ASX Limited (ASX) Earnings Call Transcript & Summary

Good morning, and welcome to ASX' Financial Results Briefing for the First Half of the Financial Year ending 30th of June 2024. Thank you for taking part in this virtual presentation. I hope you're well, wherever you are joining us. My name is Helen Lofthouse, and I'm the Managing Director and CEO of ASX. I'm pleased to be presenting these results today, along with ASX's Chief Financial Officer, Andrew Tobin. I'd like to acknowledge the Gadigal people of the Eora Nation, who are the traditional custodians of the country where I'm speaking today. We recognize their continuing connection to the land and waters, and we thank them for protecting this coastline and its ecosystems. We pay our respects to elders past and present, and we extend that respect to any First Nations people present today. Today's presentation will cover 4 areas, and then Andrew and I will take your questions. So I'll begin with an overview of the results for the first half of FY '24 and our focus areas. And Andrew will provide a more detailed view of our financial performance, including each line of business. And I'll then update you on how we're tracking on our strategy, and I'll provide some observations on the market outlook and its implications for ASX, and we'll finish with Q&A. I cover 4 topics in the first part of today's presentation: some highlights and commentary on our results; an update on our 2 near-term focus areas of regulatory commitments and technology modernization; and I'll provide some detail on the business rationalization actions, which we've been taking. Turning now to our financial highlights. ASX demonstrated solid revenue growth in the first half of FY '24, despite challenging markets. We delivered $511.7 million of revenue, which is a record for the first half of the financial year. Our diversified business model supported the revenue performance with growth in Markets and Technology and Data, offset by a decline in our Listings and Securities and Payments businesses. Total expenses were up by 26.9%, compared to the first half of FY '23 and 10% compared to the second half of FY '23. It's important to note that the significant increase in investment in our key focus areas began after the first half of FY '23, and therefore, the second half of FY '23 is the better comparable. The first half of FY '24 figure also includes several items that are one-off in nature, which Andrew will explain in more detail shortly. Clearly, this level of growth is not sustainable and reflects the critical demands placed upon ASX in the past year, and the investment required to support our long-term sustainability. Our FY '24 total expenses growth guidance is unchanged, and we have a business rationalization program underway, which is expected to reduce our total expenses growth rate in FY '25, which I'll talk about shortly. Underlying net profit after tax decreased by 7.8% to $230.5 million. Statutory NPAT increased substantially given the prior corresponding period included the loss from the derecognition of the CHESS replacement project. ASX's dividend payout ratio is 85% of underlying NPAT, which is in the middle of our range, with the Board declaring a fully franked interim dividend of 101.2 cents per share. The Board has also approved the reactivation of our dividend reinvestment plan for the interim dividend, with no discount applied to the DRP price. The next series of slides will provide an update on our near-term focus areas of regulatory commitments and technology modernization. Our investment in these areas is crucial to support the long-term sustainability of ASX and to increase shareholder value. Our licences are some of our most important assets. They are the foundation of ASX and they drive our revenue and shareholder value. We've made significant progress on our regulatory commitments during the past year, delivering a series of important reports and initiatives that provide additional transparency to our regulatory agencies and other stakeholders on how we're changing and improving. The implementation of the recommendations covered in the reports is also valuable as it underpins further improvement in our governance, stakeholder engagement and delivery capability. Increased stakeholder engagement has formed part of our new strategy in the past year and we're starting to see how our actions in various stakeholder forums are supporting a positive shift in industry sentiment. And these forums are, not only key to delivering projects such as CHESS replacement, but they also allow for better customer relationships and opportunities for growth. We're also focused on our delivery capability and we're implementing recommendations from the 3 special reports to ASIC, which we published last year. This will benefit the delivery of our current and upcoming projects, including in technology modernization, as well as business as usual activities. We currently have other regulatory commitments that are ongoing, including work underway to address the recommendations in the RBA's annual FSS assessment. The ASIC investigation into oversight, statements and disclosures around the CHESS replacement project remains ongoing and we are cooperating fully. We're providing input on 2 key areas of legislative reform as well. Firstly, the implementation of the competition in clearing and settlement services legislation, which was introduced last year. As we indicated previously, ASX supports the policy intent of this legislation, and we're currently preparing a submission on the scope of services to which the legislation will apply. Secondly, the financial market infrastructure regulatory reforms. Among other things, the proposed reforms would provide powers for the RBA to step in and resolve a crisis at a domestic clearing or settlement facility to ensure the continuity of critical clearing or settlement functions and to protect financial system stability in Australia. We've recently made a submission, which is supportive of the reform package and its objectives, and suggests some modifications to address some practical issues and risks and ensure that the reforms operate as intended. Along with our licenses, technology underpins ASX' businesses and it drives revenue and shareholder value. And we're continuing to invest in modernizing our technology to ensure that it's sustainable in the long term. As you can see from our enterprise technology roadmap, we're making good progress with the 3 major projects underway. The first major project is CHESS replacement, I'll provide an update on that shortly. The derivatives clearing project includes an upgrade to our OTC clearing system initially before the replacement of the Futures clearing system. The third major project is the upgrade of the trading applications and network. All of these projects involve significant stakeholder consultation and we're developing a coordinated industry implementation plan to manage the change load. The execution of these projects is enabled by investment in our technology platforms. We're building modern technologies and practices, which should allow us to increase efficiency, quality and consistency between business lines, to leverage automation and to improve the speed of delivery. As I mentioned earlier, we've also been investing in our delivery capability. And this has included uplifts in integrated planning, quality engineering and testing, as well as skills and training. And these steps will help us to simplify and standardize our technology and take a strategic approach to technology solutions and project delivery. Replacing CHESS is expected to provide substantial benefits for the Australian market and ASX. In November last year, we announced the selection of the TCS BaNCS for Market Infrastructure product as the solution for the CHESS replacement project. This product is operated in multiple geographies by a range of major financial service providers, including exchanges. And it's a good fit for the Australian market, specifically offering support for direct holding structures, as it's already operating a similar model in Finland. This significantly reduces the amount of customization required. Some of the other key benefits include, improved scalability to support future market growth as needed, and we're taking a staged implementation approach, which should reduce delivery risk compared to a single cut-over approach and also help stakeholders better manage their change load. And there's the potential for reuse of industry investments in workflow development and global messaging standards, subject to consultation on the scope and detailed design. Interoperability, which is facilitated by a modular architecture. This will enable unaffiliated market operators, clearing and settlement facilities and other providers to access and interoperate with the individual clearing, settlement and sub-register services using standardized interfaces. The TCS product will also support innovation by offering connectivity with alternate and emerging technologies. And this will create opportunities for new services to be introduced by ASX or by other providers as driven by market demand. As I mentioned earlier, stakeholder engagement has been a key area of uplift for ASX. We've listened to our stakeholders and we propose to deliver the project in 2 releases, which is expected to reduce overall delivery risk and help manage the change load on industry stakeholders. Release 1 will be the clearing service with an indicative delivery timeframe of 2026 and an estimated cost of between $105 million and $125 million. Release 2 will be the settlement and sub-register services, and the scenarios being considered estimate completion in 2028 or 2029. Now that we have announced the CHESS replacement solution design, industry consultation is underway to finalize the scope and timing of the releases and develop the industry work plan. This includes industry evaluation of a potential move to T+1 settlement. We expect to determine and communicate the timeline and estimated cost for Release 2 in the December quarter of 2024 following industry consultation. So we've made good headway in our key focus areas and we need to continue this momentum. We're also focusing on building capabilities, and on opportunities to deliver what matters to our customers. And to do this well, we will need to make some difficult decisions to ensure we are prioritizing the most strategic and efficient outcomes for the group while continuing our cost-conscious approach. We've had to manage an elevated level of expenditure given the heightened regulatory demands and the velocity of technology change and delivery in the past year but we're highly conscious that the current level of total expenses growth is not sustainable. We've sought to address this strategically through a program of business rationalization that aims to sharply prioritize activities, simplify processes, reduce duplication and optimize our workforce. And last week, we initiated a targeted restructure that better aligns our people to our strategy. For example, in our Technology division, our Chief Information Officer will have centralized oversight and dedicated resources to deliver ASX' technology modernization roadmap. This restructure is balanced with the need to prioritize investment in our key focus areas of regulatory commitments and technology modernization and we still expect to add people to support this. Once this targeted restructure and prioritization process is complete, it is expected to result in a net non-project-related head count reduction of approximately 3% and an estimated annual saving of approximately $11 million in operating expenses. And this demonstrates that we're prepared to make difficult decisions and be disciplined in our approach to prioritization and efficiency to deliver on our strategy and to manage operating expenses. At our Investor Day last year, we'd flagged that we would be undertaking expense management initiatives to address expense growth and we've made progress on tightening our procurement protocols and optimizing our workforce by reducing the use of consultants. We've also previously flagged a review of our equity portfolio. You've already seen us take action in this area, such as the sale of our stake in Yieldbroker towards the end of last year. And we're exploring options regarding our equity stake in Digital Asset following our decision to use a product-based solution for CHESS replacement. Regarding Sympli, we continue to see e-conveyancing as an attractive market and we're enthusiastic about the opportunity to bring an efficient and customer service-focused competitor to that market. We now have additional clarity over the likely timing for industry readiness. And this is following last month's publication by the National Conveyancing Council requiring readiness for interoperability for key registry instruments by the 31st of December 2025. This will be subject to final approvals and any extensions that may be granted. Sympli's cost base has been reshaped to reflect the timing of this requirement and the team continue to progress its customer offering. These actions demonstrate that we're making active choices to manage our equity portfolio in a disciplined way. And all of these actions will create a more sustainable expense base and give us the foundation for growth as we move towards the next horizon of our strategy. I'll now hand over to Andrew to talk through the detailed financials for our first half results.

