OFX Group Ltd

ASX:OFX

Earnings Call Transcript 2019-Q2

[John Alexander Malcolm, CEO, MD & Director]

Thanks, Kevin. And good morning, and thank you for joining the call. As Kevin said, I am Skander Malcolm, CEO of OFX. With me is Selena Verth, CFO; and Matt Gregorowski from Citadel-MAGNUS to support our Investor Relations. Appreciate you haven't had much time to digest the material. We'll move through it relatively quickly so that we can leave plenty of time for questions at the end.Let's jump straight to Slide 4, and it summarizes what's been a good first half for OFX, as our revenue momentum and strong execution continues. We delivered our strongest ever half in net operating income at $59.9 million, up 11.6% on first half 2018, driven by very strong growth in corporate, at 19%, but also good growth in consumer at 8%. What is especially pleasing is that every region delivered double-digit revenue growth with real strength in Asia at 29% and North America at 18%, the 2 regions we've targeted for further investment in 2019. Transaction growth has continued and our margins have remained stable overall, excluding IPS. As we've talked about before, we've introduced several products and technology initiatives to drive a better client experience, with a new release of our Global Currency Account, a new website and a new app, all launched in the first half and all yielding positive feedback in client metrics.Finally, good cost discipline meant EBITDA grew 8.2% to $14.5 million, and we're on track to deliver an annualized positive operating leverage. The interim dividend will be paid at $0.264 per share.In summary, this was a strong result and we're pleased with it.Moving to Slide 5, the fundamentals that drive our business continue to improve. Active clients are stable, and the number of new customers grew in Q2 versus Q1 and this momentum has continued into October. This gives us confidence to guide that active clients will grow in the second half as the effect of the improvement in clients' experience are realized. Transactions per active client have grown 13.6% in the last 12 months, driven by the CRM programs across our consumer segment and the continuing growth and engagement in our corporate segment.ATVs were up partially due to some large transactions in IPS, but excluding those we're still good. This delivered a turnover of $12.1 billion, up nearly 18%.Moving to Slide 6. This strong momentum is especially pleasing, given another relatively quiet period in terms of volatility. As you can see, there was an increase in volatility versus the first half of 2018 and then it reduced in the second quarter. Overall, it does remain below the long-term average. Investment in our CRM programs along with our client experience enhancement is what is driving our ability to grow despite a lack of volatility.Now, let me hand over to Selena for more details.

[Selena Verth, Chief Financial Officer]

Thank you, Skander. If we move to Slide 8, as you'll see the continued momentum is flowing through our top line, with fee and trading income up 11.9% compared to first half '18 and net operating income up 11.6%. This is a record half for the business. We're pleased to report that fee and trading income growth, also referred to as revenue, is coming from all our regions; Australia, New Zealand, up 11%, Europe up 13%, North America up 18% with U.S. alone up 31% and Asia up 29%.Lead revenue indicators of the group with active client group growth in North America, Asia and our corporate portfolio. Our revenue generation is focused on both new and existing clients. The returning clients now account for 72% of our revenue as we see increased transactions and value from our back book. We've continued to out focus our margins with NOI margins ex our international payment solutions business at 56 basis points, up from 55 basis points in the first half '18, largely driven by our consumer book. This is now 4 consecutive halves of stable margin.As discussed at AGM update, we've had a number of large-value, low-NOI margin transactions in the IPS business during the half. We have removed these from our margin analysis, but as a reminder, EBITDA margins for this business -- for this segment of our business are strong and they are accretive to the overall portfolio.As you may remember, we committed to positive operating leverage on an annual basis. We have invested in growth, with costs up 4.8% compared to the first half '18, but we are on track for an annual positive operating leverage on an EBITDA basis, excluding the nonrecurring corporate action costs. EBITDA is up $14.5 million, up 8.2% on the first half '18, and net profit after tax of $9.4 million up 13.2% on the first half '18. Our effective tax rate for the quarter reduced to 19% due to R&D tax benefits from fiscal year '18. Our ongoing tax rate is still expected to be 25%. We continue to generate excellent cash flow, and interim dividend will be $0.0264 per share.If we move to Slide 9, we've continued our operating cost discipline, while investing for growth. Our operating expenses are up 12.8% on the first half '18, driven by increased investment in employees and promotional expenses, while keeping all other expenses as flat as possible. Employee expenses are $26.7 million, up 13.2% on the first half '18, as we invest in our revenue-generating headcount up 22%. Our promotional expenses are $9.5 million, up 21.8% on the first half '18, as we drive activity. You will see the segment reporting we've increased our spend in the U.S. and it has delivered revenue growth of 31%. The increase in promotional spend is also for encouraging our existing clients, with transactions per client up 13.6%. We have held occupancy costs flat on the second half '18. But as we have previously indicated, we've reached capacity in 2 offices and expect this to increase in the second half of '19.We continually look at our cost base and have productivity programs in place that will deliver annualized expense savings of $1.6 million. Our capital expenditure program is on track with $4 million invested in the first half. As previously committed, this is driving our customer experience, with the launch of the new app, the new website and the Global Currency Account. We are also investing to deliver reliable scalable systems.I'll now hand back to Skander to take you through the fiscal year '19 outlook.

