PayPoint plc

LSE:PAY

Q2-2026 Earnings Call

[Nicholas Wiles, executive]

Good morning, everyone, and welcome to our interim results presentation this morning. We're going to adopt our usual format, starting with me giving an overview of our performance in the first half. Rob can then cover the financials, followed by an update on the delivery of our key growth projects and then a first half business review. Rob is going to update on our progress in working with Nile, on our long-term organizational framework. And then finally, an update on our outlook and the Q&A.

And with that, turning really to the first half and an overview of actually our first half. And I think despite an uncertain market background, the performance of our underlying business has remained in line with our expectations. We've continued to grow our PayPoint core estate with new business in key areas such as housing, local authorities, government departments, FMC brand campaigns and in Love2shop business. I think progress has been good. We've accelerated growth in our digital payments platform. We've taken further actions to strengthen our card processing platform and its capabilities. And in parcels, we've strengthened further our key carrier relationships, all of which is very much consistent with the long-term objectives we set out for the business earlier this year.

In the first half, we have encountered 2 specific challenges, which have impacted performance. Firstly, the financial terms of our new commercial contract with InPost Yodel have had a greater impact than we'd anticipated and with the additional volumes we would expect to come through not yet materializing, and that's rather been compounded by what's now the well-publicized disruption to parcel volumes and service in our network from the InPost Yodel internal network and operational harmonization plans.

It's taken some good work and collaboration between the 2 businesses but it does now feel that we're through the worst of the operational disruption and we expect our volumes to recover through the course of November, which, as you know, is really a key trading period for the business. Secondly, in OBConnect, the first half of this year has seen slower growth than we had anticipated and some consolidation after a strong performance last year. I think this is largely due to the overall opportunities we'd hope to see from the verification of pay opportunity and uptake in Europe being rather disappointing with the team, I think, doing a really good job in response by pivoting the new business pipeline and opportunities to other areas alongside what we're doing in terms of discussions already underway with several jurisdictions and corporates to replicate the success of GetVerified in New Zealand.

And while the OBConnect business will not grow at the rate we expected in the current year, I think it's fair to say the foundations and capabilities of this business remains strong and our growth in the second half will still be stronger than the performance we saw in the second half of last year. So I think overall, our confidence in the opportunities that OBConnect brings to our business is undiminished. Its technology platform and capabilities remain important to our long-term digital ambitions as a business.

More positively, we've made significant progress in the first half in the successful delivery of several major projects, which are key to our long-term growth. We've launched bank local services with Lloyds Banking Group and with the expectation of further banks to join this service in the coming months. We've launched Royal Mail Shop and branding across the Collect+ network following the strategic investments in Collect+ by Royal Mail. And we've accelerated the Love2shop partnership with InComm Payments.

Each of these projects required detailed planning and execution, and now the focus is very much shifting from the rollout to the actions required to accelerate consumer adoption. Turning now to our summary of the financial performance of the business. Overall, as I said already, a resilient performance across the key financial metrics. And by division, net growth in each business with the exception of Love2shop, where the impact of the anticipated changes we've made to our accounting treatment have resulted in some changes to the timing of revenue recognition on the expiry of cards which has resulted in a greater weighting to profit recognition in the second half.

In terms of our growth plans, we should not let the specific challenges we've experienced in the first half deflect the business from the long-term growth plans we announced earlier this year. Delivering GBP 100 million underlying EBITDA remains a key financial milestone for the business. And while we're making meaningful progress towards this target in the current year, it is going to take a little longer to achieve. It was always an ambitious target to be delivering it in this financial year but it remains a key milestone for the business.

We still believe a combination of our business mix today and the delivery of our key growth projects will deliver consistent net revenue growth in the range of 5% to 8%. And in the meantime, we're developing an organizational structure for the long term to support this accelerated growth. And maximizing returns to shareholders through strong and consistent earnings and cash generation. For the current year, we're on track to deliver more than GBP 90 million to shareholders through a combination of ordinary and special dividends and share buybacks.

I'll now hand over to Rob, who will take you through the numbers.