Thanks very much, Helen, and good morning, everyone. As Helen has already mentioned, our first half '24 financial results demonstrate the resilience of ASX' diversified business model, despite challenging markets over the half. The underlying and statutory profit for first half '24 was $230.5 million with the underlying profit after tax down 7.8% compared to 1H '23. However, ASX's statutory profit after tax was significantly higher given the comparative period included the derecognition charge of the capitalized costs associated with the CHESS replacement project. Operating revenue for 1H '24 of $511.7 million, increased by 2.4% compared to pcp and was a record for the first half of the financial year. Total expenses for the period were $220.7 million, up 26.9% on pcp or 10% compared to the second half '23 period and I will speak further on this expense profile and our business rationalization actions shortly. We saw a strong rebound in net interest income in the half, up 20.9% to $39.4 million, supported by further RBA cash rate increases on ASX's cash balance, offset by lower collateral interest due to the decrease in participant collateral balances. The increase in expenses, relative to the revenue outcome, resulted in our EBIT margin falling from 65.2% in 1H '23 to 56.9% this period. And the 7.8% decline in earnings per share to 119 cents is consistent with the trend in underlying net profit after tax. Reflecting this underlying earnings result and a dividend payout ratio of 85%, being the midpoint of the current dividend policy range, the Board has determined an interim dividend of 101.2 cents per share. Underlying return on equity generated in the half was 12.6% compared to 13.4% in the pcp with the decline reflecting the fall in underlying profit in the half. Now, turning to the business line revenue outcomes. Total Listings revenue was 4.4% lower than pcp at $104.9 million. The annual listing fees, which are set based on each listed company's market capitalization, declined by 0.7% to $53.5 million and this makes up nearly half of the total Listings revenue. As noted earlier, the continued uncertain macro environment has contributed to the lower initial and secondary capital raising activity. There were 28 new listings, with a quoted market cap of $33.2 billion in the half compared to a market cap of $2 billion from 40 new listings in 1H '23. Secondary market capital raised fell by 25.3% with $22.5 billion raised this half compared to $30.2 billion in the pcp. As you may be aware, we recognize the revenue derived from initial and secondary listings over 5 years and 3 years, respectively, and so the revenue outcomes reported mainly reflect prior period activity. And this is shown in the bar charts on the slide. Therefore, initial listing revenue recognized in 1H '24 was $10.3 million, down 12.7%, and the secondary revenue was $37 million, down 6.3%. Moving now to the Markets business. The Markets business generated revenue of $153.2 million, up 10.4% compared to 1H '23. Futures and OTC revenue of $114.4 million was up 16.6% on 1H '23, supported by a 17.6% increase in total Futures volumes driven by interest rate volatility in the period. Strong growth was observed across all major products including 90-day bank bill futures, and 3- and 10-year treasury bond futures with traded volumes up 34%, 19% and 13%, respectively. However, value cleared through our OTC clearing service was down 16% compared to 1H '23. Cash market trading revenue was $30 million, down 7.4% on pcp, and that was impacted by overall ASX on-market traded value of $660 billion in the half compared to $733 billion in 1H '23. As outlined in the chart on the lower right of the slide, the majority of this decline came from Open Trading value with the Auctions and Centre Point values broadly consistent with the pcp. ASX's share of on-market trading averaged 88.4% in the half, which is marginally lower than the 88.9% share generated in the pcp. With increased equity market volatility, we also saw higher single stock and index option volumes leading to a 6% increase in equity options revenue to $8.8 million. Now, looking at the Technology and Data. The Tech and Data business had another strong period with total revenue of $124.6 million, increasing by 6% compared to 1H '23. Information Services generated revenue of $76 million, up 8%, supported by strong growth in demand for equities and futures data, as well as benchmark and index volumes. Technical Services was also up, with revenue coming in at $48.6 million, 3.2% more than 1H '23. Growth in customer infrastructure and connections at ASX's data center drove this revenue increase with the number of customer cabinets remaining steady at 388. The number of service connections between data center customers increased by 4.9% to 1,378 connections by the end of the period. And finally, moving onto our fourth business segment, Securities and Payments. The Securities and Payments business generated revenue of $129 million, down 3.4% compared to 1H '23. Issuer Services revenue was $29.6 million, down 9.5%, impacted by a decline in average HIN volumes, resulting in lower subscription fee revenue. Subdued levels of trading activity and a reduced number of new lPOs also adversely impacted revenue in the period. This was partly offset by an increase in the use of the primary market facilitation service in the half. Equity post-trade services includes cash market clearing and settlement activities. And revenue from these services declined by 7.5% to $64.3 million compared to 1H '23. The total on-market value cleared for the half was $699 billion compared to $773 billion in 1H '23 and total settlement message volumes related to the settlement, transfer and conversion of securities, fell by 6.7% in the period, primarily due to lower levels of equity market trading. Austraclear generated revenue of $35.1 million, up 12.1% compared to the prior comparative period. Austraclear saw a 5.4% growth in holding balances to just over $3.1 billion at 31 December and a 2% increase in transaction volume. And the Austraclear revenue also includes the net operating contribution from Sympli, ASX's property settlement joint venture. Sympli continued to meet significant development and operational milestones in the period while also reducing its cost base in the half. ASX's share of Sympli's operating loss was $5.6 million compared to a loss of $6.8 million in 1H '23, representing a 17.6% improvement in the