[John Alexander Malcolm, CEO, MD & Director]

Thank you, Selena. Moving to Slide 11, let me give you a brief update on the priorities we've executed against in the first half. I've touched earlier on the delivery against our product roadmap, and our NPS scores continue to grow driven by these enhancements. It's very pleasing to see that it's up by at least 10% in every region. We have invested, as we said we would, in people, particularly in North America and Asia, with staff numbers up 34% and 64%, respectively. In North America, we also grew our promotional expense 30%. This investment will underpin our future revenue growth.Our commercial partnerships pipeline is stronger than ever, with several opportunities being added and several opportunities reaching advanced stages in different geographies. We have also delivered some critical APIs for our partners, which is building a very solid pipeline.I've touched on the tech investments that's improving the client experience, but in addition to that, we've made good progress in improving our security, and in continuing to drive down our banking and treasury costs. Our risk management program goes from strength to strength. We've continued to pass the U.S. state exams and received the e-money license in U.K. in July. On the people front, we completed the remaining hires for our global executive team, appointing a new Chief People & Culture Officer, Jillian Rezsdovics; and our new President for U.K. and Europe, Sarah Webb. And we've amended our incentive program, and it's been put in place for our key executives and it was approved by shareholders at our 2019 AGM.Finally, on Slide 12, these are our key commitments. Firstly, to deliver stronger EBITDA in second half '19 and in second half '18 with double margins. We'll grow active clients, and we'll deliver annual positive operating leverage. We expect to continue to grow revenue across all geographies, with more features and benefits from services enhancements that will improve our client experience and our conversion rates. All in all, this was a very good result. We're delighted with momentum we're seeing across the business.And with that, thank you. And let me hand back to Kevin, who is our moderator, who will be able to field any questions and direct questions.

[Operator]

[Operator Instructions] And our first question in queue is from Bob Chen from Deutsche Bank.

[Bob Chen, Research Associate]

Just a few questions for me. Could you quickly elaborate on some of those corporate actions costs, how much that was? And can we expect more of that -- them in the second half and what that relates to?

[John Alexander Malcolm, CEO, MD & Director]

Yes, Bob, just on those, we announced in our ASX release that we were looking at an opportunity externally, and that conversation or those conversations have ended. As part of that process, we incurred some expenses. They're nonrecurring, so they won't recur in the second half.

[Bob Chen, Research Associate]

Okay. And then just a question on that sort of active client numbers. So I can see that, that's sort of come off a bit over the half and you've sort of guided towards growth in the second half. Is that sort of year-on-year growth or is that sort of half-on-half growth? And what kind of sort of growth rate are you sort of expecting?