[Rob Harding, executive]

Thank you, Nick, and good morning, everyone. I'll start with the key financial highlights. Net revenue of GBP 84.7 million is marginally up versus the prior half 1. There's a revenue breakdown on the following slide, which shows PayPoint segment revenues are up 2.9% but this is dampened by Love2shop revenues down 9.6%. As Nick said, this is timing in nature, and we fully expect this position to unwind in the second half to give year-on-year growth for the Love2shop segment.

Underlying profit before tax of GBP 25.7 million is down 4.5% that being a combination of flat revenue plus a 2.3% increase in overall costs. And I'll cover the cost deltas in a few slides. Reported profit before tax of GBP 19.9 million is after GBP 5.8 million of deductions to underlying numbers, including GBP 2.6 million of amortization of acquired intangibles and GBP 3.2 million of exceptional items, of which GBP 2.6 million relates to legal costs in respect of claims against PayPoint and the remainder is reorganizational costs.

Underlying EBITDA of GBP 37.3 million is broadly flat versus the prior half with GBP 1.2 million of lower profits being partly dampened by higher depreciation and amortization. On earnings per share, diluted underlying EPS of 26.7p is 2.6% down versus the prior half. And finally, on this slide, net debt is down 3.2% to GBP 84 million for the first half. And again, I'll cover this in more detail shortly.

This slide breaks down the net revenue into a little bit more detail. As I mentioned previously, PayPoint segment revenue is up 2.9%, with e-commerce revenues of GBP 8.6 million, providing growth of 7.5%, and that's driven by transactional volumes increasing 20% to GBP 74.3 million. Payments and banking revenue grew 4.4%, and that's driven by the inclusion of GBP 1.9 million of revenue from OBConnect. And in shopping, growth in service fees of 8.4% to GBP 11.6 million was largely dampened by cards, which is a combination of both lower process volume and sites impacting revenue and ATMs revenue down, reflecting a reduced demand for cash across the economy.

For Love2shop, 12 months ago, I explained the half 1 numbers included revenue brought forward from half 2 into half 1, and this was following changes to expiry dates on some of our products. For this year, we've made further changes to the expiry date of some of our products but these changes will benefit the second half year. And therefore, this revenue drop is all timing in nature. Overall, with billings growth of 4.6%, up versus the prior half 1, we expect year-on-year revenue growth for the full year.

This slide is really a graphical view of the revenue growth I highlighted on the previous slide and how this revenue growth contributes to underlying profit. So from left to right on this chart, shopping revenue is up GBP 200,000, e-commerce revenues up GBP 600,000, payments and banking GBP 1.1 million and Love2shop revenues down GBP 1.8 million, which I've said is timing in nature. I'll cover costs on the following slide but these have increased GBP 1.3 million half-on-half. And therefore, on the right-hand side of this slide, these movements result in an overall profit of GBP 25.7 million.

On costs, this slide breaks down the GBP 1.3 million increase that I mentioned, most notably is the inclusion of OBConnect costs of GBP 1.8 million following the majority stake we took in this business in the second half of last year. We've also seen additional depreciation and amortization of GBP 500,000 and GBP 500,000 in respect of financing costs. Offsetting these costs is a GBP 1.5 million reduction in people and overheads, which is the continuation of strong cost control discipline across the group. So these factors result in a GBP 1.3 million increase in costs of GBP 59 million.

Next on cash generation. We had a GBP 24.2 million of cash generation from operating activities in the half which is down GBP 4.3 million versus the prior half of GBP 30.7 million, and that delta is primarily working capital in nature. Further down the cash flow statement, we have tax of GBP 4.6 million, CapEx of GBP 10.9 million, which has increased by GBP 1.5 million half-on-half as we continue to invest in systems' modernization, a GBP 10.4 million payment in respect of the legal settlement, a one-off payment to the pension scheme of GBP 1.5 million.

And then we have the GBP 43.5 million cash in from the part disposal of Collect+, along with a GBP 13 million outflow for shares bought back in half 1 and GBP 13.9 million in respect of dividends. This gave an overall reduction to net debt of GBP 13.4 million for the period to GBP 84 million.

Very briefly on balance sheet. Net assets for the group of GBP 102 million are GBP 4.7 million higher than the March year-end position. And the key drivers of the swings are obviously half 1 earnings of GBP 14.9 million, the proceeds of GBP 34.1 million net following the ID investment in Collect+. And we've actually used these proceeds to subsequently distribute a special dividend of 50p per share, and that resulted in GBP 34.5 million going out in the second half of this year.

