Computershare Limited (CPU) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to another Valentine's Day date with Computershare as we go through our 1H FY '24 Results and Conference Call. Nick Oldfield, our CFO; and Michael Brown our Investor Relations team are here with me. And as usual, we've released a presentation pack. Now on this call, we'll take you through the highlights, the outlook for the second half and through it, an update on our strategies. Nick will then take you through the financials in more detail. Following the presentation, we will open the line for Q&A. And finally, just to remind you, we will be talking in constant currency and U.S. dollars unless we state otherwise. Okay. So let's begin on Page 2. As you can see, Computershare has continued to deliver strong growth with management EPS up 23% compared to the prior corresponding period. Management revenue was up over 6% to $1.6 billion. Management EBIT ex. MI was up 20% and margin income increased by almost 25% to a 1H record of $429 million. In the first half, we benefited from growth in core fee revenue recovery in some of our events and transactional revenues and with higher yields and stable cash balances record 1H margin income. Now the headline results on this page do include U.S. mortgage services. And in the PCP, a full 6 months contribution from KCC, our claims administration business, and we completed the KCC sale in May 2023, and we're on track to close the sale of the U.S. mortgage services in March '24. Now let's turn to Page 3. Here, we show the results for the continuing business on a Proforma basis. Put simply, it shows how we would have performed if we had not owned U.S. mortgage services for the first half of FY '24 and used anticipated proceeds to pay down debt. As you would expect, there would have been a drop in revenues and MI and EPS outcomes would be similar at around about $0.54 per share. But I think the standout differences are free cash flow and ROIC. So you can see that the simpler Computershare is capital light and more cash generative. And assuming mid-cycle rates of, say, 3%, the new simpler capital-light Computershare should be able to deliver 30% EBIT margins and 25% ROIC on average and, of course, subject to M&A over the long term. And that's an upgrade and signals the higher quality in the business with the sale of U.S. mortgage services. I'll now move on to Page 4 and give you an overview of each of the 3 core revenue streams. Now Computershare's integrated business model, which has that portfolio of recurring fee revenues, cyclical event and transactional revenues as well as large client cash balances, which generate margin income continues to deliver robust returns through the cycle. Recurring fee revenues increased across all businesses, up around 3%, and we have purposely orientated Computershare to benefit from structural growth trends such as equity-based remuneration, bond issuance and the rising demand for governance services in an increasingly regulated and complex world. And these are the long-term tailwinds for us. Now events and transactional revenues were down 4%. However, if we exclude KCC and the PCP growth was actually over 9%. And the drivers here were strong employee share plans trading revenues and also higher corporate action revenues. And finally, on margin income, Computershare's overall client balances, including MMF were up on the prior period at over GBP 76 billion. And along with enhanced yield was the driver behind the record 1H margin income results up almost 25%. So let's now move to Page 5, where I'll provide some commentary on the core business segments. Let's start off with Issuer Services, where revenue was up 14%. We saw higher corporate action fees, more margin income and our registry was stable. Although the shortfall in IPO was did not replenish shareholder numbers in this period, which we would expect to recover as IPOs recover, but management EBIT in this business increased by 25%. The corporate actions itself was an interesting story. Unsurprisingly, we managed 17% less corporate action events in the period compared to the PCP. Within that number, capital raise numbers were pretty consistent, but IPOs and mergers were down. However, the average size and fees on our deals were larger, especially in the U.S., and this exceeded the volume decline and drove the revenue growth. Government Services revenue was similar to last year. And whilst the word growth in underlying client paid fees up 14%, this was offset by the timing on recoverable fees, which will come through in the second half. Moving to employee share plans. That division delivered a record result. Trading revenue recovered well, as I mentioned earlier, and fee revenue increased too as new client wins and fee increases kicked in. Even the higher number of stock exercises in the half, the value of the book grew up 10% to almost $230 billion. And as we often talk about employers continue to use equity more often in remuneration schemes, creating the significant leading earnings power in this business. Our EquatePlus platform is continuing to give us a market advantage. We're continuing to invest to strengthen and grow the business. We acquired Solium Capital U.K. on the 1st of December and continue to expand our U.K. and European client base. We also have several new technology developments coming to market, including enhanced client reporting and an upgrade to the mobile app to provide more digital services. So good momentum here. In the deck, you will see we have consolidated reporting for U.S. CCT with our Canadian Trust business. Now we do provide the usual breakdowns at the back of the pack in the appendix. Now we did see continued growth in Canada, although in the U.S., CCT's performance was slightly lower due to reduced levels of bond issuance, Ginnie Mae custody movements and temporary higher costs. Now we plan for these costs to come through as we exited the TSA in October. Through the TSA, we had over 300 staff that did not transfer from Wells Fargo. But we were -- as we were exiting the TSA, we had to establish recruit, train replacements, and that did include establishing an Indian captive, which will help reduce operational costs in the future. Now the CCT integration was one of the largest and most time-sensitive projects we've ever undertaken in Computershare. And I'm pleased to say that this highly complex technology and operational transition was finished on time and within budget with minimal disruption to clients, employees and other key stakeholders. Now this track record really highlights Computershare's technology expertise and major project management skills. Now I've also said that we will use increased earnings from margin income to invest in and strengthen the group. You were investing in enhanced digitized solutions across the issuer space, and we're creating modern platforms to reflect the relationship issuers want with their shareholders and provide digital foundations for us to find new solutions to meet our clients' challenges. Moving now to costs. Our total costs increased by about 1%. However, excluding KCC, costs were actually up over 6% and BAU cost OpEx grew by 4%. Now inflation was somewhat mitigated by some of our cost-out programs, which saved us $18 million, and there are a further $57 million of integration cost synergies in CCT to come as well as future benefits of EquatePlus rollout and other cost programs. But in the period, we also had a number of operational expenses and one-offs. We had over $6 million in stranded costs for KCC, for example, which we will be removing and as I mentioned, temporarily higher costs in CCT. Cost out especially with the impending sale of the U.S. mortgage service business will continue to be a major focus for the team. Finally, cash flow and balance sheet are highlights of the results. Free cash flow was almost $300 million. Debt leverage now stands at around 0.8x and is trending lower by June 30 and including the sales proceeds for U.S. mortgages and the cost of the buyback and also assuming no M&A, it should be around about 0.4x. Now this balance sheet strength gives us great optionality. Now we will continue to invest in and strengthen our core businesses, including our digitization strategy and product road map, and we will continue our patient approach to M&A with a pipeline of attractive deals look okay, and we will reward shareholders with buybacks and dividends. And today, we also announced an interim dividend of $0.40 per share. Now that's a rise of 33% versus the PCP and there's a new record high interim payment for Computershare. So let's now move on to Page 6 and talk a little bit about margin income and provide some commentary on balances and hedging. Overall, balances were fairly stable, including MMF, and we manage over $76 billion of total client balances, whilst the total is up. The mix of these balances are driven by cyclical factors such as movements in interest rates, the level of corporate actions, bond issuances, et cetera. Some of these balances yield more than others, depending on duration, client contracts, and the type of balances they are. And Nick will talk a little bit about that later. I think the other important point is to provide an update on our hedging policy. We have continued to lock in margin income since we last spoke at the AGM. We now have about $1.6 billion of total margin income locked and regardless of moves in interest rates. Now over $270 million of MI is locked in for FY '24 and $260 million has been locked in for FY '25. Now these hedges were all about improving the consistency of our earnings and as we look forward, let me address the question many of you will have in mind, what happens to Computershare earnings when rates fall. I mean, in isolation, a 50 basis point change in cash rates equates to around $0.05 of management EPS on an annualized basis. But of course, as ever, there's a little bit more to it than that. When rates fall, we also expect corporate actions and bond issuance levels to increase, for example, and that should drive up our cash balances. In fact, a $1 billion increase in cash balances also generates around $0.05 per share of management EPS. So it's hard to tell when that will happen, but it's not all with downward traffic. Now let's move to Page 7, and talk a little bit about the outlook. With our decent first half, we do have a positive outlook for the rest of the financial year. We are reaffirming guidance and management EPS is expected to be increased by around about 7.5% in FY '24 to around $116 per share. Now that does imply around 11% management EPS growth 2H versus 1H. We continue to expect EBIT ex. MI to be up for the year, as I said. And in 2H, we assume ongoing growth in recurring fee revenue. That's the quality industrial and Computershare, you might say. And we also anticipate similar levels of revenues in corporate actions and also in CCT ex. MI. Now admittedly, I do see a stronger corporate actions pipeline, however, I think a number of deals may well slip into FY '25, which is a minor earnings sensitivity for the group. We also expect margin income to be around $825 million for the group. As many of you will remember, our guidance methodology is to apply the interest rate curves as we where, we prepare these numbers which, at the moment, assumes a U.S. rate cut in May, although that view seems to have changed just overnight. And of course, we also have to assume that we maintain current levels and mix of balances. As I said in August, guidance is more sensitive to these balances and rates these days and therefore, changes are more meaningful. However, the treasury hedging policy is designed to soften and smooth the impact. And also for outlook, we still include U.S. mortgage services for the full second half of the year in guidance. But we do not include the impact of the buyback on the share count. And once we complete the sale of that business, we will adjust these on completion. Now Nick, let me hand over to you for a little bit of a deeper dive into the financials.

