Computershare Limited (CPU) Earnings Call Transcript & Summary

Welcome, everybody, to the Computershare FY '21 Full Year Results presentation. [Operator Instructions] I'll now hand over to our first speaker, Chief Executive Officer, Stuart Irving.

Good morning, everyone, and welcome to Computershare's FY '21 Results Conference Call. I'm joined today by Nick Oldfield, our Chief Financial Officer; and Michael Brown from our Investor Relations team. As usual, on this call, I'll take you through the key aspects of our results and the outlook for the new financial year. And we did release a presentation pack to the ASX, and it's also on our website. And there's a lot of information in the deck for you. And as usual, on these calls, I'll focus my remarks on the opening pages of the presentation. Nick will then take you through the slides on our financial results. Then after some concluding remarks, we will open up the call for questions. Also, as a reminder, we will be talking in U.S. dollars and constant currency, unless we state otherwise. So let's start on Page 2 of the presentation. There are really 3 key points I'd like to call out here. Firstly, I'm very pleased to say that we delivered a strong operating performance in the second half of the year. Earnings were 39% higher in the second half compared to the first half, and we made just over $0.30 per share of EPS in the second half. We said in February that we expected the 1H results would mark the bottom of the earnings cycle for Computershare and that earnings growth was underway, and you can see that coming through. 2H was effectively the equal best operating result, excluding margin income, in Computershare's history. Secondly, our main operating businesses are performing well. We are making good progress executing on our growth plans, and we're also benefiting from high market activity levels. Without a doubt, the year had plenty of operational challenges. Margin income is frustrating with record low interest rates, and the government restrictions in U.S. Mortgage Services went on for longer than we expected. However, the strong growth in Issuer Services and Employee Share Plans enabled us to deliver on the upgraded guidance that we provided in February. Adjusting for an increase in the annual leave provision as many employees were restricted to home and didn't take leave, EBIT, excluding margin income, would have also been in line with guidance. Finally, as I've talked about before, strategically, a better quality Computershare is emerging. We clearly made a big step forward this year with our announcement in March. We are acquiring the assets of Wells Fargo Corporate Trust Services, a leading U.S. provider of trust and agency services to government and corporate clients. Due to complete later in the year, the acquisition accelerates our scale to a top 4 position in the attractive U.S. corporate trust market. It also provides Computershare with greater exposure to interest rates and positive long-term growth trends in trust and securitization products. Now we are delighted with the acquisition. We have secured regulatory approval from the OCC since we last spoke, and we are heavily focused on the plan to first separate the business from Wells and then integrate into Computershare. And on that note, I would like to thank our existing and new shareholders for supporting our capital raise to partially fund the acquisition. We had very high levels of participation in the offer, which is a great endorsement of the strategy. And I am very grateful for your support. Now let's move along to Page 3, where we show a more detailed analysis of the results, the earnings waterfall. We bridge from the FY '20 management EPS of $0.56 per share through to the result of $0.52 per share for the year and then show guidance on the far right-hand side for comparison. I'll walk you through the bridge. Margin income on the left was the single largest factor in the period. The drop in MI from $200 million last year to $104 million this year cost us over $0.13 per share. $0.084 of this drop was in the first half, and it's the lowest level of MI for a long time for us. We averaged $20 billion of balances in the second half, which was high, partly driven by strong corporate actions activity. But the average yield on the exposed balances was only 0.7%, and this was less than half the rate we earned in FY '20. Grouping 3 of the next columns together, Mortgage Services cost us $0.10 of EPS. As we've talked about before, we took the decision to be more conservative and change the amortization period from 9 years down to 8 for the performing MSRs we own in the U.S. to reflect the elevated level of runoff in the market. That cost us $0.016. It impacted earnings, but it's noncash. Second, the extension of the foreclosure moratorium in the U.S. won't surprise anyone either. It was part of the government's response to the pandemic, and it went on for around 10 months longer than initially anticipated. And while the CARES Act moratorium was finally lifted at the end of July, it was in place for the full second half of the year, and it cost us around $0.019 per share. The third part of the cost is in UK Mortgage Services. FY '20 was the last year we received a sizable fixed fee contribution under the UKAR contract with only $4 million coming through in FY '21. So that was a $45 million drop in revenues over FY '20. This reduced EPS by $0.07 in FY '21. We clearly knew this was coming, and we've been proactive in taking out more cost from this business to adjust. And you also see on Page 21 of the deck, we have upgraded our cost-out target in UK Mortgage Services from a total of $65 million to $75 million, and we delivered $8.4 million of these extra savings this year compared to our original plans. We are making good progress rightsizing the business, and we do expect to return to a modest profit in FY '22. Moving to the green bars, the good news stories. All of the cost-out programs across Computershare really helped our results. Across stages 