time in many years. Isn't it a concern here that it sort of seems to have crept up on Tyro? I note 7th of January, the disclosure talked about 15% impact. The next week, it was 30% impact. Isn't it a concern that the outage seems to have been much more serious and much quicker? And is it something, looking back on it, that should have been attended to quicker? Or were the company's existing procedures and policies in place and you were comfortable that this was properly handled in accordance with the disaster recovery plans you would have had in place? -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [59] -------------------------------------------------------------------------------- Yes. Thanks for the question, Andrew. Now look, just trying to answer that in an overall way. The disclosures, the first disclosure we made related to the number of terminals which were impacted at that point in time, there were more terminals that lost connectivity over the first series of days. So we've reported as events unfolded and reflected what the impact was. As I just called out, it was circa 30% of our merchants, of which 19% at the peak were fully impacted and 11% were partially impacted. In terms of the event itself, as we've sort of -- or as we have disclosed in the release that we made in the past, this was something that arose from an issue sitting on the terminal. It was not something that was able to be foreseen. The -- when the incident happened on the evening of the 5th of January, at 10:00 that evening, a major incident event was called. All our emergency response and disaster recovery initiatives kicked in at that point. And I could tell you, everything humanly possible was done to mitigate the impact on our merchants. So I'm very comfortable that all due process and procedures were implemented, and everything that was possible to be done was done. As I've called out, though, this is something that has never happened in our history. This has happened with other institutions, though, in the past. What Tyro is doing which is quite different to anybody else, we are not comfortable sitting here today, and I'm not comfortable sitting here today without a fall-over solution -- a fail-over solution, which is why we are developing our dongle, which will be issued to every merchant as a fail-over. Now that's something no other institution has done, notwithstanding that fact others have had incidences like this occur. So we are taking this. We recognize it could happen. I'm not prepared to sit here and ignore it going forward. I don't think it will ever happen again due to the root cause of this issue. However, I'm not prepared to ask people just to trust us. We will actually have an alternate path for people to transact with us. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Cooke. -------------------------------------------------------------------------------- Robert Michael Sean Cooke, Tyro Payments Limited - MD, CEO & Director [61] -------------------------------------------------------------------------------- Thank you very much. Look, I'd just like to thank everybody for their time. Appreciate those attending the call and have a great day. -------------------------------------------------------------------------------- Praveenesh Pala, Tyro Payments Limited - CFO [62] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.