Handepay Ltd (PAY) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to PayPoint's conference call to discuss today's acquisition announcement. [Operator Instructions] I must also advise you that this call is being recorded today on Thursday, November 5, 2020. I would now like to hand the call over to Nick Wiles, Chief Executive Officer of PayPoint plc. Please go ahead.

Thank you very much, and good morning to everybody. Thank you for joining us this morning at short notice. I'm Nick Wiles, CEO of PayPoint, and I'm joined by Alan Dale, our Finance Director, and we're delighted to be announcing this morning the acquisition of Handepay and Merchant Rentals. We're also joined by Mark Latham and Ian Kennedy from Handepay and Merchant Rentals. So welcome to them both, and they're getting an opportunity to do part of our presentation this morning and to answer your questions. As we've said to you, you'll know that we're currently in a closed period ahead of our results announcement on November 26. And this morning, we are limited in our comments really as they relate only to the acquisition. And clearly, we're in a position then later at the end of this month to talk more fully about the performance of the business and answer your questions around that. If I can turn to the acquisition highlights, to give you the highlights here. This is very clear for us, an important step in delivering an enhanced growth and value in our core U.K. markets. And I'm ready to focus our business further on the U.K. and the opportunities we can see from the markets we're already well established in today. Handepay is a leading card payments business. It's well established. It's a top 4 card payments business with over 21,000 merchants across the U.K., processing over GBP 3 billion annually. With Merchant Rentals, a card terminal leasing business with an active estate today of over 30,000 SME merchant terminals. The business has been delivering strong growth for the year to April '20, GBP 16.7 million of gross revenues and an adjusted EBITDA of GBP 5.4 million. And as I think Mark and Ian will talk through with you later, they have demonstrated a resilient performance through COVID, certainly through COVID One, they managed the downtick during the early days of the lockdown, and we saw a strong recovery as the economy opened. And they're very comfortable talking about their plans as to how they managed through the second stage of lockdown. And I think that reflects both the resilience in the business, but also, really, the opportunities from what are quite clearly much higher levels of cost usage through the economy. We're going to see earnings enhancing from the acquisition in the first full year of ownership. And as you know, we have a March rent. So that's the first full year to March '22. And the acquisition value is GBP 70 million on an enterprise value basis, which we expect to complete in January of next year, subject to regulatory approvals. It's important to position our announcement today really in the context of our strategy as a whole. And I've said already, we'll have more to say on that at our interims at the end of this month. But I think as you can see clearly, this does leverage growth from our core U.K. market. And I think more importantly, it accelerates our business shift towards, really a digital platform and services based on our focus and what you can see in terms of growth from our U.K. markets. And if you look at the 2 pie charts, I think what it shows well is really the structure of the business today. As you know, we announced the sale of our Romanian business during October for GBP 47 million in cash, and that's due for completion at the end of our current financial year on the 31st of March. And what you will see is, really the movement in the business from where we are today in the pie charts on the left across to, really what the sort of illustrative structure of the business will be going forward. And what we will see is actually that sort of the emphasis of cash and the greater emphasis around the opportunities from a digital payments and services platform and actually digital offering and, more importantly, a sort of a retail offering actually through our retailer network. And what we will see there, clearly, is you have multipay and e-money, you'll have the benefit of bringing our PayPoint cards business today alongside Handepay, the value of our terminal relationships through the SME market and our offerings, actually through PayPoint One, being principally parcels ePOS. And as you know, actually, our growing relationship with Deliveroo and other opportunities such as the ATMs as well. So I think what you're seeing here is really us capitalizing on growing sectors, increasing significantly, the diversity of our customer base. And I think in that respect, we will have a combined market share in the card merchant market in the U.K. with still less than 5%, which I think demonstrates the opportunity for growth in that fragmented market. And I think with it, in the cards market, it will give us the capability to deliver better pricing, better onboarding and a better in life customer experience through our combined PayPoint cards business. And I think it would inject sort of new energy and new momentum in that business as we take it forward. If we look at, really where the growth potential in the U.K. card payments market is, you will see, I think, really very clearly and be aware that sort of perhaps 2016 was a tipping point in that shift from cash to cards in terms of behavior from U.K. consumers. Our own data in Q1 of this year showed a 75% increase in card payments through the first U.K. national lockdown. And as we know, the impacts of COVID has actually accelerated the number of trends across the economy. And unquestionably, this shift from cash to cards is one of those. What's interesting in terms of the opportunities we look forward even today, from the data we've seen and the research, we see there are still over 2 million SMEs in the U.K. who don't currently offer a card payment service. And certainly, which is what's consistent with that drive to shop and support locally, over 80% of consumers in the same survey claim that they would be even more inclined to shop locally if cards were accepted. So simply 2 data points, but I think really supporting the view that we are sort of very much sort of playing a bigger part in what is a growing market in the U.K. If I can hand over to Alan now, really talk about really, firstly, the business, the operating model, and then actually -- we'll actually turn to Ian and Mark to hear their thoughts as to the resilience of the business through the first stage of lockdown and the steps they're taking during the second stage. Alan?