operating result. Turning now to expenses. Total expenses for the half were $220.7 million, up 26.9% on pcp or 10% compared to 2H '23. This growth reflects the different demands on ASX during the period given the significant increase in expenditure incurred to meet the group's regulatory commitments and also technology modernization roadmap, which commenced after 1H '23. Expenses in the half also reflect certain regulatory, compliance costs that are one-off in nature. And like many other companies, ASX has also observed inflationary pressures impacting our expense line. The largest growth in expenses was in relation to staff where expenses were up by $28.3 million or 29.3% with permanent and contractor head count increasing from 945 in 1H '23 to 1,140 in 1H '24. Approximately 25% of this head count increase was allocated to projects which are part of our CapEx spend for the period. We also saw a significant increase in administration expenses, the ASIC supervisory levy and incurred $7.3 million of regulatory costs, which are one-off in nature, mainly comprising of professional legal fees and audit fees associated with the preparation of special reports requested by ASIC. Reducing our total expense growth rate is a key focus as we recognize that the current growth rate is not sustainable into the future. As Helen mentioned, last week the group initiated a targeted restructure to better align ASX' people with our strategy. The impact is estimated to be around 3% of our non-project workforce with several divisions undertaking a reorganization of team structures. Following this action, ASX expects to achieve annualized savings of approximately $11 million. We expect the total expenses figure in the second half of FY '24 to be lower than the first half as we start to realize the benefits of our business rationalization actions. And we expect the one-off costs that I referenced earlier to reduce in the second half. Other ways that we intend to mitigate the expense growth rate beyond FY '24 by continuing the review of our workforce mix across consultant, contractor and permanent resources, leveraging process simplification and automation and pursuing strategic procurement opportunities. We expect that these initiatives will lead to a reduction in the total expenses growth rate in FY '25 compared to FY '24 guidance, and we will provide FY '25 total expenses growth guidance at our Investor Forum in June. Net interest income consists of net interest earned on ASX's cash balances and net interest earned from the collateral balances lodged by participants. Total net interest income for the half was $39.4 million, representing an increase of $6.8 million, or 20.9%, compared to pcp. The group net interest income of $22.2 million was up 82% and was driven by higher investment returns due to the higher RBA target cash rate during the period. Net interest earned on the collateral balances was $17.2 million, down 15.7% on 1H '23. The average collateral balance decreased from $12.1 billion in 1H '23 to $10.4 billion in 1H '24 and the investment spread on the total collateral balances remained consistent at 10 basis points, given the significant levels of excess capital in the financial system. The decline in collateral balances reflected the reduction in market volatility and therefore, participant margin requirements during the half. The average participant balances, subject to risk management or interest haircuts, declined from $8 billion in 1H '23 to $6.7 billion this half, and this was the key driver of the overall fall in net interest earned on the collateral balances. The excess cash in the financial system is expected to persist leading to investment spreads on collateral balances remaining around this current level for at least the next 12 months. ASX's balance sheet continues to be strong and positioned conservatively, with the S&P long-term rating of AA- reconfirmed during the half, and a nominal amount of drawn debt for working capital purposes. Of note, amounts owing to participants fell by approximately $1.5 billion over the half year, reflecting a decrease in collateral lodged by participants. This decline also drives the level of cash and other financial assets held at balance date. From a shareholder return perspective, underlying return on equity in the half was 12.6%, down 79 basis points compared to 1H '23, reflecting the lower reported underlying profit in the half. And we expect the ROE to move back into our medium-term target range of between 13% and 14.5% as the future total expenses growth rate moderates. And, as I mentioned earlier, the Board has determined an interim fully franked dividend of 101.2 cents per share or 85% of underlying earnings per share, reflecting the midpoint of the revised dividend policy to payout 80% to 90% of underlying NPAT. The 1H '23 dividend reflects the previous dividend payout policy of 90%. The Board also approved the reactivation of the dividend reinvestment plan for the interim dividend, and no discount will be applied to the DRP share price. In terms of capital management, we also plan to issue a corporate bond to raise between $200 million and $300 million to support the medium-term CapEx program that underpins our technology modernization plans. We plan to issue this bond in the second half of FY '24, subject to market conditions. Our CapEx for 1H '24 was $49.9 million compared to $56.6 million in 1H '23 with $13.9 million of this spend allocated to the CHESS replacement project. Other key project spend in the half includes the derivatives clearing and trading projects. Given our strategic focus on technology modernization and the ongoing need to replace the CHESS systems alongside other major projects, we expect the CapEx spend to increase in 2H '24 noting that the CHESS replacement project is now moving into the execution and delivery phase. CapEx guidance for FY '24 is unchanged with a range of between $110 million and $140 million and we plan to provide FY '25 CapEx guidance at our Investor Forum in June. In summary, the 1H '24 result reflects the strength of ASX' diversified business as demonstrated by posting a record first half revenue outcome. We've been operating with an elevated expense base reflective of the current key focus areas and priorities. And we are focused on reducing our total expenses growth rate in FY '25, relative to FY '24, with a number of actions underway to achieve this. And with that, I will now hand back to Helen. Thank you.

