Computershare Limited (CPU) Earnings Call Transcript & Summary

Welcome, everybody, to the Computershare financial disclosure review presentation. [Operator Instructions] I'll now hand over to our first speaker, Chief Executive Officer, Stuart Irving.

Good morning all, and thanks very much for joining us on the conference call today. Nick Oldfield, our CFO; and myself, will take you through the new financial disclosure review pack we released to the ASX last night. And this pack really aims to upgrade our financial reporting for investors, and it's really the next step in our commitment to continuously improving the transparency and also the user friendliness of our financial reporting. As many of you may remember, a couple of years back, we worked on making the story in the front section of the results pack clearer and simpler. And we've now moved on to making the more detailed data and appendix easier to use, and we sought and received some great feedback in this process. You wanted to see results from actual FX. Others said we had lots of data but not all in the right places and they had to churn through the footnotes. And some also said it was tricky to interpret the underlying data in our bar charts and wanted to see the data in tables. That was all very constructive feedback. And we hope the end result here makes your life easier, especially late at night in reporting season. So for those of you that assisted in the journey, really a big thank you from Michael, Nick and I for all your time there. So what is new, and what have we done? Well, first, we've increased the amount of financial disclosure we are providing. There is new information on historical business segment P&Ls, reporting in actual FX and more detail on margin income and sensitivity analysis, for example. We've also maintained all of the original data we provided, but we presented this in a much easier-to-use format. The new pack is designed to be the single go-to place for all your financial reporting, but what's not in the pack today? Well, there's no commentary on current trading or any changes to our outlook and guidance. That's still intact. We do report our first half results on February 9 and we'll cover all that ground there. Nor have we restated any historical results or business segments, and that consistency is important. All of this information will also be downloadable in Excel via the investors section of our website, so I would close by saying please work your way through the materials at your own pace. And if any of you would like a follow-up call, please let Michael know, and we'd be pleased to connect. Thanks once again for all your input. And I'm now going to hand over to Nick to take you through the pack.

Thank you, Stuart. And Good morning, everyone. I'm going to keep my comments on Slide 3, our contents page. And here, in the middle column, you can see what's changed in our deck; and in bold, what the new disclosures are. I'll now run through what you can see on those key slides. So first, on Slide 8, we show the key financial highlights over the last 10 halves. Now this slide is a regular part of our deck. However, it does provide a good summary of our long-term track record all on one page. And we've also now added in the weighted average number of shares by period, as we've noticed a few differences in people's calculations here. The next slide I'll call out is Slide 13. Now this is new disclosure, a full P&L breakdown for our key business segments in actual currency over the last 6 halves or 3 financial years. Now in all of our recent investor outreach, this was a common request for this level of detail and at actual rates; and we are happy to provide it. And then on Slides 13 through 18, we show the same P&L format for each of our 6 business segments. Importantly, this all is then readily reconcilable to the full management P&L we include at Slide 9 and the statutory P&L reconciliation we include on Slide 28. And then to supplement the 6 business segments, we also show breakouts of some of the individual P&Ls, employee share plans, U.K. mortgage servicing, U.S. mortgage servicing, in exactly the same format. And this is all on Slides 19 to 21. The next new disclosure item is on Slide 27, which breaks down our management revenues, taking out the impact of acquisitions and disposals, the UKAR fixed fee in U.K. mortgage servicing and margin income to show our underlying organic revenue performance. And I'll now turn to margin income. This was another key topic highlighted to us where some additional insight was requested. Margin income is covered in Slides 31 to 35, but let me call out some of the key points to note as you work through these slides, starting on Slide 31. Now this is not new, but we do now provide client balance data in table format, making it much easier for investors to transpose into their models. On the contrary, Slide 32 is new. Here we show margin income split by exposed and nonexposed. And we then split the exposed margin income into hedged and nonhedged, giving much greater transparency into the earnings we generate from our hedging activities. We then break down average yield across the various categories. There is one point to draw out on Slide 32. At the end of FY '20, we unwound some hedges. However, the benefit derived from those hedges is amortizing through the P&L over the period through to FY '24. Accordingly, in the line at the bottom of the table, we strip out this benefit to show the underlying hedge performance on the hedges actually in place right now. Now Slide 34 shows our hedge book as at the 30th of June 2021 and how it runs off. Now this isn't totally new disclosure. We previously showed it as a bar chart, but we now provide it in table form to make it easier to interpret. And we also provide the breakdown by currency so you can see where that hedge book is. And then on Slide 35, we show some of the key sensitivities to margin income if interest rates or our exposed balances change or if the sterling or Canadian FX rates moved. Some key points to note here are as follows. Firstly, in this slide we are applying these sensitivities to our FY '21 numbers. And second, the sensitivities are applied to legacy balances only. There is no reflection of the Wells Fargo CCT business balances in this slide, but as we move forward, we will update these sensitivities to factor the CCT balances in. And then in terms of how to interpret the numbers, while the bullet points below the table set that out for you, let's be clear on some of the key points. If rates in FY '21 have been 25 basis points higher, the margin income would have been $26.3 million higher at $133.3 million, and overall EBIT similarly would have been $26.3 million higher. Now if rates have been 25 basis points higher and exposed balances 10% higher, margin income would have been $38.4 million higher at $145.4 million. And management EBIT would have been $38.4 million higher as well. So that concludes the key highlights of the pack. I'll just wrap up with a couple of closing remarks. As Stuart said at the outset, we really appreciate all the feedback we received prior to updating this deck. Thank you again to all of you who assisted, and we hope this updated pack addresses your comments. There is no reduction in disclosure here. On the contrary, we sought to expand disclosures where appropriate. All of the data in the deck readily reconcile the management P&L and down through the statutory P&L, all of which is included in the pack. And finally, to reiterate: All the data is available to download on our website. Thank you again for listening. I'll now hand back to Michael, who will coordinate the Q&A session.