Yes. Thank you very much, Nick, and good morning, everybody. As Nick says, this is an exciting acquisition. It gives a strong SME growth opportunities because Handepay and Merchant Rentals are working across -- they have many different sectors as demonstrated by some of those pictures there. The first thing I'd like to make clear is it's slightly different to PayPoint's own card proposition in that they offer a full range of terminals. So PayPoint is providing the countertop terminals along with PayPoint One. But Handepay is also providing portable and, say, mobile terminals. So therefore, we're offering more choice now to retailers. I think it's really important to call out their Trust Pilot ratings. So 4.9 out of 5 is really good, 98% of their customers rate them excellent. So I think it's a great organization for PayPoint to be joining up with. Looking at their sectors, as I said, they're across, let's say, a number of different -- if we're looking at their September split, grocery and supermarkets were 17%, food and beverage 16%; and auto trade 17%. So that makes up the 3 main parts. And then it's across a whole lot of other, say, SMEs. I think one of the other important things is the way they go to market. They pride themselves on transparent pricing, no joining or set up fees. They specialize in switching and often cover most of switching fees. And I think most importantly, they offer a price challenge. So it's actually GBP 1,000 if they can't save the SME money by switching to Handepay. So I think that's really good. And as Nick says, we're going to hear about their fast recovery after COVID, and in particular, the hospitality sector, which was down, but then has bounced back. Just looking a bit more, I'd say, their operating model. As Nick said, we're expecting synergies saying from the acquisition. I would say that's more so from the revenue side where putting the 2 businesses together will bring better prices and a festive experience life cycle for, I'd say, the SMEs. There will be some cost savings through some back office efficiencies, but I think it's very much about revenue. They work with 3 acquirers. So EVO, Worldpay and Lloyd's Bank. EVO is their current acquirer. Worldpay was historic ones. They still got a book with them. And Lloyd's Bank, the Merchant Rental business, actually provides asset finance, say, for terminal was for Lloyd's Cardnet. And people, say, will probably be aware that PayPoint's acquire of WeWork with Lloyd's Cardnet. So there's a good fit there. Looking at the sales team. I'd say we've got Ian on the call. I'll say Ian Kennedy is going to lead the combined sales team. So you can see the size of their sales team compared to PayPoint's. They grew the sales team considerably in 2016, 2017, I'll say, to generate the business. And just to put it into context, their head count is around 180 people compared to our 450 people. But you can see the vast majority of their people are at sales facing. Regarding the relationships . So combined, we will have 30,000 card servicing relationships. So PayPoint 9,000, Handepay 21,000. And then they've also got 30,000 relationships with, say, merchants for renting, I think that's about 40,000 terminals out there. Those terminals typically are on 42 months average contracts and then they roll into a secondary period. Regarding overlap, we're really pleased, it's minimal. I think we've identified as 200 situations where it's actually -- we've got a card machine, they've got a car machine. And then there's a further 300 where we've got PayPoint One, but haven't got cards. So very minimal overlap, which is great news. And say, With that, I'd then like to pass over to Mark to talk about how they've dealt with COVID.

Well, thanks, Alan. And I'd just like to start by kind of rewinding to where we were towards the end of March as the first lock down here. Obviously, hindsight is a wonderful thing, and we didn't have it at that time. So we had to sort of make decisions based on the data as it was being presented to us. So we took the decision to furlough the majority of our sales and support staff. We closed our office in Haydock and we implemented remote working for the remaining core service teams. And once we've done that, we really started to try and focus our efforts on supporting customers in the best way we could. So that really involves working with our colleagues in marketing to build and promote a customer tool kit, outlining all the products that could help customers continue to trade during the lockdown. So for example, our e-commerce offering, our virtual terminals and our pay by link products. We made sure that service levels were maintained all the way throughout, and we rolled out a new cloud-based phone system to enable us to do that. And we supported customers who were forced to close and struggling to make their rental payments by offering deferment. And all the while that was going on, we were obviously keeping a very close eye on the transaction data that we were seeing daily and the support core volumes that we were starting to see and we were trying to put together that our plans for reopening as the world started to come a bit more back to normal. Ian, do you want to talk through the reopening part.