Thanks, Andrew. Our vision is to be the market's choice, inspiring confidence and trust. And one of the ways that we'll achieve this is by having great fundamentals, which is a key pillar in our 5-year strategy. I talked earlier about how our licenses and technology are fundamental to our business and how we're making good progress in our regulatory commitments and technology modernization focus areas. People are the other fundamental part of our business. There has been significant change at the executive level over the past 12 months with Jane Franks also joining as our Chief People Officer in November. With a strong team now established, we remain focused on building a vibrant culture where our people are empowered with clear accountability to deliver great outcomes for our markets. I've spoken today about the investment required to protect our core businesses but we haven't forgotten about growth. You've heard me talk consistently about how I am a believer in customer-driven growth. And we're listening to our customers to understand their emerging needs. For example, in our Markets business, we intend to expand our core electricity derivatives offering to include gas and carbon futures as part of an energy transition ecosystem. And we recently announced that we're working with the Clean Energy Regulator to undertake exploratory work on developing the Australian Carbon Exchange. And this has the potential to broaden our offering further by providing an exchange where Australian carbon credit units can be traded, cleared and settled. We look forward to talking to you more about the growth strategies for each of our businesses at the Investor Forum in June. We have a portfolio of high-quality businesses with diverse revenue streams which drive our strong revenue performance throughout market cycles. We have unique strengths that are not easy to replicate and we're privileged to have leading positions in a number of markets. We bring local, regional and global customers together in fair and transparent markets, which provide deep liquidity and access to a wide range of products and services. And we play a crucial role in the Australian economy, operating critical market infrastructure in a highly regulated environment. ASX also benefits from clear structural tailwinds. Australia has the fifth largest and fastest-growing pension system in the world, which is an important part of what makes ASX an attractive listing venue compared to global peers. And also, as a data-rich environment, we are always looking at new ways that we can leverage the ongoing growth in demand for data. And I already mentioned our intention to grow our energy transition ecosystem in our Markets business as one of a range of potential decarbonization opportunities that ASX is focused on. So, turning to outlook. Many of the trends seen during FY '23 continued into the first half of FY '24. Cash market trading activity remains subdued, which is also a trend we're seeing at our regional peers. While average daily value is down in the half compared to the prior corresponding period, it is worth noting that it's up 4.9% on the pre-COVID level. Easing inflation and growing confidence around the interest rate peak should see a return to growth in cash market volumes. However, heightened geopolitical tension remains, creating some uncertainty. An improvement in these market elements, though, would be expected to drive increased activity in the IPO market as well. And despite a quiet start to FY '24, there remains a solid pipeline of entities looking to list on ASX as conditions improve. Also, dual listings provide Australian investors with the ability to trade quality, large companies in the local currency and time zone, with Newmont, Arcadium, Light & Wonder and Capstone Copper being recent examples. These companies also benefit from access to Australia's deep capital pool, index inclusion and local sector knowledge. And ASX then benefits from listing fees, trading, clearing and settlement revenue. It's also worth noting that net new capital quoted has been positive over the past 5 years on our equity market, which underscores the ongoing appetite from corporates and investors for access to public markets. Our Futures business continues to be a beneficiary of current market conditions. Rates futures are performing particularly strongly, with calendar year 2023 being a record year for 90-day bank bill futures trading. And we're also starting to see activity move further out along the curve as the market takes a firmer view on peak interest rates. In terms of guidance, FY '24 total expenses growth is expected to remain between our previously stated range of 12% to 15%. We have a business rationalization program underway to bring this growth rate down in FY '25. Our capital expenditure guidance for FY '24 of between $110 million and $140 million is also unchanged and primarily supports our technology modernization program. We have the capital management flexibility in place to support this investment, including the proposed launch of a corporate bond of between $200 million and $300 million in the second half of FY '24, subject to market conditions. And we remain focused on underlying return on equity as a key performance metric driving the organization, which we expect to move back into our medium-term target range of 13% to 14.5% as the total expenses growth rate moderates. To conclude, the first half of FY '24 delivered solid revenue growth in challenging markets, which was offset by growth in total expenses. We're continuing to invest and we're making good progress in our near-term focus areas of regulatory commitments and technology modernization to protect the long-term sustainability of ASX and to drive shareholder value. And we're focused on reducing our total expenses growth rate in FY '25, relative to FY '24, with actions underway. Thank you, and I now invite questions.