1, 2 and 3, the Equatex synergies and expanded cost-out opportunity in Mortgage Services added $0.094 of earnings. Now we do expect our cost-out programs to deliver a further $73 million of gross savings over the next 2 years, and we continue to look for more cost-out opportunities. As you know, it's in our DNA. We'll use these savings to help mitigate wage inflation pressures. Across the group but particularly in the U.S., wage inflation should run at around 3% next year, and I can see the pressures across the economy. While we manage our costs very carefully at Computershare, that's around $38 million of additional headwind on a pretax basis next year that we have to offset to deliver growth. Moving to the next green column in the bridge. We did deliver profitable operational growth in FY '21. We delivered over $0.09 per share of operational earnings growth, excluding margin income. And the split was broadly $0.03 in the first half and $0.06 in the second. And as I mentioned earlier, EBIT ex MI was up 12.6% for the year. And adjusting for the increased annual leave provision as we didn't force people to take time off during the pandemic, it would have been 14% growth. But I think that was an important thing to do because I think we've retained our special culture at Computershare despite all the challenges of remote working and lockdowns. So at the earnings level, we came in at down 7.3% for the year. That was 70 basis points ahead of the upgraded guidance we gave in February at down 8%, and we made just over $0.30 per share in the second half. But let's now talk about the businesses and how they performed, starting on Page 5. We'll start with Issuer Services, which is the largest business in the group and contributes 43% of total revenues. The business is performing well. Revenue was up 9% this year. And again, we saw the operational gearing come through with EBIT ex MI up 26.3%, and margins expanded by 240 basis points to 24.4%. And I'd have to say, we're very pleased with these results. Revenue grew across all its business lines. Registry revenue was up 3.2%, excluding margin income, which is a good pickup from the 0.6% growth in the first half. The number of shareholder accounts we manage around the world increased slightly year-on-year. And we also increased client wins by a net 277, which is up 82 wins on FY '20. This market share growth is a good validation of our offer. Now issuer paid fees grew by over 4%. These are the recurring revenues and now account for 69% of total revenues in the business. Holder paid fees are more transactional. But pleasingly, we did see some recovery in the second half year. The account -- they account for over 28% of the revenue, and margin income effectively halved in the business throughout FY '21. Corporate Actions was strong in FY '21. We saw increased transactional volumes and high market activity levels across all our major regions. Excluding margin income, revenues in Corporate Actions increased by 35%. The M&A and Hong Kong IPO boom has been a positive for us, but FY '21 was also a story of capital raises, particularly in the U.K. I'd also remind you that our key metric is the number of completed deals rather than announced ones. Announced transactions are a good lead indicator, but we do earn our revenues when the deal has been completed. Stakeholder Relationship Management, another of our event-based businesses, did well. Revenues ex MI increased by 45% with a very strong first half as we completed a number of mutual fund proxy campaigns. As I said before, though, these projects are lumpy and not recurring. We don't expect the same level of contribution from Corporate Actions due to less capital raise transactions or from SRM in FY '22. Our new Governance businesses, as we now call them, are building scale. We are successfully leveraging our core registry skills in the new complementary adjacencies, Registered Agent and Entity Management. Our key metric of units, or entities registered in a state, under management has grown 12% during the year through underlying resilience of the book and new client wins. These are high-quality businesses with room for sustained growth in large addressable markets. They also provide recurring subscription-style revenues and don't have any margin income exposure. I'm pleased with our progress in Governance Services and our ability to provide an expanded suite of services in a combined offer, and it's a clear competitive strength. Moving on to Employee Share Plans. It also delivered a robust result. It more than doubled earnings, excluding margin income, in the second half compared to the pcp. Recurring fee revenues increased by 4%, excluding margin income. EBIT ex MI was up 68%, and we delivered 790 basis points of margin expansion on the same basis. But what's really driving that growth? Now as you know, we are implementing our market-leading platform EquatePlus across Europe and Australia with over 3 million participants now live on the platform. And this is helping us win market share. New client wins were up 7%. Transactional revenues also recovered as equity markets rallied. You will remember the fees were down 7.4% at the halfway stage and have finished the year up 16%, and they're now above pre-pandemic levels. That's been a big recovery driver. The structural rise of equity-based remuneration is also clear to see here. Units under administration are up 13%, and more companies are issuing equity deeper into their organizations to attract, retain and reward employees. Now moving on to Business Services. It delivered a disappointing result. So these are clearly not peak earnings for the group. Revenue was down 15%, and EBIT ex MI fell by 34%. Now there are really 3 parts to this. Firstly, the Canadian Corporate Trust business performed consistently, which is a decent result given the high pcp. Bankruptcy reported strong revenue growth, up 37%, although it was first half-driven, and Class Actions declined by 31%. Now there are a couple of points to make here. First, the economic