Alongside that, the 12 for 13 share consolidation reduced our share capital by circa 5.3 million shares. Other key balance sheet movements are the dividends paid of GBP 13.9 million and the share buyback of GBP 30 million. And similar to the prior half on the share buyback for accounting purposes, we've provided for the full GBP 30 million commitment in these balance sheet numbers.

Lastly, before I pass back to Nick, on the left-hand side of this slide, we continue to invest in the business to drive future revenue streams and improve operational resilience and efficiency. We've increased the interim dividend by 2.1% to 19.8p, while targeting a cover of over 2x and along with the buyback targeting leverage ratio of 1.2 to 1.5x. For this financial year, the business is on course to generate over GBP 90 million of shareholder returns through a combination of the ordinary dividend, the special dividend and the GBP 30 million share buyback.

On the right of this slide, we expect net debt to increase in the second half, driven by those ordinary and special dividends and the share buyback, plus up to GBP 25 million in respect of CapEx for the full year. And with the second half spend, we fully expect to stay within the target leverage ratio of 1.2 to 1.5x. I'll now pass you back to Nick.

[Nicholas Wiles, executive]

Rob, thank you. And now really turning to the progress in the delivery of our key growth projects in the first half. I think as a business, the standout achievement of the first half has been the launch of multiple projects, both enhance our consumer proposition and establish important partnerships that strengthen the long-term prospects for the business.

Firstly, as I said, we've launched PayPoint BankLocal into our retailer network, enabling cash deposit or withdrawal with Lloyds Banking Group, the first of our high street banking partners. Secondly, we've launched Royal Mail Shops and a strategic investment into Collect+. And finally, we've taken further steps to accelerate our partnership between Love2shop and InComm Payments for the merchandising of the Love2shop gift card across multiple retail channels.

Turning now in a bit more detail to each of these. On successful launch of BankLocal service in August, I think, was a major achievement for the business, involving a group-wide collaboration. Lloyds Banking Group are the first high street bank to use this service, enabling their customers through our network to deposit cash via both app and card. In terms of success to date, we've seen a rapid adoption of this service from Lloyds Banking customers with the strength of our network delivering genuine convenience for cash banking services. Consumer and press feedback has been positive. And as we've seen with other of our services, as the pattern of transactions becomes established, we see strong demand for the service outside traditional opening hours and a weekend.

And in terms of what next, I think following the strong start and early adoption, our focus is now very much on further developing our cash banking services in the second half with the next phase of work focused on driving consumer awareness through a variety of channels, accelerating our SME banking solution and those plans [ succeedly ] can launch in Q2 of next year and engage further with other high street banks for our range of cash deposit solutions.

Overall, we expect to make significant progress in the rollout of our cash banking services over the next 12 months. Turning now to Collect+. The investment by Royal Mail into Collect+ announced at the end of September was a really important strategic step in our partnership with Royal Mail. The partnership strengthens the positioning of Collect+ as the leading out-of-home network and will enable the future expansion of further Royal Mail services into the network. It will enable further investment in both our consumer service proposition and our retailer network support as the partnership adds to our existing carrier relationships as part of a carrier-agnostic network.

The launch of Royal Mail Shop in the Collect+ network reflects our confidence in the strength of the Royal Mail brand and the opportunity to enable for consumers a broader Royal Mail services, including postage as well as collect, send and return parcels throughout a growing portion of the Collect+ network. The rollout of Royal Mail Shops is now really gathering pace with 3,000 stores already branded Royal Mail Shop, which, as I said already, enables a wider range of over-the-counter postal services, including stamps. And by the end of our financial year, this number would have increased to at least 8,000 sites.

To support this, there is an extensive consumer marketing campaign already underway with more planned over peak and into 2026 as we increase consumer awareness, drive more footfall and volume into the network. And as we look into the second half, as I said already, it's important to ensure that we have at least 8,000 sites branded and live for the full Royal Mail over-the-counter service by our year-end. We need to be taking the necessary steps, again, as I said already, to increase consumer awareness and uptake of these services. and we do launch our self-service kiosk in the first quarter of next year. And I think this is a really important time to accelerate the pace of our partnership with Royal Mail and to accelerate the consumer adoption of these services through the Collect+/Royal Mail Shop network.