[Operator Instructions] Your first question comes from Ed Henning with CLSA.

Just on costs, and then some competition, but firstly on costs, looking at the banks for a very long time, regulatory costs such as the gift that keeps on giving. Why are you so confident that they're going to drop away? And if you think about your plans, at least for next year, have you got assuming regulatory costs go up at all? Or are they just dropping out? If you can give us any insight on that as the first one, please?

Sure. Ed, so I'd say, it's not so much that we are confident about regulatory costs dropping away. I agree that the regulatory environment has changed and the cost associated with that. As what we've articulated today is more about the breakdown of some of the costs that we've seen in the first half and just really drawn out which components of those specifically are one-off costs. And that, combined with our business rationalization work, is really what's aiming at bringing our growth rate down.

Okay. And then if I just think about the guidance you've given today, if we take -- if we annualize what you're going to print in the second half, is that a good starting point? And then take off the $11 million and then, obviously, add some investment and add some inflation onto thinking about our FY '25 number? Or is there any reason why we shouldn't annualize the second half number as a run rate?

Andrew, do you want to take it?

Yes, Ed, I might grab that question. We do need to get through our business planning exercise over the next couple of months. And as we see today, we'll come out with sort of FY '25 expense guidance at -- in June. But these actions that we've taken does provide us with confidence around that sort of growth rate going into FY '25. So some of the comments you've made don't appear unreasonable, but we do need to get through our sort of business planning process, and we'll come back to the market in June.

Okay. No worries. And just one last one. You talked about the competition and clearing settlement legislation. When do you anticipate that to finalize?

Well, the process at the moment is about specifying which particular services that will apply to. And then there's a process of regulators going through defining the detailed regulations around that. So, I don't have a view at this stage of what that timeline would be. It's certainly in progress, but I would expect it will take a while for the regulations to be written up the consultation process around those to happen, and then presumably some implementation time period. So those are the inputs. And then your guess is probably as good as mine on what that adds up to in terms of a final timeline.

So even when you drop your first clearing point in 2026, the regulation may or may not be there for potential interoperability. Is that how I should read it?

Well, I don't know, because I don't know the timeline on the regulation, so I can't really comment on that. I guess, what I would comment on, though, is bear in mind that we already support interoperability, for example, with unaffiliated market operators, with share registries, obviously, interacting with the subregister. So interoperability isn't a completely brand-new concept. What we're trying to make sure is that, as we build the new solution, we're absolutely supporting interoperability in a consistent, standardized way with each separate element of the clearing, settlement and subregister modules. And that's something that we're getting on and doing anyway.