Good morning, everybody. Yes, the first decision that we took from a sales perspective was to talk to the lead providers. We established that leads were still available, and we took the decision to reopen the office from the 1st of June for a phased return of telesales. And we kept a close eye on the sales performance in that time, which was very strong from the outset. We then moved, through July to High Street and started to reopen and we traveled or returned the field sales, where we utilize regional sales managers. And then in the period of August through October, we've gradually returned all remaining field and telesales, business development managers with the final group returning on the 2nd of November. And sales have remained consistent with pre-COVID levels, which clearly demonstrates that there's still a large market for us to go after.

Thanks, Ian. So looking forward now to the current situation, I think it's fair to say we're approaching it with a much higher degree of confidence than last time. Many more customers stayed open than we originally thought and our bounce back has been pretty quick and pretty strong. So with that in mind, this time around, we're not planning to furlough anyone. The office is staying open, albeit with social distancing in place and a number of colleagues continuing to work from home. We'll be focusing our sales efforts on the wide range of businesses, which continue to be open and who are obviously processing the card payment now. And our switcher proposition is even more relevant now that card volumes have grown. And finally, we'll be working with the marketing team to make sure that we've got consistent lead gen for our telesales operation. So I hope that gives you a brief flavor of how we managed the business through the first lock down and our plans for the next month or so, and I'll hand back to Alan.

Yes. Thank you, guys. That sounds good. So a brief word about the financials. As Nick said, we're in a close period. So some of my comments will be limited, but those results were announced on 26th of November. What we're buying is 2 legal entities, say, Handepay with the card services and a company called Merchant Rentals, which does term leases. So there isn't a consolidated company over the 2 of them. So therefore, we have put together some metrics to give the market an idea. We're paying GBP 70 million on a cash-free, debt-free basis. As an excess, that's subject to FCA approvals. We expect to complete in January '21. Gross assets are GBP 20 million, the gross revenue GBP 16.7 million, and adjusted EBITDA of GBP 5.4 million to give the market an idea of the size. PayPoint's net revenue for last financial year was GBP 8.7 million. So that compares similarly to Handepay's gross revenue of GBP 16.7 million. So you can see the size compared to ourselves. As we said, it's only enhancing in the first full year of ownership, which will be financial year ending '22. And we believe there's a number of opportunities or synergies. As everybody knows, PayPoint is very cash-generative, so I think that fits in nicely there. We are extending our current financing facility from GBP 75 million to GBP 95 million to fund the acquisition. But I would remind people that back in October, we did announce the disposal of our Romanian business. And I say we're getting proceeds for that of GBP 47 million expected in April next year. The other thing I'll call out really is just the -- let's say, size of their sales operation. We're saying there, they add 500 new merchants a month, so there was a steady growth in their portfolio. And so with that, I'll pass back to Nick.

Alan, thank you. And really, to summarize on our last slide here. I hope that you can see this is a really important step for us as we strengthen further our portfolio mix, and we move from our traditional cash business towards more of a digital payments platform and services through our core retailer network. We believe this has the potential to deliver really enhanced growth and value in our U.K. core markets. As we've said, Handepay is a well-established top 4 card payment business with strong and new relationships for us as PayPoint and our merchants. That's an additional 21,000 merchant relationships. And really across the Merchant Rentals business, a further 30,000 terminal relationships. And I think what -- this strategy has broaden out significantly our client and sector mix and SME exposure. As we've said, the significant growth and potential for efficiency from enlarging our card payment business and actually moving to new sectors and also new geographies within the U.K. As Alan has said, it's [ challenging ] in earnings enhancing in our first full year of ownership and with synergies coming from both a combination of revenue opportunities and also from cost savings. And as we've said, we're expecting to complete this in the first quarter of next year, subject to regulatory approvals. And with that, actually, we're happy to take questions.

[Operator Instructions] We will take our first question from Will Kirkness with Jefferies.

I had a couple of questions if that's okay. First, just wondering if you could talk about the growth that you've seen perhaps over the last few years, whether that's mostly been organic? And how we should think about, I guess, the FY '21 year, is that going to be similar to FY '20 or do we see a return to kind of the FY '20 metrics by FY '22? And then the other question was just around sort of the growth and retention. So I think the churn you listed there implies about 20% per annum. I just wanted to check my math on that.