stimulus packages have effectively delayed the bankruptcies we expected to see when the year began, and you can see that in the public filings. There's been very little activity over the last 6 months. But we do expect volumes to recover over time, but the outlook for FY '22 is slightly subdued. Same with Class Actions, there has been very little activity through the courts. And while the structural growth trends are intact at around 6% volume growth p.a. in cases, again, the outlook for FY '22 is a little subdued. Now let's move to Mortgage Services. It's been a doozy of a year. There have been lots of challenges to manage. With the pandemic-related restrictions in the U.S. extending through FY '21 and a prolonged period of record low rates driving elevated levels of runoff, the results aren't all bad. EBIT ex MI margin, including the increased amortization, stayed positive. Total UPB is down 6% to $112 billion. With this, the value of loans we sub-serviced increased by 16%. The mix is improving also. Performing sub-servicing UPB grew by 28%, and we now sub-service over 290,000 loans. Capital light revenues increased by 17% in the year, partly as we're able to sell MSRs on a retained basis, converting owned MSR into sub-servicing business. This helped drive the mix in the portfolio I've just talked about. We also expanded our recapture capability. This is our defense to losing loan servicing from refi. We have retained the servicing on over $250 million of loans that would have been serviced somewhere else. Having said all that, we had just over $700 million of capital employed in this business at the end of June. This reflected a delayed MSR transaction, which completed in the first week of July and a temporary peak in advancing on behalf of a sub-servicing client. Adjusting for this, the invested capital would have been flat over the year. We're now very focused on the pathway to better. But what is this? Now we can reduce the capital employed through ongoing MSR sales, recycling capital and creating new capital-light sub-servicing businesses. We have a strong pipeline of new fulfillment business, and we're in the process of implementing these contracts. And whilst the moratorium on foreclosures has come to an end, there are still a range of relief measures put in place by the CFPB, which will remain through to the end of the calendar year. Once these finish, we do expect to be able to add high-margin nonperformance servicing work, together with its associated ancillary fees to help improve the bottom line. That will start to come through in the second half. But clearly, we've got a lot of work to do here. Putting it all together, our largest businesses performed very well. The more cyclical events businesses were a mixed bag, ups and downs. Margin income was frustrating. U.S. Mortgage Services needs to improve, and we've added a whole new long-term growth engine in the U.S., which is Corporate Trust. Now let's move to Page 6 and talk about our outlook for FY '22. For FY '22, our initial guidance is to deliver around 2% growth in management EPS. Now there are several moving parts in this, so I'll step you through it. The guidance includes CPU legacy. Now that's Computershare before the acquisition and without the rights issue. Also, let me highlight an important number here that may be missed in all the excitement of an improved margin income outlook. For the legacy business, we do expect management ex MI (sic) [ management EBIT ex MI ] to improve over 3% on the pcp. Second, we show the contribution from CCT for the 8 months we expect to own it for the year; and finally, the dilutive impact of the rights issue. Now to help you, we also put in a bridge for the guidance, which is on Page 7. Starting on the left, we have FY '21 management EPS translated at FY '20 FX rates of $0.5203. Then there's the FX adjusted equivalent of what we're reporting today, which is $0.5246. That's in constant currency. With wage inflation that I've called out, cost-out programs and some underlying business growth, the guidance for the legacy business would have been $0.547 per share. This would be a rise of 4.2% compared to the adjusted pcp. That's underlying organic growth. Moving along the chart, the Corporate Trust acquisition is expected to close in October or November, and we expect CCT to add over $0.04 of earnings in FY '22. We then have to adjust for the rights issue. Now we assume the rights issue took place in full on the 1st of July. Pre the rights issue, the weighted number of shares on issue in FY '21 was around 540 million. In FY '22, it's over 604 million. Using the higher share count dilutes EPS by $0.056. Taking all this into account, we expect around $0.534 of EPS in FY '22, which is around 2% growth on last year. The other guidance assumption to call out is on margin income. Again, I'll do a little bit of a sum-of-the-parts breakdown here. We expect for Computershare on a stand-alone basis MI to be the same in FY '22 as it was last year at around $107 million. This is better than the initial guidance we gave at $80 million for FY '22, and Nick will talk you through how we achieved the uplift. We assume balances of $17 billion. And as usual, we base our yield assumptions on the 3-month swap curves as they are today. We don't speculate on the rates. You'll also remember that CCT has balances, too, $60 billion of them. Around $9 billion is directly exposed to interest rates with the majority of the others in money funds where fees are fixed, and we don't classify them as margin income. We expect CCT to contribute additional margin income of around $38 million. So this gives us $145 million of margin income in total. Balances for the group should average between $55 billion to $60 billion. Our view is the margin income will be split broadly $60 million in the first half and $85 million in the second half, and this reflects our assumption around the timing of the closing of the CCT acquisition. I'll now pass over to Nick for further details on the financial result.