And now turning to our continued progress with InComm. Our partnership with InComm established just over a year ago, has been a really important step in us delivering a strong new sales channel, enabling the sale of Love2shop physical gift cards through the major high street retailers. Sales through this channel have continued to grow strongly ahead of the peak sales period in the run-up to Christmas, and we benefited from a combination of growing consumer recognition of the brand and increasing availability of our cards through these additional high street retailers.

We've also seen the benefit of further rolling out the Love2shop card into our PayPoint retailer network with growth through this channel from our refreshed merchandising now up by more than 50% during the course of this year. I think with the next stage of this multichannel approach being the launch of the Love2shop Digital Mastercard in the early part of next year, enabling spend via digital wallet in-store and online, the further expansion into more high street retailer gift card malls in 2026 and more gift pegs in each of these malls and also the launch of MBL brands such as Greggs into the InComm Payment mall itself.

I think we can really see this partnership is now building strong momentum which is combining the merchandising expertise and distribution channels and the reach of InComm with an outstanding multi-redemption gift card product and product innovation from Love2shop.

Now turning to our business review. And firstly, in shopping, we've seen continued growth in the first half in each of our product estates with the exception of the Handepay card estate and have shown growth and some solid financial performances from the underlying business areas. We've seen continued service fee growth. And while card merchanting net revenue and process value are marginally down, I don't think this fairly reflects the continued work to strengthen the operational foundation of this business.

The improvements to the quality of our card proposition and the increased focus on profitability per merchant. We also saw another strong performance from our partnership with YouLend with funding advances up by over 50% in the period. In our FMCG activities, we continue to work with a growing number of consumer brands with 16 campaigns delivered in the first half, a strong pipeline of opportunities for the remainder of this year.

And in our ATM business, after a challenging period, we're seeing early signs of our recovery plan delivering results as we better manage the ATM estate and use our data to optimize individual site performance.

In e-commerce, overall, a positive half for Collect+ with both net revenue and parcel transactions showing growth in terms of really all the key call-outs. As I described earlier, we launched the first phase of Royal Mail Shop, branding into the network and enabled over-the-counter Royal Mail services in over 2,000 locations. And as I described earlier, we have encountered some operational challenges from the internal harmonization of InPost and Yodel which in the period has impacted both volumes and service in the second quarter. We think the action we've taken in partnership with InPost has now stabilized this and we expect volumes to recover during the key peak period.

More broadly, we continue to work hard across the wider carrier portfolio to maximize volume and performance with each carrier and support consumer adoption of out-of-home as we continue to grow the Collect+ estate. In Payments and banking, the key theme in this business has been the continued growth in our digital and open banking activities. And with the growth we are now seeing, we expect to arrive at a point soon whereby digital revenue will exceed revenues from our cash payment channels. Specific highlights from the first half have been several important new business wins, particularly in housing from a strong and well-balanced overall new business pipeline, good work to strengthen further our relationships with our existing clients with a number of upselling initiatives and several important client wins for our open banking activities.

Our first half digital revenue does include a latent contribution from our majority-owned OBConnect platform. And finally, in Love2shop, as Robert said already, the adoption of a more prudent accounting treatment in terms of the timing of revenue recognition from the expiry of cards which we announced, I think, at the time of the acquisition, has resulted in a timing impact to the headline performance of the business which will be unwound in the second half of the year.

Operationally, the business continues to perform well. I've already described the progress in our partnership with InComm

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position for our peak trading period.

In Park Christmas Savings, we expect to deliver a flat performance for the year after some good work through the year to support our agents and strengthen the saver proposition as we already turn our focus to the 2026 savings campaign. And in MBL, we've had an outstanding first half with a doubling of process value, which reflects the growing reach of this business and its brand partners. And with this, I'll now hand over to Rob to give you an update on our organizational framework project.

[Rob Harding, executive]

Thanks, Nick. In our FY '25 results, we announced a key target was establishing a framework to deliver greater automation and agility. We've now recently completed Phase 2 of this project, supported by now an independent consultant to identify how we can drive this automation agility across 3 key processes: onboarding, customer support, and billings & settlement.