Thank you, Stuart, and good morning, everyone. I'll start with our financial results on Slide 8. Total revenue for the group increased 6.2% over the PCP, and excluding margin income, revenue was broadly flat. Remember, however, these comparisons include KCC in the PCP. Adjusting for this, revenue for the group was up 10.3% and revenue, excluding margin income, up 4.5%. As you've heard, this revenue growth was largely driven by an increase in event and transaction fees. Margin income was up 25% to $429 million, largely the result of higher rates. And total costs were up just over 1.3% excluding KCC, they're up around 6.5%. These are broken out in a bit more detail on Slide 15. In summary, though, BAU OpEx, excluding KCC, is up around 4%, this is the balance of the benefits from our cost-out programs of $18 million, offset by inflation across our personnel and third-party expense lines of $47.5 million. In addition, we saw another $23 million of increased costs in the half, and these costs were either unusual or less BAU in nature. Around 1/3 of these related to new investments establishing a new captive back-office operation in India and cost attributable to the Solium Capital U.K. acquisition. About half of this is one-off and will not recur. Another 1/3 related to stranded costs arising from the KCC disposal, we expect to reduce these in FY '25. And the final 1/3 is increased irrecoverable VAT expense in the U.K. Higher margin income means lower proportional vatable revenue, the result of which is that we're unable to recover quite as much VAT as we have in the past. Going forward, this expense will become BAU in nature until rates come down. EBIT increased 24% to $546 million, and the EBIT margin improved 480 basis points to 34% both largely attributable to the higher MI and transactional revenue growth. Excluding MI, EBIT was up 21% as well as the transactional revenue growth, EBIT ex. MI benefited from lower amortization expense because of the longer MSR useful life now being applied. On a Proforma basis, excluding U.S. mortgage services, 124 EBIT ex. MI would have been higher by around $19 million at $135 million. Interest expense was up 60% to $86 million. The average cost of debt was almost 7%. Now we do expect interest expense to be lower in the second half, reflecting the maturity of $220 million in USPP debt. Remember, all of our debt is at floating rates, so it's a natural hedge to margin income in the event that rates fall. Tax expense was also higher in the half, that up by almost 10% at just over $129 million, albeit the ETR was 230 basis points lower at 28%, reflecting lower levels of Canadian withholding tax payments during the half. We expect the ETR to be similar in the second half. Management NPAT was up 23% to $331 million. Management EPS was also up 23% to $54.8 per share. Adjusting for the buyback, it was a touch higher at $54.9 per share. During the first half of '24, we bought back 5.59 million shares at an average price of just over $24. That's in Australian dollars, of course. The actual 1H one-offs was $602, 390,548 million shares. Statutory results are on Slides 49 and 50. Statutory NPAT was $105 million, down 40%, this was largely attributable to the impairment related to the U.S. mortgage services disposal of $116 million, which we noted in our ASX announcement of October 3. This does not impact the expected sale proceeds in excess of $700 million. In addition, the amortization of non-MSR acquired intangible assets of $34 million; acquisition-related expenses of $60 million, largely the cost of the CCT integration and $15 million associated with our cost-out programs also impacted the statutory result. Slide 9 bridges the 23% improvement in EPS from 1H '23 to 1H '24. The sale of KCC cost us $0.08 per share in earnings, but this was more than offset by improvement in both core fees and event and transactional revenue, $0.06 per share between them. MI added almost $0.12. But as I mentioned previously, the cost of running the business as well as interest and tax expenses were all up by $0.046 and $0.03, respectively. After including $0.01 in benefits from the buyback, overall EPS was [ $54.9 ] for the half. And on Slide 10, we show how we expect second half earnings to unfold. The EPS is expected to be around 11% higher in the second half. We'll see the usual seasonality benefits from proxy and AGM season in the northern hemisphere. That's worth $0.03. And stronger employee plans trading driven by client vesting events is the key driver behind the operational revenue growth of $0.043. MI will be a little lower to reflect the anticipated mix of balances plus the U.S. rate cut in May, whilst cost will be a bit higher. This is largely the result of salary increases being effective 1 October. So we see a full 6 months of that in the second half. Interest and tax expense will be a bit lower. We don't anticipate any Canadian withholding tax in the second half, whilst the forecast rate cut and debt repayment will both help. This leaves us with planned EPS for the second half of just over $0.60 per share. For the avoidance of doubt, we're not factoring in any impact from the ongoing buyback or the sale of U.S. mortgage services, we'll update the market of the net effects on completion, but we don't expect them to be material. I'll now move on to margin income on Slide 11. We're now expecting around $825 million of margin income in FY '24. In the first half, we delivered $429.4 million of MI on average client balances of $28.7 billion. That's a yield of 2.99% and to be clear, this excludes money market funds. In the second half, we expect slightly higher balances of $29.5 billion but a lower yield of 2.68%. These higher balances are essentially where we exited January together with what we have current line of sight to. The lower yield reflects an assumed U.S. May rate cut in line with the latest curves and other currency rate cuts in Q4. In total, these rate cuts drive around 1/3 of the lower yield. The other 2/3 are the result of the expected mix with the second half balance growth driven by nonexposed balances. Looking at this all in aggregate, we anticipate average balances of $29.1 billion for the year, which are expected to yield 2.84%. Within this, exposed balances currently yield just under 5%. Hedged balances currently yield just under 3%, and our nonexposed balances yield just over 100 basis points on average. Obviously, yields are driven by the mix between the categories, and we're a little bit more sensitive to the mix in CCT, which are largely driven by market factors. Within CCT, the mix of balances is really driven by the volume of bond issuance across the various product categories it serves. In 1H '24, we've seen strong volumes across high-yield and investment-grade conventional debt as well as CLOs, but these typically drive lower-yielding balances. We do earn more MI on products such as RMBS and CMBS, where issuance levels are at cyclical lows, but we do expect they will recover in the future as these markets improve. Outside of client balances, MMF balances are up. This is mainly due to an increase in new business that drives balances to them in particular, certain structured debt programs. It is not about balances switching from exposed to MMF. Let me be clear on that. And as we've stated in the fact, MMF balances earn around 10 basis points on average. In the chart on the bottom left of this Slide 11, you can see the movements in our anticipated NI relative to our August disclosure. We expected $840 million of MI back then. However, the curves are now lower, and this reduces MI by $32 million. Balances are also a touch lower for the year on average. Less CCT new business is going into cash versus MMF and U.S. mortgage services balances are down due to lower refinancing levels. The impact of lower balances is $40 million in MI for the year. Offsetting this is an improved mix, predominantly in the first half, nonexposed balances are proportionately lower with more new business going into MMF whilst exposed balances are higher, largely due to improved management of foreign currency balances at CCT. This is delivering $35 million in incremental MI. We've also restructured some of the hedge book, extending out duration to enhance yield. This drives $22 million in extra MI. Now going back to hedging. We've currently got around $9 billion of swaps and term deposits in place, covering around 52% of our exposed book, 56% if we adjust for the sale of U.S. mortgage services. Policy wise, we do have capacity to go higher, but in practice, we will always be conservative. So I do not expect to increase our overall hedge book percentage materially from here. There's more detail about balances on Slides 52 to 56. However, we have inadvertently not disclosed the same level of detail around exposed, hedged and nonhedged NI as previously. I am sorry about this, and we are looking to rectify it, and we will update the deck on our website shortly. I'll now wrap up my comments with a look at our balance sheet and cash flow on Slide 16. In the period, we generated approximately $370 million of net operating cash flow. That's an EBITDA to cash conversion rate of around 60% at actual rates. Free cash flow was $296 million. Net spend on MSRs was $56 million. This was higher than intended as we did not complete a recycling trade given the impending disposal. Instead, the MSRs will be sold with the business when it completes. Net debt is $1.31 billion at the half, around $94 million higher than at year-end. This reflects the impact of the increased dividend as well as the buyback. Last week, we repaid $220 million of maturing USPP debt, and we'll continue the buyback post resorts. The interim dividend is set at the same level as the final. So we expect another $155 million or so of outflow there. And just on the dividend, you'll note that it's franked at 20%. This is the maximum amount we can frank right now. We expect franking credits to be back at 0 in September. With the proceeds from the sale of U.S. mortgage services, overall net debt will be much lower still at year-end. I'll now hand back to Stuart.