Thank you, Stuart. Good morning, everyone. Let me start with our financial results this year, which are on Slide 19 of the deck. As you can see, group revenue ex margin income was up 3.6%. And adjusting for M&A and the UKAR fixed fee, organic operating revenue growth was 4.6%. Increased contributions from Issuer Services and Employee Share Plans are the key drivers here. Reflecting the fall in interest rates, total revenue for the group fell 0.8% over the prior corresponding period. There's more detail on revenue on Slides 27 to 29, including revenue, excluding margin income, across each business stream. EBIT for the year fell 11.5% to $440.7 million. In large part, this decline is attributable to the $95.1 million reduction in margin income, whilst amortization expense increased by $35.8 million. This reflects both the change in amortization period announced last year and an unwinding of a couple of excess strip trades midyear. We assume an 8-year amortization period for performing loans going forward and, therefore, expect amortization expense at a similar level in FY '22. As Stuart has already said, excluding margin income, EBIT increased 12.6% to $336.4 million. And adjusting for the increase in our annual leave provision, EBIT, excluding margin income, was up 14%. The EBIT ex margin income margin was up 130 basis points to 15.6%, again, largely due to the improved contributions of Issuer Services and Employee Share Plans. As anticipated, interest expense was lower, reflecting the lower rate environment. Our income tax expense was lower, too, at $105.4 million. The effective tax rate for the year was 27.2%, slightly better than we anticipated. This was largely due to a change in tax rates in the U.K. and the related revaluation of the net deferred tax asset position. We also expect a slightly lower ETR range in FY '22 of 26% to 28%. This reflects a slight change in expected profit mix and a lower expected US BEAT expense. Management NPAT was down 7.4% to $281.4 million. And as you've already heard, management EPS is down, too, 7.3% to $0.5203 per share. Our statutory results are set out on Slides 25 and 26. Statutory NPAT was $189 million with the difference attributable to the amortization of non-MSR acquired intangible assets of $42.7 million; acquisition-related expenses of $24.5 million, which was largely attributable to the ongoing Equatex integration; and $27.5 million associated with our cost-out programs, the main contributor being the UK Mortgage Services restructuring. I'll now jump back to Slide 8 and talk about margin income. Now the Margin Income result was broadly in line with expectations, with 2H '21 being $51.5 million at actual rates. Notwithstanding this result, average balances were actually around $2.5 billion better than the first half and much greater than we expected, meaning our overall yield on client balances declined further from the first half to around 51 basis points. This increase in balances is largely due to a growth in SPAC funds, as we have managed to penetrate that market segment in the second half of the year. To date, however, these balances have not attracted any margin income due to the fee arrangements in place for these types of transactions. So adjusting for these SPAC funds, our exit balances at the end of FY '22 -- FY '21, sorry, are in line with our FY '22 expectation of around $17 billion. Looking to FY '22, however, we're actually upgrading our margin income expectations to be around $107 million. And that's $145 million when we include the contribution from CCT. A reminder: these numbers are in constant currency. So what's behind this improved margin income outlook for our core business? Well, firstly, we've been able to secure an extension of our deposit protection service contract in the U.K. through to 2026. This means that we can reinvest funds that have previously been expected to revert to short-dated rates in FY '22, and we could add further duration to term funds that were previously anticipated to end in FY '23. Moreover, and importantly, this new contract provides more flexibility in terms of duration and liquidity requirements, whilst U.K. medium-term rates have also improved significantly since we did our half year outlook. Altogether, the DPS represents around 2/3 of the margin income uplift that we're now anticipating in FY '22. The remainder of the uplift is driven from the improvement in the U.S. dollar interest rate outlook, where medium-term swap rates have picked up since the half