Your next question comes from Simon Fitzgerald with Jefferies.

Just on the head count to 1,140. I was just hoping you might be able to break it down a little bit, Helen, in terms of how many of those staff, in terms of the increase from June, represent people supporting the licenses versus development staff?

Andrew, do you want to take that?

Yes. So, I made a comment around the sort of shift over the last 12 months or so, and about 25% of that increase related to CapEx spend. So projects in the main that we've got going on across the organization, they were the head count there that sort of came in over that 12-month period.

Excellent. Okay. And then with -- how should we think about how that will look towards the end of the calendar year, just given that you said 3% reduction? And I know that, that is the non-project related staff numbers. But any sort of thoughts on how that will look towards the end of the year?

Yes, Simon, I would sort of encourage you to think about that in terms of the overall sort of expense guidance that we've provided rather than a specific head count number at this point in time, and that's our key focus. There are a number of different expense categories that we think about. And so, remaining within that guidance range is what we've guided to the market at this point in time, 12% to 15% for the full year. And that implies -- and we've called out specifically today a reduction in expenses in the second half.

Okay. That's fair. Then just on maybe the net interest on collateral balances. I can see that the -- and as you mentioned, Andrew, that the biggest driver of that is actually the average collateral balances that have come back down. But even at sort of 10 basis points in terms of the average spread, it really does look like that's going to be a difficult line to make that much out of just for the moment.

Yes, and I might comment on that one, Simon. The -- I think firstly, bear in mind, the collateral balances came down significantly because of a change in margin requirements. So actually, that's just the margin levels on particular positions declining as margin models reflect what's appropriate for the conditions. So that's the reason for this significant change towards the beginning of this year. What we have seen is, steady growth in open interest in derivatives balances. But the sort of change down in terms of margin requirements was the biggest shift. So the steady growth that we're seeing as a result of increased open interest is more of a gradual build back in those balances. So, I guess, that's the first thing I would say, that those balances, the open interest side of things, is moving positively. And I would hope that we would continue to see that grow in the future. I think the other side of that equation, as you say, is the spread that we generate on those balances, and that's remained at 10 basis points. And you can see from the guidance that Andrew provided is, we are expecting that to remain for certainly the next 12 months and perhaps more. And I know we've talked previously about the scale of cash in the system and it's quite easy to see that if you have a look at the ESA accounts at the RBA and the level of balances there, which I think are still around $300 billion.

$350 billion at the end of January, I think is the number.

Still significant?

Still significant. And so, that -- I think that the take -- some of that cash coming out of the system and therefore, the kind of spreads on short-dated -- on cash and short-dated instruments, those are going to change more slowly and I think it will take some time for that situation to rebalance.

Just one thing to note, there also the TFF balance, Simon, is in that total balance of $350 billion. And I think just over $100 billion is due to mature around about July this year. So we need to look beyond that as well. But it's still a substantial balance of cash in the system.

And then just 1 final question. Is it -- can you just remind me if there were any new pricing structures that we should be aware of that will be implemented in calendar year 2024, just across all the various products?

Simon, maybe we can come back to you on that one because there are some areas where the price increases, if they apply, tend to kick into them in the 1st of January. But let us just come back and just check that one so we can give you that detail.

Your next question comes from Andrew Buncombe with Macquarie.

My questions have been answered. I'll let you keep moving.

Your next question comes from Kieren Chidgey with Jarden.

Likewise, most of mine have been asked, but I just wanted to clarify some of the commentary coming through around some of the cost initiatives you've already started undertaking. Maybe firstly, the mFund closure, is that fairly small in terms of potential benefit to the cost base? And is it largely headcount anyway that's sort of included in that $11 million number you've provided?

Yes, I'd say it's quite small. That's really about looking at the complexity of our business and figuring out which bits actually make sense, both for us and for the market in terms of complexity of options for the market. So rather than having a material cost associated, it's more of a general complexity reduction for everyone.

Sure. Yes. And so, when we sort of arrive at the Investor Forum in June, should we be expecting broader cost-out initiatives? Or is the message today that the head count reduction and the $11 million of savings is the -- essentially the lion's share of what's to come in terms of what you're planning on doing?

Look, at this stage, Kieren, our focus is really on embedding the changes that we've just made, and that will take a little while to sort of bed in and make sure that's really effective. Going forward, you can certainly expect to see us very carefully prioritizing to make sure that we're delivering the right outcomes for our strategy. But my hope will be we've got regular review processes, our quarterly business review processes. So, our aim will be that we will use those to keep on track and make sure we're directing investment to the right places on a regular basis.

Okay. But from the sounds of it, no sort of significant step change and above what you've announced today?

Sorry, was that a question?

Well, yes.

Yes. I think I've covered what I can, and -- but, I guess, I would just reiterate, you can certainly expect to see us focusing on prioritization, whether it will be necessary to do this kind of step change to achieve that, I'd hope that we would be able to do that in more of a regular BAU way.

Okay. And just another point of clarity on the regulatory cost number, yes, which was $13-odd million in second half of '23, $7 million this half. You do use the words one-off in the presentation talking about it. So is the expectation the second half '24 that, that number moves to 0? Or is it sort of -- is there an expectation we will still see some higher costs there through the back half for '24 and maybe into '25?