Thank you, Nick. And operator, can you please remind participants of how to ask a question? And then we might wait a moment for [ a queued call ]. Thank you.

[Operator Instructions] Our first question comes through from Kieren Chidgey from Jarden.

I just had a couple of very quick questions. So when the Wells Fargo business comes in, will it just feed into this framework for your margin income reporting? Or will you separately -- are you disclosing that in some different way?

Do -- Nick, do you want to take that one?

Yes. Thanks, Michael. Kieren, yes, so we will -- if you look at Slide 5, what you will see there, Kieren, is that we've actually broken down Computershare Corporate Trust as a segment line on that slide so you'll be able to see. And it's set at 0, as you would expect for the last couple of years, but there you'll see that we break down revenue, margin income, EBITDA and EBIT by business line, and -- but for corporate trust, we'll do that throughout the deck.

Okay, but -- and specifically on the margin income component of that business, Nick, will it [indiscernible] margin income framework...

Yes, it specifically -- yes. Specifically it will feed into the margin income framework and we will break that down, so you'll be able to see the balances and the margin income for that business.

Okay. And secondly, on this sort of underlying as opposed to reported impact because of the hedges, I mean, is that something that occurs, I mean, what -- on ongoing basis we’re -- you closing out hedges? And sort of will we be tracking both sort of a reported hedge yield and underlying hedge yield through time as 2 distinct line items? And will you continue to give the future amortized benefit?

We -- look. We will continue to make that separation as we've done on this slide. What I would say, Kieren, is that the hedges that we unwound at the end of FY '20 was very much a one-off. It's not something that we have done before and -- or something that we would expect to do on a regular basis. There was -- clearly that was coming out of -- or in the throes of the pandemic. And we felt at the time that it was the right thing to do given where markets were, but it's not something that we've done prior to that. Nor have we done it since, but given that, that was -- it has an impact, we felt it was appropriate to separate it out. And we will continue to disclose on this basis.

Okay. And I just had one final question, which is not so much about the disclosure but more about something we can see now with the revised disclosure a little bit more clearly just around the U.S. mortgage services business, the cost growth there through the '21 year which was quite pronounced. Are you able -- I don't know if this is the right forum to just comment on sort of what was driving that.

It was mostly in the fulfillment business, Kieren, as we sort of onboarded a range of customers. So we had a fair amount of upfront cost and also deployment and development of a platform. So that sort of -- the cost and the revenue didn't quite line up, as in you had to build the infrastructure and get the people in before the new clients were onboarded. That's probably the biggest thing on the cost side.

Okay. And is there any further step up sort of in the buildout of that platform in '22...

No, no, no. The platform is there. It's now about sort of onboarding; and getting, hitting these fulfillment targets with the customers, yes.

The next question comes through from Andy Chuk from Macquarie.

Just a few quick ones. So just firstly, is this pack the way to think about disclosures going forward? It's going to come out exactly like this?

Yes. This will be the appendices for our half [ or ] the full year. And of course, it will just be rolling forward as we progress through different reporting cycles. So we normally always have the front of the pack which talks about the businesses, and they have a whole series of appendices. And this pack will replace the appendices, yes, because you don't really get any business commentary [ on these either sets ], so it's much more about sort of cleaning up all the appendices and providing you these sort of much more detailed information going forward.

Yes, got it. Next question is just around Slide 34. Those balances for the hedge portfolio rolloff, are they on a spot basis, or are they on average basis?