year. We've been able to take advantage of this and add duration to the book to secure a higher return in FY '22. Together, this drives a higher yield expectation in FY '22 on the legacy book to be around 63 basis points on balances of $17 billion. Now looking at the CCT book. We expect that to come on board in October and November time and deliver around $38 million in margin income during the year at a yield of around 29 basis points. Now to be clear, we are not assuming any upside in FY '22 from extended duration, recapture of money market funds or yield enhancement strategies at this point. There's more detail on our balances on Slides 71 to 75. Next, I'd like to talk about Slide 20. Here, we show the bridge in operating costs between FY '20 and FY '21. Importantly, we've drawn out the reduction in underlying operating expense so you can see how the cost-out programs are having an impact. These programs realized $82.6 million of benefit in FY '21. $32.4 million of this came from the finalization of the asset migration program in UK Mortgage Services. All the IT costs associated with the transition has come out, and that's what this saving represents. The remaining $50.2 million comes from our other cost-out programs, the largest being the restructuring of our UK Mortgage Services business. Overall, our adjusting operating cost base was $1.181 billion, a reduction of 6.5%. So where did these savings go? Well, first of all, there's $8 million of M&A-related additional OpEx, a little bit of Corporate Creations and a full year of Verbatim. Then there's the investment in growth. We've added capacity to meet demand in Corporate Actions and in building out our corporate secretarial capability. This added $33 million of cost. And finally, there's some one-off costs of $9.6 million, a regulatory levy and a particular bad debt. These won't repeat in FY '22. You will also note that cost of sales increased from $371.8 million to $410.4 million. This is driven by the sales mix and underpins that higher revenue excluding margin income that we discussed earlier. Total operating expense is detailed on Slide 35. So you can see the usual breakdown there. And on Slide 21, we show the impact of all our cost-out initiatives. And you'll see we're increasing our cost-out savings target by $30 million relative to our prior estimate. This reflects: Firstly, a $10 million increase in the synergies we anticipate generating from taking the EquatePlus platform around the world; second, an increase in our expected benefit realization for the UK Mortgage Services cost-out program of around $10 million, taking the overall saving here to $75 million, excluding the IT costs associated with the platform migration; and third, an increase in our Stage 3 cost-out target of $10 million. This represents the additional savings from the transformation of our finance and people functions, together with some reductions in office space. At the same time, we've increased the expected costs to achieve by $15 million. The total gross multiyear benefit target, for which we extend the delivery period out to FY '24 now, from these programs is now estimated to be $276 million. I'll finish with some comments on our balance sheet and cash flow on Slide 22 before handing back to Stuart. In the period, we generated $375.3 million of net operating cash flow, representing an EBITDA to cash conversion rate of around 60% at actual rates. Free cash flow was $260 million. CapEx was down for the year at $16.3 million due to lower IT-related spend. And net cash flow was $40.8 million after spending $21.8 million on acquisitions, $172.8 million on dividends and around $123.6 million on MSRs. Now a capital recycling transaction was slightly delayed at year-end and completed in the first week of July. Adjusting for that, net investment in MSR for the year was around $100 million and therefore, largely maintenance, in line with the amortization expense for the year. We do expect that net MSR investment will be a fair bit lower in FY '22. All told, net debt has reduced materially over the last 12 months. This reflects the receipts of the rights issue ahead of completion of the CCT acquisition later this calendar year. And as a result, our net-debt-to-EBITDA ratio fell to 1.07x. Looking ahead, the net-debt-to-EBITDA ratio will peak post the completion of the CCT acquisition before starting to organically repair. And we anticipate it being around the top of our target range at the end of FY '22. I'll now hand back to Stuart.