Thank you, Nick. Now let me wrap up with some brief comments on our priorities and also our strategies. Operationally, in the second half, we're going to be focused on continuing to deliver the planned CCT synergies, our digitization projects and continued rollout of EquatePlus along with a range of existing and new cost-out initiatives. To complement our organic growth, we'll also continue to patiently evaluate our pipeline of acquisition opportunities and continue with the buyback. As I said, we have the balance sheet capacity to self-fund our growth, strengthen our businesses and also reward shareholders. We will continue to execute our strategies to build a simple computer share with higher quality earnings and better returns and it's the execution of these strategies that lay the foundations for future growth. Now we've shown you more about what that Computershare looks like today. It took a little bit of leap of faith to see the core strength when we first spoke to you about it back in 2022. The simpler Computershare will be capital light, more cash generative and will deliver higher returns for shareholders. We should also have more consistent earnings with our increased hedging and that's important in an uncertain rate environment. But just on that rate environment, perhaps a simple way to look at this would be on a sort of mid-cycle basis. Now I still think that if we assumed interest rates were at 3%, margin income in the group should still be around $600 million per annum with over $250 million of that locked in each year. So as you can see, Computershare is performing strongly, has multiple growth options and a strong financial base, and we're well placed to continue to grow recurring revenues, benefit from cyclical recovery in some of our events and transactional-based businesses and capitalize on attractive M&A opportunities. It's been an extremely busy productive and rewarding time at Computershare. And before we open to Q&A, I'd like to thank all of our loyal customers and all of my colleagues for their outstanding contributions in what was one of our most intense but rewarding 6 months that I can remember. Now I also have to offer some apologies. I do believe that there were some technical sound issues for those on the phone conference, not so much in the webcast and I'd be happy to recap at any point, anything that we may have been missed. The script from today will be shortly released on to the ASX. So let's now move on to questions. Thank you.