Yes, Kieren, I might grab that question. So we don't expect it to go to 0 in the second half, but we're expecting it to fall based on what we know at this point in time. Calling FY '25 is a bit too early to call it. And just a reminder of the things that have been in there, there's legal fees and there's also sort of assurance costs around those special reports. Now, we completed those 3 special reports last calendar year, so you wouldn't expect those costs to repeat, for example, in the second half of this year.

Your next question comes from Andrei Stadnik with Morgan Stanley.

I want to ask my first question, just around costs into the second half. I just want to check what kind of just the arithmetic around just how much work is required in the second half to hit guidance. Like, arithmetic suggests that the total costs need to be down about 5% in the second half versus the first half in order to actually come in at 15% growth or less for the year, right? And that's quite a big step down, especially considering D&A probably is not going to step up, might actually step up. So is that arithmetic broadly there? And so, then kind of walk you through the confidence that you can really pull back costs in the second half by 5% or more.

Andrei, yes, your arithmetic is correct, and we've called that out today, a fall in the second half expenses compared to the first half. There are a number of different lines that we think about it that gives us confidence and a number of actions that gives us confidence as well. So we've talked about the one-offs today, and I've just mentioned that around the regulatory cost line, but there are a number of other lines, admin went up in the sort of this half compared to the prior comparative period that we're not expecting to have the same level in those lines and staff that we've talked about as well. So there are a number of different lines that we think about. And it's based on the activities that we were sort of undertaking in that first half of this financial year. Those increased regulatory requirements and compliance requirements, we don't think will be repeated to the same extent in the second half.

And my second question, just around rate futures. So rate futures volumes have recovered very nicely. What's the latest you've seen on that? Like what feedback you're getting from the market? And apologies, it's been a very busy morning. But can you also talk a little bit about the price simple contract trends on rate futures?

So in terms of how the rate futures are performing, as we said, we've noted for a little while now that the short-term derivative futures have been performing very well. What's really nice to see from this result is actually you're seeing particularly the tenure futures recover more strongly than it has done for quite some time. And I think that reflects kind of a growing confidence about the overall shape of the interest curve and really is enabling people to more actively think about the whole curve. I don't have anything specifically on the contract pricing today, really, in terms of any new update there, I'm afraid. Or was your question more about the average contract fee and the mix there?

Yes, yes. So it's been a [ busy ] morning, so I have been a bit lazy here, but yes, what happened in this half year?

Got it. Let us check that one, Andrei, and maybe we'll loop back to you on that one once we've got a bit more detail.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. First, just on the ROE target, the 13% to 14.5%. I was led to believe that, that was sort of a target range and there would be corrective action taken if you reach the bottom end of that range. And you're now quite a bit below that range. I'm just wondering if there are levers that you can pull on the pricing side or anything else that will help raise that. And what timeframe do you think you'll actually need to get back into the bottom end of that range?

Look, I think my first comment would be, ROE is a really important overall performance metric for us and we're very focused on that. So, we absolutely do focus on that as to where we're going to. I might let Andrew just comment on the route back into that range.

Yes, Sid, it's all around the expense number really is the critical thing for us to think about first and foremost, and we've talked a lot about that this morning already. And so, if you think about where we're heading in the second half around our expense numbers, and also the comments that we've made around the growth rate into FY '25, that return is not too far away into that range, 13% to 14.5%.

Okay. Okay. Can I ask a question just around debt as well? I thought you were originally going to raise some debt in the first half, that's been delayed to the second half. Just keen to be -- keen to understand exactly what that's for? I mean, I know that you have dropped your payout ratio already. Just keen to clarify, is this -- I mean, is this just for CHESS replacement? On my calculations, you could probably fund it with a lower -- having your payout ratio at the low end. Just wondering, that's quite a large amount that you're raising to sort of set forth.

Yes, I might grab that question, Sid. And this commentary around this is consistent with our Investor Day last June, and it's sort of resetting capital management more broadly to give flexibility to the Board and management as we think about the future. And there are a number of actions that we proposed last June and we're sort of playing those out. I suppose one of those was resetting the dividend payout ratio to a range of 80% to 90%. And today, we've determined it of 85% payout ratio consideration for the DRP. And the Board has activated that DRP this time around and that will provide retained earnings and funding going forward as well. And the third element is introducing a corporate bond and some funding into the capital structure more broadly. As you would know, ASX is completely ungeared. We've got a AA- credit rating and we think we can optimize the capital structure with some corporate debt into the capital structure more broadly. So, a number of those things that we think about, as well as thinking about forward CapEx programs and demands on the business as well.

Then just a final question, just around D&A, that's still extremely low, well below CapEx. I was just wondering if you could give us some guidance around FY '25. Presumably you have some visibility now on that, Andrew.

Yes, Sid, we'll come back and provide further sort of guidance in June, as I mentioned, but I've mentioned previously on prior calls that we wouldn't expect a dramatic step up in D&A. It will be a gradual process over the next couple of years. A number of these projects that are underway are still in their build phase. And so, until they're put in use, we won't be starting to amortize that capitalized cost.

Your next question comes from Scott Russell with UBS.

Yes. Just a couple of questions from me, please. The first is just picking up on the costs, and you've announced a business rationalization. Helen, if I go back 6 months, we were talking about an expense management review underway to reduce the expense growth rate in FY '25. Can I confirm, is this announcement today around the rationalization? Is this that review complete? Or do you envisage that it will be more comprehensive by the time we're in June and the Investor Day?