I think we can confirm that all of the growth that has been achieved in the business throughout its life has all been organic. And I think it's reflective of a business that has actually been sort of growing its sales capability, growing its position in the market, both geographically and by sector. And I think one of the really exciting things for us as we spent time with Mark and Ian is actually really talking through the opportunities from where we are today to sort of further enhance that growth and actually drive that from what would be clearly an enlarged sales force within large opportunities across more sectors. But I think we can certainly confirm that. In terms of sort of growth looking forward, I think probably the best guidance we can give today, I think, is actually in the observation we make around the acquisition being earnings enhancing in its first full year. And I would hope that even looking through COVID, that should give you some confidence as to, really the trajectory of growth as we look into next year. And clearly, we're having to manage through COVID and actually sort of some of the sort of anomalies that throws up in terms of the month-on-month performance. But as Mark said, we're confident that we will recover the sort of pace and trajectory of growth given the actions that actually Mark, Ian and the team are actually already putting in place at Handepay. And for that reason, I would say that we are very confident that, actually, we will return to that rate of growth that we're talking about and underpin our statement of actually earnings enhancing in its first full year of ownership. In terms of the churn, the churn is actually typical of what you see in this sector. And I think, again, one of the real opportunities that we've been talking to Mark and Ian about is how we reduce that churn. I think we're going through a slightly unusual period at the moment in terms of, I think, across all of our businesses, we're seeing lower rates of churn because we're seeing lower activity across sales teams. But in reality, one of the real opportunities we see going forward, not just within Handepay but across in large card business, is to reduce that rate of churn and clearly get a higher benefit from actually the new merchants that we're winning and onboarding. And I think that will come from clearly being more attentive around in life experience and also ensuring actually that we're targeting properly the right product to the right merchant. I don't know whether there's anything you want to add, Ian and Mark around the churn point.

I suppose, I would just add that, obviously, we want to work with our partners and the sort of the wider business now to make sure that our product offering is really strong and add a bit more depth there as well, which should help manage that churn rate.

If I could just quickly come back on the growth comment. So if we looked at just sort of forgetting a look forward, but if we look back at perhaps the last 3 years to FY '20. Could you perhaps help a bit with what kind of growth rate that would have been? Was it sort of double-digit or mid-single digit? Just a broad kind of brush of how the business maybe performed over the last 3 years?

Well, look, I think what you should feel comfortable with is that I think, historically, the growth rate in the business has been sort of mid-single digit. And clearly, that's a platform from which we want to accelerate. But I think the baseline number I would be using will be a mid-plus single-digit number.

We will now take our next question from Joe Brent with Liberum.

Could you give us probably a little bit further about the components of the future growth? It sounds like there's an opportunity for sectoral growth, geographic growth, maybe new merchants as well. And then secondly, could you talk a little bit about costs and synergies? I mean, clearly, one of these companies have very high operational gearing. Is there an opportunity to kind of stick their revenues on your cost base and take out back-office costs? And then finally, Ian and Mark said that they provide a wide range of terminals. Going forward, will that include to the PayPoint terminals?

Helpful, Joe. I mean, you'll appreciate that we're early days in terms of quantifying the scale of the synergies that we [indiscernible] and I think you're right that I think said already, they sort of split between cost and revenue. If we look at the revenue first, and to your point around terminals, I mean, certainly, one of the areas that we're already exploring is across the current Handepay and Merchant Rental SME base. There has to be opportunity for us to look at additional opportunities through those terminals, whether that's a rudimentary ePOS system or whether that's something we could do around parcels as well. And sort of in talking with Mark and Ian, and actually a team at Handepay, it's clear that there's unquestionably a real opportunity to open that up and would it clearly drive additional revenue through that current merchant and customer base. So that's one area of opportunity. And I think that will obviously impact sort of the style and capability of the terminals that we introduce into the estate as we go forward. The second one around cost. I think that's a delicate one because what we want to do is improve the quality of customer service. And for that, we need to actually sort of have the right support across the call centers, across telesales and across really the whole sort of resource and back office. But let's be clear, when you're bringing together 2 businesses of this size, there are some cost savings to make, but they need to be made in the right way to ensure that they deliver better service and actually a better level of retention to address the churn point and actually open up more opportunity to drive the sales faster. So I think there's a gentle balance there, but I think you're absolutely right. Inevitably, there are some efficiency savings that come from having higher scale in the business.

Can I just have a follow-up on the disclosure. You've given us the gross revenues. Will there be a net revenue figure? And will that be included separately in your reporting going forward?