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

Stuart and Nick, just starting on core revenues. There were 2 areas there. I was just interested in a bit of color on. Firstly, on CCT, sequentially, there was quite a significant drop in the revenue ex. margin income from $250 million in second half $23 million to $22.6 million clearly aware there's lower issuance moving through U.S. debt markets, but still surprised by the extent of that half-on-half change. So just wondering if you can unpack kind of what drove that?

Kieren, yes, there's a couple of things moving on sort of deepen the weeds a little bit in terms of all the sort of different revenues. Probably one of the largest components of that is really our document custody revenues. I'm sure you'll remember that we needed to be an approved document custodian and we're having some challenges with Ginnie Mae approving Computershare as a document custodian in the marketplace. As a result of that, we had to move the Ginnie Mae sort of documents out which took place in April of '23. As a result of that, when you go into the PCP, the Ginnie Mae revenue was still in there in FY '23 first half. It wasn't in there in FY '24 first half. That's probably one of the sort of the major drop downs as far as when you look at some of these comparisons, yes, there is sort of -- there was lower market activity. I think both myself and Nick touched on that. But we have seen sort of market share improve in a number of categories, et cetera. And I think that the business is still sort of well placed to continue. It's always useful reminding ourselves that when we acquired that business, it didn't make any money on an EBIT ex. MI basis. And we've been sort of putting amending fee structures, working on the efficiencies there. So -- but it was probably that sort of the Ginnie Mae stuff is probably the biggest issue. I mean that was a reduction of 13% or so of our document custody revenue. That's really the weeds behind that line there.

Okay. And sort of the other segment issuer services, just one you should have paid numbers, I think, down to around similar like 3% on PCP similar to what the account numbers did year-on-year. How much of that is attributable to the lack of IPO activity in the market at the moment? Sort of just wondering what your view of more sustainable through cycle trends are in that business moving forward?

Yes. So I mean, from an issuer services perspective, you're right. I referenced on the call that just Computershare maintained market share for its IPOs, but the number of IPOs, we processed in the first half of '24 compared to '23. It was down 50%, half the number of IPOs. And we do have a little bit of a reliance on the IPO market to replace and replenish shareholder numbers for companies that disappear of the bores, bankruptcy, M&A, been taken private, et cetera. So IPOs were down, that also has a little bit of a knock-on effect on some of the other sort of registry maintenance revenues there. As you can imagine, in a post-IPO period, you have a little bit of lock up on some of the employees. And when that frees out, you have the ability for them to actually trade out. So the DWAC fees, et cetera, et cetera. So that's really what the story was on that front in terms of shareholder numbers, et cetera. It's hard to sort of guess what a normalized environment. I think it's been 5 years since I've seen a normalized environment. It feels like that sometimes. But I mean normally, we would expect sort of low single-digit, sort of growth in that sort of register maintenance area. But -- and I think that as of IPOs come back a little bit, et cetera, we'll see that return to growth. But clearly, a focus for us as a business as well, just in terms of pricing and other things that we can do to shore up that line.