Thank you, Nick. And finally, on to conclusions. Look, FY '21 was undoubtedly one of the toughest years of my and many other people's careers. Managing global businesses remotely, the numerous false starts to the pandemic recovery, having record low interest rates cloud our performance, not to mention making a leapfrog acquisition with all the due diligence you'd expect of us as well as completing a major and complex capital raise, so it was pretty tough. But everyone did their job, and our teams continued to deliver exceptional client outcomes. And I want to express my thanks to all my colleagues for the outstanding contribution and dedication, not to mention the resilience. Looking forward, we enter FY '22 with renewed vigor and confidence. We'll keep our heads down and keep true to the strategy to build stronger, more efficient businesses with more leverage to structural growth plans. We will focus on executing well, maintaining cost disciplines and investing strong free cash flow in growth, new technology and balance this with a conservative capital structure and returns for shareholders. We do expect to return to positive earnings growth in FY '22. We have high-quality businesses with scale and strong recurring revenues in the group. Now event activity will fluctuate, and interest rates will be what they are, but we have significantly increased our optionality for when rates do start to rise. I'd like to thank you all for your time, and I'll now hand back to the operator to open the line for questions.

[Operator Instructions] The first question comes from Nigel Pittaway from Citigroup.

Stuart and Nick, first of all, just a question on the margin income guidance and sort of the renewal of the DPS contract. I mean, previously, you sort of highlighted some concerns that banks weren't sort of willing to take 5-year money, and the rates you were getting on 5-year money were somewhat subdued. So did that change over sort of the last few weeks and enabling you to sort of get a higher return and, therefore, sort of obviously come out with that $107 million guidance on the legacy book?

So Nigel, just quite importantly on the DPS contract, so as you may be aware, in the last year of the contract, the investments have all got to be put short dated and be fairly liquid. And that was due at March '22. So we had a little bit of a DPS cliff. During the last sort of 6 months, we've been in discussions with the British government. They've renewed that term for 5 years. That's meant that we've not had to come out of some of the term, which are enjoying quite higher rates. And they've also changed and relaxed some of the rules around what we can do as far as these investments are concerned and some of the durations and the limits. So that's helped. As Nick said, it's probably around about 2/3 of the uplift. The other 1/3 really is some of the changes of appetites for certain banks for funds both in the U.K. and also in the U.S. I mean, the U.K. rates have sort of improved a little bit for longer-term money, and there was also some opportunities that the treasury team identified in the U.S. to be able to do that as well. That really sort of explains through why we get that uplift in margin income in FY '22. So it's a range of factors, yes. But there is certainly -- some financial institutions certainly do have appetites and have been offering attractive rates.

Okay. Second question is just on servicing-related fees in mortgage servicing. They seemed to sort of leap in the second half and have been the highest they've been by a key margin. Can you just make some comments on what's driving that, please?

Nick, do you have anything for that?

Yes. So that just reflects some other income associated with some MSR transactions that were completed in the second half. We mentioned some unwinding of an excess strip. And as we've sold some MSR on a retained basis in the second half, that drove a little bit of a gain, Nigel. So that's largely what's behind it. I wouldn't expect that to repeat at that level in '22.

So the first half level is probably more an indication of the go-forward position. Would that be fair to say?

The first half level and just a little bit of steady growth, yes.

Yes. Okay. And maybe just finally, I mean, obviously, you sort of mentioned the big increase in recovery in transactions in Plans in the second half. It does look as if sort of that lift in revenue pretty much dropped through straight down onto the EBITDA line. I mean, is that a sort of fair way to describe it? You're basically getting those transaction revenues with very little cost attached to them, and they just drop straight through?

Yes. That's right. I mean, we have to maintain the underlying infrastructure regardless of the number of transactions that actually come into the marketplace as far as people exercising their stock, et cetera. So we are able to get that extra increase to the bottom line in that business. As I said, it was a big driver of the recovery in that business, the increased vesting and exercises certainly through the second half.

The next question comes from Simon Fitzgerald from Evan & Partners.

Nick, first question for you. Can you just give us a little bit of clarity in terms of your expectations of depreciation and amortization charges in FY '22? And I'm comparing that to the $182.1 million that was booked in '21.

Yes. I expect amortization to be fairly flat in 2022.

And depreciation as well?

Yes. I mean, not materially different to what it is in '21.