Scott, our expense management review is a broader set of initiatives, some of which are ongoing. So we've been looking at things like procurement and how we manage those processes, looking for efficiencies and a number of different actions there, looking at the workforce mix, for example, between sort of consultants, contractors, and permanent employees. So there's a number of levers there that we have been working on through the half, and that's in addition to the specific targeted restructure that we announced today. So you can expect that, that focus on expense management and expense discipline will continue. The targeted restructure was a specific set of organizational changes, which was actually a mixture of some restructuring for efficiency and focus and strategic prioritization. And, obviously, there were some head count impacts coming out of that, too.

Okay. And a similar question, just given there's so much activity at the ASX at the moment with all the projects that are on at present, how much visibility do you actually have on your cost base at the moment, just in terms of timelines of projects, the ultimate need for consultants and personnel thinking out beyond even 6, 12 months?

I might turn that one to you, Andrew.

Yes, Scott, it's an ongoing process. We're thinking about long-term planning around some of these longer term projects. The CHESS program is a good example of that, and we've got long-term plans in place to think about that. And that was part of the announcement back in November in terms of thinking about strategic partners, Accenture in this case as the systems integrator to augment our resources that we have in the organization. So there's different ways that we're thinking about this, but we think about it both short-term, manage it on a monthly basis, and those reviews through the annual budget and business planning cycle, but also plan over the longer term. So we are looking at it from different angles. And we also think about that, obviously, from an OpEx perspective and a CapEx perspective and sort of those optimal resourcing mixes across both of those sort of spend streams, if you like.

Okay. And just another question around Sympli. You've announced that you'll maintain that investment. And I think you mentioned the justification being around a significant market opportunity you see there. Some people would say that, that marketplace for e-conveyancing is well and truly sewn up now. So I'd just be interested in any comments on a market entry strategy given it's going to cost. I think you're losing about $11 million per annum and you probably won't generate $1 of revenue for over 12 months.

Do you want to take that? So, no, that's okay. So on Sympli, we do continue to see that as an attractive opportunity. We're pretty enthusiastic about it. I think it's a sizable market. And yes, you're right, there's only one player in that market at the moment. But there's absolutely a recognition that competition is going to be a good thing for that market. And that's why both government and regulators have focused on that and introduced the interoperability reforms which I mentioned today. I think the other thing to bear in mind is that, we actually think that there is a real opportunity to deliver a product to that market which is -- which offers a much better customer experience and better integration with the broader conveyancing process. And that's something that I think we're well positioned to do along with our JV partner ATI.

Okay. I'll leave it there. Look forward to hearing more about it.

Your next question comes from Nigel Pittaway with Citi.

Just sorry if I missed it, but are there any costs associated with the $11 million of savings?

Nigel, I'm happy to grab that question. There are redundancy costs associated with that. So there's a small net cost that we'll incur in the second half, but that's all factored into our guidance for the full year and the second half expense number going down.

Okay. So, it's all going to be taken above the line.

That's correct, Nigel, yes.

Yes. Okay. Secondly, I mean, are there any sort of project costs, et cetera, that you're already aware of for FY '25? Or is sort of everything that you've had to do now pretty much in the base?

Sorry, Nigel, would you just say your question again?

Yes, I'm just interested to -- I mean, obviously, you've given us sort of a flavor for where the sort of base, I think in answer to Ed's question right upfront about where the base for going forward costs might be in terms of using the second half. Can we just apply a normal growth rate to that? Or are there sort of anything that you're aware of that would sort of drive that higher than a normal growth rate already in terms of projects? Because you've obviously had a big lift this year. You've got a lot of committees to do, but that's already in the base. Is there anything further to come in '25?

Nigel, look, I appreciate the question. But as you can imagine, we've got detailed planning and forecasting to do before we can really give you that transparency. But we will be coming back at the Investor Day in June and we expect to give you FY '25 guidance at that point.

Right. Okay. So at this stage, the right assumption would be just a normal growth rate, or...

The only -- what we've said so far and is really all I can say at this stage is, we are absolutely focused on ensuring that the growth rate in FY '25 is lower than the growth rate that we saw in FY '24. Beyond that, we'll really be coming back with further guidance in June.

Okay. Maybe have a go at this one then. I mean, if you sort of take your cost guidance, you're going to end up there or thereabouts $430 million. You've got some savings coming through this year. So let's say you get the $7 million of your $11 million left for next year. You've flagged $7 million of one-off costs. So if we take the 2 $7 million off $430 million, you get to a base of about $415 million, $416 million. Anything wrong with the logic? Not asking you to comment on the numbers, but just the logic.

Yes, Nigel, I think Andrei asked a similar question, so the approach is not unreasonable. I suppose it's difficult for us to comment right now. But what I would take out is that, we've got a lot of confidence from the actions that we've taken to date and also the plans in front of us for the next half, right? And we'll come back to you in June with further detail around this. But the actions we've taken, we're playing out those sort of expense review actions more broadly, whether that be across head count, workforce optimization, strategic procurement, et cetera. There's a number of things that we're thinking about to sort of reset the expense base of the organization.

Right. But the logic of working out the base was reasonable or unreasonable?

I don't think it's unreasonable, Nigel.

Thank you. There are no further questions at this time. I'll now hand back to Ms. Lofthouse for closing remarks.

Great. Thank you so much for your questions, everyone. So today, we announced solid revenue growth in challenging markets, which was offset by growth in total expenses with actions underway to address this. From a strategic perspective, we're making good progress in our near-term focus areas of regulatory commitments and technology modernization to protect the long-term sustainability of ASX and drive shareholder value. Thank you very much for joining us today.