And just one last question on U.S. mortgage services on the sale. Just comparing your proforma, I guess you provided against your actual [indiscernible] about 1% low, which is a bit of a change from the sober commentary around the transaction being EPS accretive. So just wondering what's altered there and maybe that's more a temporary factor around performance of that business at the moment? And then sort of associated with that, assuming the sale does complete, how we should be thinking about the potential for stranded costs for that division moving into FY '25?

Yes, Kieren. So you're right. Based on the figures that we disclosed last night, it does look marginally dilutive based on first half '24 actuals. When we disclosed in the past, we were looking at FY '23 performance. And the reality is that the performance of that business it was better in the first half of '24 than it was in FY '23, and that really explains the difference in that impact. You'll recall that we've had an ongoing sort of cost-out program in that business for the last 18 months, and we really sort of saw costs come out in the first half. And so that's really what's happened -- and what -- that's really what's happened there. In terms of...

Just on the stranded cost.

Yes. So in terms of stranded costs, yes, there will be stranded costs for the U.S. mortgage services business in addition to the stranded cost we've already got from KCC. We're putting a program in place now to address those over the course of the next 12 months or so. We do obviously have TSA arrangements in place with the buyer for U.S. mortgage services. So that gives us a little bit of time before to get our plans in place and to start addressing those. But we know what we've got to do and how much we've got to take out, and we're pretty confident that we can deliver on that.

The next question comes from Andrew Buncombe from Macquarie.

Just 2 from me, please. The first one, I suppose, is in the context of your strong cash generation position and your exceptional gearing. How are you thinking about the M&A pipeline for the next 12 to 24 months?

Andrew, thanks for the question. Yes, thanks for pointing out the balance sheet, the optionality that it gives us when we discuss that at the board at Computershare, we always try to find the balance between returns to shareholders, investments in the business and then inorganic opportunities from an M&A perspective. As we've said in the past, the areas of M&A, we're particularly looking at are really in the core businesses that we have just now particularly through governance services. They tend to be slightly smaller based acquisitions and bolt-ons and then also in the corporate trust space. I'm fairly confident from looking at that pipeline. I said that Corporate Trust felt to me a little bit like share registry in the '90s and I kind of emphasized how large that project was extracting out of a large U.S. bank, a very complicated business over 100 technology platforms and moving that across and finding solutions to these challenges. And I think now we're knocking on the doors of other institutions because we have these credentials. We can prove that it can be done. So our pipeline is looking reasonable. We're in discussions and diligence on a number of items. It's still a long way to go. But I'm positive that there's opportunities out there to deploy capital at suitable returns. So it's an exciting time.

Excellent. And then my other question was in relation to, I suppose, the book mix of the CCT business. There seems to be a bit of misunderstanding around how that book mix is balanced. Can you just give us some color around whether the majority of that book is actually skewed towards residential mortgage-backed securities or commercial mortgage-backed securities?

Yes. So look, yes, we have -- I mean, from a market share perspective, you would say that it's skewed towards commercial. But if you look at overall number of deal sizes and bond issuance, it's actually sort of more on the residential mortgage-backed securities just in terms of the number of deals and number of transactions. We have a very high market share of CMBS but I think that market has been pretty down over the last 12 months. But we have more sort of skew towards RMBS and we do on CMBS just in terms of the different products. I mean CCT itself is made up of a dozen to 15 or so different products. We're fairly balanced throughout that. There is a lot of third-party material out there talking about relative market sizes, et cetera. And I'm really pleased that through this sort of transition with our clients and having new platforms and other bits and pieces that we've been able to sort of maintain or enhance the vast majority of our market positions across all these products.

The next question comes from Nigel Pittaway from Citi.

I was just after trying to understand a bit more about the impact of this skew towards larger transactions in Issuer Services and the impact that's having on the sort of numbers in that division? I mean, do those larger transactions typically have a higher skew towards margin income? Are they sort of lower EBITDA ex. margin income deals. Can you maybe just give us a bit of color about that?

Yes, sure. So just to recap on that one, Nigel. I talked about our overall corporate action events being down around about 17% globally in 1H '23 Computershare processed just over 900 individual corporate action events and in 1H '24, we processed just over 750 corporate action events and that's really the drop there. But despite that volume reduction, our revenue from corporate actions was actually up. A lot of that was in the U.S. There was a number of above-average size events and we did events for Johnson & Johnson, Highlands Real Estate Investment Trust, Black Knight, Broadcom, AMC Entertainment, and they kind of drove sort of higher revenues. And I think you then sort of have that sort of look forward. Well, what does that actually mean? Again, looking at sort of pending M&A, which are global deals announced and is pending. The report as at sort of the end of the year was sort of pending deals are actually up 180% compared to December '22. And there's some pretty transactions in the U.S., especially that have been announced. You have Exxon looking to acquire sort of Pioneer Natural Resources, Chevron, looking to acquire [ Hess ], Cisco Systems with Splunk, you've got KKR, they've got multiple deals in excess of $20 billion, et cetera. So the pipeline of some of these larger sort of transactions which is -- it really depends on the type of transaction. If it's all stock, then there's no real MI component. It's all fees. If it's a cash type deal, then that's really where MI comes into it. And when I look at some of the larger deals that are coming off, that's basically fee-based, not just MI-based because there are sort of more stock deals. Now I think some of these transactions may well slip into FY '25, not necessarily the second half. It always takes a little longer these days, it seems to get some of these regulatory and competition approvals, but I think the prospect is positive.