Okay. That's fair. And also, I note that just in the -- one on the back pages in terms of the reconciliation with the statutory profits, there's $29 million there of other costs. $22 million of that relate to the U.K. cost-out program, and that's consistent with the treatment that you've done in the past. I guess I'm just trying to get a bit of a handle in terms of what some of those numbers might look like in FY '22, just given that we've got a lot going on, and there's the big transaction costs associated with the CCT business.

Yes. So sorry, let me just clarify a comment I just made in terms of our amortization and depreciation.

Sure.

So they'll be fairly -- I think they'll be broadly in line with '21 with the exception of there will be some additional depreciation expense associated with CCT, so just to sort of call that out. In terms of the statutory adjustments or management adjustments in '22, they will be -- obviously, we've got the cost to achieve that we call out on Slide 20. So that'll be a large part of that. And then you will have the costs associated with the Wells Fargo CCT acquisition. They will broadly be in line what we previously disclosed. So that will be in addition to what [indiscernible].

And are they likely to come through in 1 year, in the FY '22 year, the [indiscernible]...

It will be largely in the second half.

Yes. Okay.

Largely the second half, and then you get a full year in '23.

Okay. Good. And just one final question on the Mortgage Services business. I just want to get a bit more of a handle in terms of how much of that link with the level of interest rates is important to see that get back to the same sort of run rate that we've previously seen in the past. Maybe you can sort of help me with that in terms of, I mean, margin income was one of the biggest declines that saw that business get to the loss. But what sort of expectations or interest rate levels do you need to see, to see that return?

Yes. Look, it's a good question...

Well, we all...

You're absolutely -- sorry, Nick. You're absolutely right in so much as that particular business has very little opportunity to term out the moneys that we receive, yes. So it's hard to get yield enhancement on that. So when there is an interest rate decline, it is one of the businesses that are impacted quickly and by the most. Interest rates also have a bearing on mortgage rates. And as we know, as interest rates came down, mortgage rates came down, and that kind of sparked the sort of -- the refi activity. I think we've always said in Mortgage Services, a sort of gently rising rate environment is the optimal environment for our Mortgage Services business because it provides a little bit of balance. But I think what we will see is mortgage rates start sort of -- start gently sort of creeping up as this sort of longer end of the curve, so longer-term money, becomes a little bit more expensive, that will slow down the refi. But I think it will take a while to get back to the margin income that we got in that business or we enjoyed in that business sort of through FY '18, FY '19, yes.

The next question comes from Matt Dunger from BoA.

Just if I could touch on the guidance. You've talked to the typical seasonal earnings skew. Could you confirm that this is around 40% or 42% in the first half? And also, whether this is for the total group or this seasonal skew is for Computershare legacy before you look at the margin income, which comes in largely in the second half for CCT?

So I think you saw clearly in FY '21 quite a large skew between first half and second half, yes. And we always said that we expected the better second half performance and delivered the $0.30. So there has always been a little bit of a natural first half, second half skew on the legacy business. Clearly, this year, that will also be the case because we don't expect to close the CCT transaction until November. So certainly, its margin income, et cetera, et cetera, will all be pushed into the second half as well. So it will be sort of more prevalent this year even more than it was in FY '21.

And on the tax rate guidance, 26% to 28%, are there any one-offs in FY '22? And is this in line with your long-run expectation?

Look, there's no one-offs...

Tax question, Nick. Do you want to take it?

Yes. Sure, Stuart. There's no one-offs in '22 at the moment. There was a little -- we had -- as I called out in the commentary, we had a little bit of a benefit in '21 from the revaluation of the net deferred tax asset position due to changes in U.K. rates. The reason why we're focused on -- or forecasting a slightly lower ETR in '22 is largely because of the profit mix, lower profits in the U.S. in part because of the cost to take on the Wells Fargo acquisition. That will -- and as a result, we anticipate having a lower US BEAT expense in '22 as well. Moving forward, it really depends on the -- just the outlook for corporate tax rates around the world. There's a lot of speculation at the moment that governments may be forced to put up rates to pay for COVID-related support. We've already seen that happen in the U.K. with them announcing rates will go up there from '23 onwards. So I do think that it's likely that there will be an increase in rates over the medium term. But outside of the U.K., we haven't got anything that we can point to definitively. And until that happens, my expectation is that the rate -- our ETR will be similar to what it has been in FY '21, perhaps will be a -- slightly lower in '22, but '21 is sort of a good medium-term barometer until any rate changes occur.