[John Alexander Malcolm, CEO, MD & Director]

Yes. We don't guide on the specific growth rate. We've always consistently provided an annualized number. And that's the number that we expect to grow. By the time we get to the full year, we expect to see annualized active client growth. And just to unpack the number that we've actually shared, as Selena touched on, it's actually up in a number of segments, it's up across all of North America, it's up in Asia across -- it's up globally in terms of the corporate business. There are two places that it's down, one is U.K. consumer, where we took deliberate actions to shift marketing emphasis across to North America. And so year-on-year, we're not attracting as many new clients in U.K. consumer. And it's also down in Australian consumer purely because of an IPS relationship where we've agreed with our partner that, while we put in the new API process, we're going to stop taking registrations in new dealing clients. And if you took that out of the number, you'd see Australian active client growth is well. As we talked about in the commentary, 2Q versus 1Q, we saw the new dealing clients up 7%, and so far in 3Q we've seen new dealing clients up 5% versus 2Q.

[Bob Chen, Research Associate]

Great, okay. And that sort of increase in transactions per active client, like, was any of that driven just by sort of the weak Aussie dollar or is it more likely because you've got more of these corporate customers and IPS as well?

[John Alexander Malcolm, CEO, MD & Director]

Yes, it's really driven by 2 things. Certainly, corporate and the investments we've made in the last couple of years to continue to bring on corporate clients shows up in transactions per active client. And those investments we're making and adding salespeople, particularly in North American and Asia, but also here in Australia and also in the U.K. adding salespeople who bring in corporate clients. That's where it tends to show up, transactions per active client. But the other reason is the investments in CRM, and really we're very pleased with the effect that that's having on our consumer business. So what we've been doing is providing much more structured dialogue with our customers, both active and inactive. We've been testing various programs, again, both to active clients, who then do more transactions with us, and bringing in inactive clients who can add a transaction. So it's really the combination of corporate and CRM methods in consumer.

[Bob Chen, Research Associate]

Okay, great. And just the last one for me. In terms of -- so that investment in OpEx sort of in -- looking at sort of the second half, obviously it's kicked up quite a bit over the first half. What's that going to look like in the second half?

[Selena Verth, Chief Financial Officer]

Yes. And you may remember at the full year results announcement, we guided that the two areas that we'd invest in is employee expenses and the promotional expenses and they are the ones that are up. We did and we always expected to invest stronger in the first half to drive that growth in the second half, and in employee expense, it's really investing in that sales team to then generate the growth in the second half. And also in the promotional expenses, it's investing in those clients and getting activity rates so then they trade in the second half. So what we are saying is that we will continue as we always do, monitor and watch the revenue coming through and ensure that we spend money, we get the return for the money. If we don't see the return, we will pivot until to deliver that positive operating leverage for the year.

[Operator]

[Operator Instructions] And we have a question here from Chris Bainbridge from Pie.

[Chris Bainbridge, Senior Investment Analyst and Portfolio Manager]

So just to clarify kind of just around those comments around second half EBITDA, which, obviously, sort of feed into the full year. I mean, just sort of kind of doing the calculations there. I mean, like you said, sort of points to a number, which is around that sort of consensus, so if you know, kind of over $33 million, is that sort of you know kind of in line with those comments that you've made?

[John Alexander Malcolm, CEO, MD & Director]

Yes. As you know, Chris, we don't guide. But we're certainly comfortable with the momentum that we've got in the business.

[Operator]

[Operator Instructions] As there are no further questions from the telephone line at the moment, I'd like to hand the call back to the speakers for any continuing remarks.

[John Alexander Malcolm, CEO, MD & Director]

Okay. Thanks, Kevin, and thanks, all, for dialing in. We're pleased with the business, momentum continues in the second half. And as we've laid out, the key financial commitments around growing our EBITDA, positive operating leverage remain in place, and we'll continue to drive the business accordingly. Thanks very much for joining the call.