Okay. I mean I guess I was just really trying to drive into the fact that obviously, if you look at the EBX margin income margin in Issuer Services is sort of at a low that's not been seen before. Now is that -- I mean, I was just trying to sort of understand, is it the sort of skew towards larger deals that's partly driving that? Or is it just simply because IPOs more broadly are more subdued to that sort of ended up where they...

Bigger deals. Yes. Not so much IPOs, bigger deals.

Yes. Okay. Fair enough. And then just my second question, just -- sorry -- and then just the second question is on digitization. And I was just wondering if you could sort of maybe give us some sort of overview of how much you think opportunity you think there is in digitization, both in terms of revenue opportunity and cost savings.

It's probably a long answer to that because you've got to sort of break it down by the divisions and the types of products. When we've talked about sort of digitization in the past. We've talked about robotic process automation and the ability to automate tasks that were sort of done manually before Computershare, we're a fairly earlier adopter of that technology, et cetera. You've now got other sort of technology that's coming out that we'll be able to take advantage of a little bit in the sort of AI space without getting on marketing AI on you, Nigel. But a number of our digitization projects that we've got just now is really about moving some of the friction in some of our markets with customers and their ability to actually affect certain transactions from a digital perspective rather than, in some cases, a paper-based perspective. I think that there's also going to be opportunities with some new products that we'll be able to roll out with some partnerships especially in the Issuer Services space around expediting of payments and other bits and pieces there. So it's a combination of using digitization not only to just drive lower costs, but actually to provide more value to our customers, allow them to have greater insights to what's happening on their register or their employee share plan, et cetera and really to sort of continue to be at the forefront of some of that innovation. So it's going to be a mix of cost out and enhanced functionality, which will improve increased retention, it has ability to be used as far as switch business, et cetera. So it's always a bit of a balance. It's not just all cost out.

The next question comes from Andrei Stadnik from Morgan Stanley.

Can I ask my first question around that 30%, over 30% EBIT margin target, even assuming 3% cash rates. That seems like a new target. Can you talk a little bit about that? And maybe what kind of additional M&A would be need to do in order to deliver those sort of EBIT margins even with low rates.

Yes. And so first of all, in that margin target, we're not assuming any M&A. We're just taking the business as it is on a proforma basis, excluding U.S. mortgage servicing. And we're saying, well, if we've got interest rates of 3%, then based on our current book, that should drive margin income of about $600 million at least. And then as you look at our EBIT ex. MI today, it's around -- on a full year basis, it's close to $300 million. And then if you overlay that with our cost-out programs. So you've got -- as we've said, we've got another $50-odd million to come from CCT synergies. There's other cost programs in train and collectively, that gets you to what I would say is a long-term sustainable EBIT level of around $1 billion. And so if you look at that, that should give you about 30% in long-term margin before you get to any sort of benefit or otherwise from further investments in M&A.

And my second question. Can I ask around the Corporate Trust. So can you talk a little bit more about the revenue dynamics because 1H '24 was it seems sounds like it was well down or clearly down on the second half of '23. So can you talk about some of the revenue dynamics there, maybe the mix of business and also just how important our new volumes in debt capital markets for you?

Yes. So look, I think -- I mean, just looking at CCT fee revenue was down. Look, I think it was around about sort of CCT on isolation was probably around about -- down between $7 million and $8 million versus 1H '23 just on fee revenue. As I mentioned, probably about 60% of that was really the document custody fee reduction, which is really about the Ginnie Mae related to [ customer ] files where we actually had to transfer them to a successor document custodian in April '23, so we didn't have that revenue. That was a little bit there. But overall, trust fee revenue was also down a little bit, but around about 1% to 1.5% in 1H '24 versus '23. Now trust fees were lower than anticipated. That really just reflected deal volumes across some product categories, yes. Probably with the exception just saw some of the environment certainly, the MBS category has continued to be impacted by the environment, so the resi and the commercials rod. But we also did see some most of our other categories just did see some year-over-year growth as far as new deals were concerned. But some of them are sort of margin income related, specialized asset servicing, corporate debt, small business administration categories continued to experience a little bit of growth in fee revenue. So look, it's a little bit of a mix as far as that. But I think we're well placed in terms of growing it. It's always difficult just analyzing a top line in a 6-month period, especially when we're coming right through that transition and the ability to get out there and onboard certain things. So I think that we're still pretty confident that Corporate Trust, as we've seen for many, many years in Canada, should be able to provide solid growth going forward.

The next question comes from Julian Braganza from Goldman Sachs.

Just a couple of questions for me. Just firstly, following on just from the -- just that EBIT margin target that you have there. Just wanted to understand how you're thinking about that in terms of how it applies across the different business units and particularly just in terms of the conversation around issuer services and where you can get that business in terms of EBIT ex. MI and the margins.

Sorry, Julian, you're talking about balances across the different business units or earnings across the different business units?

The earnings, the EBIT margin ex. MI, just for the different divisions of the business.