Nick, do you want to take that one?

They are on an average basis for that period.

Fantastic. Next question is just around D&A. So I've noticed that you guys split out depreciation and amortization quite separately. Just any color around why now? I mean the numbers aren't [indiscernible] [ a lot of divisions ], so just any color around why we're going down that route?

Well, I mean, Andy, we thought it was appropriate really to -- we're now sort of focusing on EBIT and EBIT excluding margin income, therefore, to give investors color on the constituent parts to EBIT. We felt it was appropriate to call out depreciation and amortization. Now to your point, it's not particularly material in a number of our business lines, but clearly in the U.S. mortgage servicing business it is material. And so to be consistent across all of our businesses, we felt it was appropriate to disclose it.

Fantastic. Just one last question: On Slide 35, with the margin income sensitivities, can I just confirm? Do those sensitivities factor in a move on the hedged exposed book, or is it just the unhedged book?

It's just on the unhedged exposed.

The next question comes through from Andrei Stadnik from Morgan Stanley.

I actually had a question similar to the last one, that rate sensitivity on Slide 35. In terms of the message you're presenting here and focusing on the nonhedged exposed balances and perhaps coming up with some smaller sensitivity to rates than investors expected or actually smaller sensitivity compared to what transpired when COVID came out -- first came out and drove yields lower quite quickly, are you basically trying to downplay the potential for high margin income from higher rates? And also how to think about the comment at the AGM where you mentioned that, when you're getting higher balances per CCT, you're struggling to maybe quite give the same rate on the incremental addition. So apologies, a long question.

Nick...

Well -- and look. We could have chosen to do plus 100 basis points, minus 100 basis points, right? I mean, at plus or minus 25, you can -- you do your multiplication and work it out. So it just gives a sort of high level sort of sensitivity on that. I wouldn't read anything into the fact that there's expectation on sort of lower rate increases or less increases. We've just been very, very factual; and this is what it would actually look like, yes. As far as the comment on AGM, look, we'll talk a little bit more about that in February. It's just about -- we obviously place deposits with many, many banks around the world. And we do see fluctuations in appetite for large cash deposits. And we -- that's normal course of sort of the treasury team's management. So we can talk a little bit more of that in February, but we're not trying to signal anything here. We're just trying to sort of provide information in a very, very clear way that shows you that from a margin income perspective we have interest rate and balance sensitivity; and then also just to help people understand currency sensitivity, which is a lot -- obviously a lot smaller than the interest rate and balances.

[Operator Instructions] We have one more question from Kieren Chidgey from Jarden.

I mean it's not a question in regards to new disclosure but sort of that nonexposed interest rate which sort of you have been splitting out for a while now. I'm just sort of interested. Clearly it's not included in your interest rate sensitivity table, but it has been coming down quite consistently with lower risk-free rates over the last number of years. So I mean, can you just remind us why that is the case and whether or not there is actually any interest rate sensitivity in there that's not being factored in?

I mean, is that a question that -- you're specifically asking about the nonexposed, Kieren?

Exactly, which is now sort of [ 18 basis points ] in second half '21 but was 50 going back a few halves.

Yes. Very simply, that nonexposed rate will depend on the -- or be impacted by the level of prevailing rates at the time. So if you think about it: If rates are 2.5%, then often we -- in those situations, the client may take 2%. And we may simply get 50 basis points, but if rates have dropped to 25 basis points, there's clearly a lot less spread overall. And so the share that we would take on a particular deposit or balance or investment is simply lower. And so whilst it's -- when we talk about nonexposed, what we're saying is that it's not exposed to, once we've agreed a deal on a particular balance, that rate doesn't change, but the overall rate that we get will be impacted by overall market conditions. So if there's less spread, then there's less share of that spread for Computershare to share in. And that's why you've seen that nonexposed rate decline over recent periods.

All right. And is your expectations, as global interest rates lift, we'll see that percentage reinflate?

Yes, yes, I would anticipate that it would go back up as rates start to rise.

We have no further questions at this time. I'll now hand back to Stuart Irving for any closing remarks.

Yes, thanks all, and really appreciate you joining us. Look. There's a lot of detail in it. A lot of you would have seen some of that stuff before, but we hope certainly that this makes things a little bit clearer for you. And over the coming days or so as you work through it, the Computershare team will be available for any follow-ups you may wish to have, so please get in touch with Michael if you want to schedule something. And that just is it from us. And I just want to say thanks again for all your support. And I hope you all get a little bit of a break in the holidays that are coming up. Thanks very much. All the best.

That concludes the Computershare financial disclosure review presentation. Thank you once again for joining us today. You may all disconnect.