The outcomes from this phase are a clear articulation of the target future state for each of these 3 processes, including key outcomes for each, which you can see from this slide. For example, for customer support, we're driving customer self-service capability in response to high-volume, low-value calls. Additionally, for each process, we've set out the benefits from moving to the target future state with financial benefits such as an additional revenue or lower costs and other benefits, for example, improved customer service levels or satisfaction levels.

Preliminary estimates have identified at least GBP 2 million of operational profit upside from moving to the desired future state with a potential to grow this figure further through the next phase of work. And this includes identifying technical solutions and external providers to support the shift to the target state, along with the costs associated with this transition. We expect this next phase of work to be completed in advance of our full year results announcing June '26, followed by implementation commencing early in FY '27. I'll now pass you back over to Nick to cover our outlook.

[Nicholas Wiles, executive]

Thanks, Rob. So turning to our outlook for the year. After a resilient first half performance and despite the impact of the 2 specific challenges that I've already described, the Board remains confident in both delivering further progress in the current year and achieving our medium-term financial goals. We're executing our key projects well, and we do expect these to have a meaningful impact on our long-term performance. In a number of areas, our focus has already shifted to coordinating plans to support the accelerated consumer adoption of these projects, and there's more to come in this area.

Look, the current trading environment is not an easy one. Consumer confidence is weak and household budgets remain tight. However, as we enter our most important seasonal trading period for a number of our businesses, we are confident in the plans we've made to execute well and our early signs continue to be encouraging. We remain confident in the growth opportunities we have as a business and that we have a strong platform from which to deliver continued strong returns for shareholders.

As we said already in the current year, we're on course to generate returns to shareholders of over GBP 90 million. through a combination of our ordinary dividend, special dividend and share buyback program. And today, we've announced -- declared an interim dividend of 19.8p, which is an increase of 2.1%, and which is consistent with our dividend policy. And with that, we're very happy to answer questions.

[Operator]

[Operator Instructions] The first question comes from Michael Donnelly from Investec.

[Michael Donnelly, analyst]

Can you hear me okay?

[Nicholas Wiles, executive]

Yes.

[Michael Donnelly, analyst]

A couple for me, please. First of all, can you tell us a little bit more about what Nile are likely to be doing in the next phase. So that's what the expected costs. You've disclosed the costs in the first half, which is really useful. But the cost of benefits and the cost savings that are likely to come through from their work in '27, '28?

And then secondly, thanks for the update on RM and IDS. Is it possible to talk a bit more granularly about the trajectory of RM volumes since the IDS investment? Or should we be modeling -- maybe forget second half this year and model a ramp-up more into '26 rather than seeing the benefits -- the volume benefits of the investment come through in the second half?

[Nicholas Wiles, executive]

Yes. Thanks, Michael. Rob, why don't you tackle Nile first, that would be helpful.

[Rob Harding, executive]

Yes. No, as I said, where we are today for each of those 3 key processes that I mentioned on the call, we've got a clear view of what the desired end state looks like and the benefits, and we've talked about 2 million plus worth of opportunities in terms of upside there. The next phase is really about going through the kind of selection process, external suppliers, vendors, et cetera, that will support that shift to that desired future state and the costs associated with that transition.

And as a part of that, obviously, we'll be making sure that the business case stacks up, so we make sure that the size of the prize is obviously exceeding the investment required. So really, Michael, the next phase of this is all about identifying external providers technology to help us to move that desired future state and making sure the business case stacks up. And that will take us probably to the end of this financial year, and therefore, we should be getting ready to execute and implement in early of next year. But we're still going through that kind of selection of suppliers and business case development at this stage.

[Nicholas Wiles, executive]

And then just on the second of your questions, Mike. I mean I think the starting point for the Royal Mail investment, which I think we were clear about when we made the announcement on the 30th of September was that a combination of the special dividend, share consolidation and the ramp-up of volume would result actually in the transaction as a whole being earnings enhancing.

But I think specific to your point around the ramp-up of volume, I think as we said already, we're growing the network and the rebranding of the network as quickly as we can. We're working really hard with Royal Mail to move as much volume into the network as quickly as possible. We're seeing that ramp-up take shape, particularly since the autumn. And I think the peak period is an important time to see that move further. But these things do take time. And I think we'll see a much more meaningful contribution from the Royal Mail volume when we get into the next financial year. So I think your core sort of premise that we will see a more meaningful impact from Royal Mail volume in the Collect+/Royal Mail Shop network next year. But I mean, the ramp-up is clearly meaningful, not least given the size of Royal Mail in terms of a carrier in the U.K. parcels market.