Yes. But I mean, we don't really talk about sort of -- I mean, EBIT ex. MI, especially in a business like Issuer Services, a number of the contracts are all to do with MI, et cetera. And I mean that business, including margin income has margins of around about 36.5%. Margin income is really part of that business, especially through corporate actions and retaining that. We have strategies to go out with companies in terms of prefunding of dividends because we can share rates, et cetera. So it's really part of that model. I mean, obviously, if you look at it just on an ex. MI basis, then that the margins would actually drop below 30%. I mean at the moment, they're running at around about sort of north of 35%, including margin income. That's really how we look at it.

Okay. Great. And in terms of just the other divisions in terms of how you look at it through the cycle relative to that 30% target. I mean I know that includes that margin income, but I mean workout, but if you back it out, that...

Yes. Well, as Nick have mentioned and I also talked about even in a mid-cycle rate environment, we still expect north of $600 million of margin income. Our Global Corporate Trust division still delivers margin, including MI north of 50% and our employee share plans business, which doesn't have a huge amount of margin income in it, but a little bit at the moment, its margins are at 34%. So as a business, just looking at this from a margin perspective, these are very, very healthy and strong numbers, really in a privileged position to be working hard on these businesses delivering margins of that rate. And when we talk about ongoing sort of margin, because MI is part of the model, and that model is factoring in perhaps mid-cycle rates, et cetera. We don't look specifically on an ex. MI basis. But across all our businesses, we're looking to grow. Part of that will be cyclical. Part of that is going to be development of new products, new client wins, et cetera. We've got pretty good margins at the moment. But that's again, margin expansion that's what we're trying to do.

Great. And in terms of just the EBIT ex. MI, in terms of the skew between first half and second half. Are we still expecting that to be similar to FY '23 in terms of just the drivers for that?

Yes. Look, you can see from the bridge in the deck, Julian, that we do expect EBIT ex. MI to be much stronger in the second half. In part, that is because of the normal seasonality that we see in the Issuer Services business and also because we typically have a stronger second half in employee share plans because of client vesting events in the second half. And of course, we've also got the benefit of the Solium U.K. -- Solium Capital U.K. acquisition in December, which will obviously benefit the second half as well. So we do anticipate a better second half. And overall, as we said, in August. We anticipate that EBIT ex. MI will be around 10% up over the -- over FY '23. And we still expect to be there or thereabouts, if not a little bit north of 10% of for the year.

The next question comes from Ed Henning from CLSA.

Two for me, please. Nick, before when you were talking about the target of 30%, you mentioned costs out. If we think about ex divestments and acquisitions on, I guess, a steady state, you've got synergies coming through, you've got costs out. You've also got investment. Are you saying over the medium term, you expect cost to go backwards or just run below inflation, which helps you get to that target?

Yes, I expect cost growth with the cost out targets that we've got, Ed. And with the cost-out targets that we've got, I expect cost growth to run below inflation over the medium term? Yes, absolutely.

Okay. But no, we're not talking about absolute costs falling because of the continued investment just below inflation.

No, that's right.

Yes. Okay. That's great. And then secondly, just on your guidance and you run through a lot today, and you've got a line of sight on a number of things. Can you just talk about some of the things that you don't have line of sight on in your guidance, the plans, the transactional revenue coming through or the -- do you have line of sight on the proxies that have a seasonality coming in and then the balances as well. Is there any -- I guess, what I'm trying to get at is, what do you see as the risks to your second half guidance? Because obviously, you run through a lot of the stuff on the underlying momentum, but I'm interested on the risks that you said.

Yes. So look, I think that risks across Issuer Services is generally pretty low. If anything, it's going to be in the upside and the closing of some of these corporate action transactions, employee share plans, the risks are really equity markets completely c*** themselves in the second half, that's really around about some of the trading, et cetera. So there's always a risk of some of the timing of that. But the busy time for them is really sort of as you come through March and April for vesting there just in terms of where equity markets are and then obviously, one of the things that we track is going to be what's happening with rate cuts, et cetera, even -- we normally just take whatever the curve says. And I know that the curve changed overnight, which is typical, just as we go and do that. We were anticipating a rate cut commentary today seeing the likelihood of that is a little bit less, but that will change next week. I'm not going to get sucked in to sort of redding about that. So -- and then it's just going to be some of the balances questions in terms of things coming in and for us to be able to deliver some of the cost-outs. The mortgage servicing, closing, I mean, obviously, there's -- we anticipate it toward in my view as sort of towards the end of March. That's really down to regulatory approvals and when that will happen. As you know, as you can see, that's not having a huge impact on -- from an EPS perspective. But it's just one of the knowns as we head into the second half in terms of when we'll actually -- the buyer will get these regulatory approvals. So -- but we're pretty -- we've got decent confidence going into the second half.

That's great, Stuart. And just on the balances part, while I understand the legacy business, you can kind of see the pipeline coming through. What's the visibility on the pipeline on the CCT business because you're obviously a little bit more dependent on market activity. Is that a lot more short term? Or do you have any line of sight on that coming through?

Look, I mean, obviously, we know -- there's fee revenue and balance revenue on the back book, right? So we know when redemptions are happening, et cetera. So we've got a pretty good sort of view on that and then also, we have a reasonable sort of outlook as far as deals in the pipeline in terms of new issuances, et cetera, et cetera, and just sort of breaking that down by deal volume across all the various products. So it's reasonable, it's consistent. It's also a business that we're learning. I mean, obviously, with our legacy business, we know that we have a bit of seasonality. That business has been sort of fairly sort of consistent in terms of the revenue drivers for a while, and we understand it more. We were limited in the historical data that we had when we certainly acquired the Wells Fargo business so we've got lots of decent insight up in Canada on sort of first half, second half, a little bit less so in the U.S. business. It's a bigger piece, and we'll learn that over time. Yes.

The next question comes from Siddharth Parameswaran from JPMorgan.

Just 3 questions, if I can. Firstly, I just wanted to just get your views on the yield. Firstly, just on the nonhedged exposed balances. I think you've reduced the guidance for FY '24 from 5.13% down to 4.86%. I just want to make sure whether that's due to changes in conversion efficiency. I know you flagged that you're expecting a drop in cash rates, I think, later this year. But it seems like quite a sharp drop just third grade light change in the cash rate. So I was just hoping you could give us some idea about what's happening with what the banks are actually paying at the moment and how we should think about that going forward?

Yes. Thanks, Siddharth. I mean, the real -- as I sort of said, the drop between what we saw in the first half, the 2.99% in the first half and the 2.68% that we called out for the second half. Yes, some of that is about the rate cut in May, but that's really only about 1/3 of that. So it's about 12 basis points were attributed to the rate cut. The rest of it is really coming from the mix of balances. And so we do see the balanced growth and the book in the second half swinging a little bit more towards nonexposed, which yields a little bit yet less versus exposed. And that's really because of the balances that we see coming in or the type of balances that they are, put another way, they are client transactions where the client is expecting a higher level of return or give back on the balances that we're managing, and it just dilutes the yield that we can generate. That's all it is.

That would specifically what you're getting from the banks on the exposed numbers.

Explicitly -- in terms of what we get from the banks on our exposed balances, we are -- on average, we're probably around 95% of cash rates. In some cases, we might even be a little bit higher. Now we obviously deal with a range of counterparties. Some of them pay us pretty much 100% of cash rates. Some of them pay us a little bit less. And it depends on the amount of money that we've got with them, what market we might be in, et cetera, et cetera. But I think if you go with -- if you use 95% as a proxy, it's not unreasonable.

Okay. Just on the exposed hedge rates that you're getting, I think you're guiding to 2.91% for FY '24. -- still surprised, given the amount of new hedges you've taken on in the last 12 months in a higher interest rate environment, but it still lags so far against the spot cash rates and what you're getting on the exposed nonhedged. So I was just wondering if you can once again just clarify why that rate is -- I mean it is higher than what you guided before but only marginally higher and it still lags very significantly versus the cash rate...

And yes, the exposed hedge rate is about 3% at the moment or will be for the second half. It's really a weighted average across a large book of hedges. We've got something like hundred different instruments in place that have been put in place at various times. And we've still got some legacy hedges in place or legacy fixed rate term deposits, which yield below current swap rates. And so that's really -- the answer is as those expire, we replace them with newer hedges at more current swap rates, then I'd expect that to the overall hedge yield to go up.

So yes, so it should still keep going up from the 3%. That's basically what you're saying. Okay. And just one other question. Just on the balances. I think maybe coming on from Ed's question. I think you indicated that the exposed [indiscernible] been dropping for a little while. And you indicated that mainly that's a mix issue, I think, on Corporate Trust. I was just wondering if you could -- do you have any visibility on where we are now, whether that's mid-cycle, whether we're at a high point versus sort of a 5-, 10-year view on the mix of balances that you typically get in this business by the different lines. Where are we in mid-cycle? Are we at a high point or were at a low point in terms of the exposed balances?

Yes. Look, which sort of -- we think that we're towards the low point in the market. If we look over the last 6 months, the balance is they've dropped off a little bit, but they're much more stable than they were. The large decline really that we saw was between first half and second half FY '23. Over the course of the last couple of months. If anything, we're seeing positive signs of balance improvement. So we think that we're towards the bottom of the cycle here.

Sorry, you're saying it's positive on the balance improvements that you're guiding to [indiscernible] reducing again in the second half?

No, no, that's not what I said. I said that we're towards the bottom of the cycle in terms of where the exposed balances are. And from here on in, we'd expect them to start to pick up. And in fact, we've seen a little bit of that over the last couple of months.

Okay. Okay. And just a final question. Just on the -- I think, Stuart, you mentioned that you were seeing market share improvements in Corporate Trust in particular segments. I was hoping you could just flesh that out? Which segments are you seeing some improvement? And can you give us some numbers?

Yes. Look, there's an independent reports that are published that breaks down all the various products. If I look around the -- some of SaaS CLO marketplace, our market share has improved 6% from 2022 and into '23, our CMBS bond admin role, the market share has improved from 90% to 98%. But I think one of the things is, I mean, in this market, you build relationships with issuers. And unless you stuff up, these issuers generally stay with you, right? And unless you're sort of being creative and do new products, which is one of the things that we're actually doing. So some of the market share numbers then looks at whether that particular issuer has been doing bonds, et cetera. So look, I think that the point that I was making was the organization went through a significant change project as we went through that integration. We may have been able to maintain, and as I said, increased market shares across a couple of areas. And that is -- that's a pretty strong achievement with all the change. And our goal is to continue to sort of provide the excellent service that our Corporate Trust division provides along with new technology to grow market share -- so -- and there's plenty of headroom to do that.

There are no further questions at this time. I will now turn the call back to Mr. Irving for closing remarks.

Well, finally, I'll wrap up. Thanks, everyone, for joining on the line today. Really appreciate. As you can see, at Computershare, we've got some very clear strategies to simplify, strengthen and grow the group and I think we're executing well, and I'm really delighted that we can share the higher earnings and better returns with the shareholders. Look forward to seeing many on the road over the coming days. Thanks very much.