[Operator]

The next question comes from Joe Brent from Panmure Liberum.

[Joe Brent, analyst]

Three questions, if I may. Firstly, there's obviously lots to talk about, but I don't think you mentioned Lloyds Cardnet. Could you give us an update there? Secondly, in e-commerce, could you remind us where we are with the Chinese e-tailers? And thirdly, just following up on Michael's point on automation. It feels like the GBP 2 million will start to impact in FY '27, is that right? And could you maybe give us some indication of the scale of future savings there?

[Nicholas Wiles, executive]

Rob, do you want to start with the automation point, that would be great.

[Rob Harding, executive]

Yes. I think we said that we've got line of sight to at least GBP 2 million here. And I think the question becomes how quickly can we execute and what's the cost to execute. And I think really looking at the full year to give that clear view, I mean, I am hoping to accelerate as much of that benefit as possible in FY '27, [indiscernible] et cetera, we can't pinpoint with accuracy. So I think probably give us until the full year results to get real clarity in terms of if we're going to drop some benefits in, let's be really clear once we've gone through that selection process with external providers, the vendor solutions and gone through that business case development. But I say I'm anxious to accelerate, get any quick wins as possible into FY '27 and drive costs down.

[Joe Brent, analyst]

Would the cost of that be treated as non-underlying or be taken above the line?

[Rob Harding, executive]

Yes. We've taken those to exceptionals. So within the kind of restructuring that I mentioned in the exceptionals for the first half, we had about GBP 500,000, GBP 600,000. So that's where we'll be treating the costs going forward.

[Nicholas Wiles, executive]

Cards business, I think, look, we've seen a small fall in the total size of the estate. And I don't think there's a particular reason for that. I think, look, it remains a competitive market. I think our card proposition, and I include Lloyd's Cardnet alongside the EVO proposition as part of that, I think it's stronger than it's ever been. And I think it's really competitive now in the marketplace. I think that our emphasis is increasingly switching from the number of retailers and the number of underlying merchants that we have to actually the quality of that business and importantly actually sort of the revenue that it generates.

The acquiring business in the first half was down year-on-year by about 8% in terms of processed volume. And I think that reflects a combination of things, including, I think, a tough retail environment, particularly for our convenience sector. And I think that's probably been our weakest sector actually across our card book, and that's probably where it's been most competitive. I think as we look into the second half, I think we're expecting certainly our sales performance in the second half to improve.

I think we've got a really strong proposition, as I said on the street. Our telesales team are performing very well. Our field team are certainly performing well. And I think we've had a number of new additions, new processes there, which I think will really deliver in the second half. So I feel quietly confident that we will continue to make progress in what clearly as we know very well, is a very competitive market. But ultimately, we need higher levels of consumer spend, and we haven't seen that in our estate in the first half.

On the Chinese, look, it's a great question. And I think that the Chinese have been relatively slow to create out-of-home choice at the customer checkout for customers using the Chinese marketplaces. They have adopted the out-of-home for returns but we haven't seen them sort of adopt out-of-home at the pace that, for example, we've seen Vinted adopt out-of-home for their principal fulfillment for their own marketplace.

We continue to work with the Chinese. And by that, I mean, sort of Shein, TikTok, Temu and ultimately, it's all down to price. And their conversations we're having directly with our carrier partners because we all want to work to move volume from to-door into the out-of-home network channels, whether that's working with InPost to get the choice of locker and PUDO or that's working with Royal Mail to offer the choice of actually the Royal Mail Shops. So I think there's more work to do there. There's clearly a major opportunity because cross-border volume is going to be increasingly important to us, but we haven't yet seen that adoption in the consumer checkout in the way that we need. And that's going to be an opportunity for us into the next year.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Nick Wiles for any closing remarks.

[Nicholas Wiles, executive]

Look, thank you. Thank you very much, everybody, for joining us this morning. As I say, it's been a robust performance in the first half, some major opportunities to unfold during the second half, and we look forward to updating you later in the year. So thank you. Have a good day.