Computershare Limited (CPU) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for the Computershare FY '24 Results Conference Call. Nick Oldfield, our CFO, is with me, along with Michael Brown from our Investor Relations team. Now as usual, we have released a presentation pack to the ASX. Now I won't subject you to a full page turn on this call. Instead, I'll focus my remarks on the highlights. Nick will take you through the financials in more details, and then we'll open the lines for Q&A. And just to remind you, we will be talking in U.S. dollars in constant currency unless we state otherwise. All right. Let's get started. Now the headlines at Computershare for FY '24 can be summarized quite succinctly: strong results, reduced complexity and increased returns. So let me just expand on that. Firstly, the results. Management EPS was up over 8%, slightly ahead of guidance. Management EBIT ex MI, up 21% and ROIC at 30%. In the year, we had growth in all the revenue lines of core fees, events and transactions and margin income revenues. So let's look at that across our 3 core business units. Issuer Services revenues were up 11%. In fact, all revenue line segments with an Issuer improved. Register Maintenance delivered positive growth in client paid fees and strong performance in shareholder paid fees in the U.S. Over in Corporate Actions, revenues were up over 23%. The result was really driven by an increase in the average size of transactions rather than growth in volumes. I think that recovery is yet to come. Now If I call out our U.S. Corporate Actions team, which had a strong year, its revenues for the year were about 25% higher than the average over the past 6 years, whereas other regions were below average. It really illustrates the uneven nature of global market recovery, but also potential opportunity of non-U.S. markets become more active. Elsewhere in Issuer Services, we saw good growth in Governance Services, our Entity Management and Co Sec businesses are resonating in the market. And we're making good progress leveraging our Issuer Services broader footprint to drive positive new client growth, although, of course, new clients from IPOs are at all-time lows. Over an Employee Share Plans, you can see that it performed strongly. Client paid core fees were up nicely. And as we flagged, the latent earnings power in this business is coming through. Transaction fees were up over 35% as we saw strong vesting activity in the period across our diverse client book. The volume of assets under administration is importantly continuing to be at a high level even with these high number of vestings. Equity is increasingly being used to attract, retain and reward employees. And our market-leading technology at EquatePlus, continues to roll out and is helping drive new client wins. Now in Corporate Trust, headline revenues modestly declined. There was a few things happening here. We exited our Ginnie Mae REMIC business in June 23, which was about $28 million in annual trust fee revenues. And outside that, underlying trust fees were flat. Market conditions were challenging. Higher interest rates did impact new deal volumes and mix. This affected balances and yields, particularly in the first half. However, in the second half of the year, new structured product issuance improved, and our book returned to overall growth. Encouragingly, this recovery in structured product securitization is driving improvement in trust fees, client balances and yields. And we finished the year with an increase in CCT balances versus the prior year and we see scope for further recovery here in '25. Now moving on to Reduced Complexity. We have delivered on strategy to build a simpler Computershare with higher returns. After waiting somewhat patiently for the right market conditions, we announced the sale of our U.S. Mortgage Services last October and subsequently completed in May. Now this was a significant milestone in reducing the complexity of our overall business, resulting in a more capital-light Computershare with higher returns. It's been a multiyear strategy. So if anything, I am now expecting our investor meetings to be about 60% shorter. But to recap, our simplification strategy also encompassed the sale of KCC, our Bankruptcy and Claims business in FY '23 that had no recurring revenue and high levels of working capital. Now we're not completely done. There's still some smaller businesses that we feel may be better owned by others, but these are not material to overall earnings or will significantly change our returns profile. So just a like pruning here and there. Now let's move on to talk about Increased Returns. Our strengthening balance sheet supports growth, investments and returns to shareholders. Net debt-to-EBITDA leverage was 0.36x at the end of the year and net debt itself more than halved including the sale of proceeds from U.S. Mortgage Services. Now that strength of the balance sheet enables us to pursue a range of opportunities. We are investing in our core businesses, making selective and disciplined acquisitions and, of course, increasing our returns to shareholders. Now let me make how we're investing in technology to strengthen our core businesses. It's my favorite topic as we continue to be an enduring future for Computershare. We have multiple technology projects running across the group. These will increase the value and integration of our offerings to customers and improve the efficiency of our processes. New technologies coming on stream in the next 6 to 18 months will replace many of our existing customer-facing products within Issuer Services. We have rolled out natural language search products to improve our servicing and continue to assess other capabilities to help in the fight against costs yet still providing a great service. We'll also continue to selectively acquire to strengthen our businesses. We announced a couple of smaller acquisitions and Employee Share Plans and Corporate Trust throughout the year that will strengthen our market positions and expand our customer base. And I've said before, we are patient when it comes to acquisitions and are comfortable maintaining a strong balance sheet while we wait for the right assets at the right prices. But of course, our capital policy is also to balance investments with returns to shareholders. We are around halfway through our buyback program and expect to resume purchases after these results. We will renew the program for another 12 months when it comes up for expiry in September. And in the absence of franking, it is a sensible way to reward all shareholders. We've also determined to pay AUD 0.42 per share final dividend. That's an increase of 5% on last year's final, making $0.82 per share in total. So let me summarize. FY '24 was an important year for CPU. We delivered strong earnings, which was a direct result of the integrated model we have assembled with that portfolio of recurring core fees, event and transaction revenue and margin income. We recycled capital out of noncore businesses and also strengthened our core too. We reduced the complexity of our business and also deleveraged the balance sheet. And we also developed new cost-out initiatives, including a new Stage 5 and laid the foundations for future growth. Now we have multiple earnings drivers, and I'll talk more about that after Nick takes you through the financials in more detail. But we enter FY '25 with a positive outlook. Management EPS is expected to increase by around 7.5% to around $1.26 per share. Now while forecasting risk is elevated, given global market volatility, we are confident in the guidance. We assume lower interest rates, but this is exceeded by our other earnings drivers. Our initial margin income assumptions are based on rate curves as of July 22 to match with this year's budget and board process. And of course, as we know, rate expectations have come down a little bit since then, but no doubt these curves will change many times between now and when we report. Ultimately, it's not that material, and we have other levers, and Nick will take you through that. Guidance does not include additional share purchases from the buyback nor any contribution from the Bank of New York Mail and Canada Corporate Trust business, which is expected to close at the end of the calendar year. That's not included in the initial guidance, but with the momentum of our core businesses, the benefits of recent investments, these counter benefits of lower rate environments such as improved client balances and events revenues and our new cost-out programs, we can deliver another year of positive earnings growth. Now Nick, over to you.

Thank you, Stuart, and good morning, everyone. I'll start with our financial results on Slide 10. Total revenue for the group increased 2.1% over the pcp, ex margin income revenue was broadly flat. Remember, however, these comparisons include KCC and the pcp. Adjusting for this, revenue for the group was up 8.6%, excluding margin income, it was up 7.8%. As you've heard, this revenue growth was largely driven by an increase in Event and Transaction fees, particularly in the Employee Plans business. Margin income was up 7.3% to $832 million due to higher rates, supported by improved balances in the second half. Total costs were flat, and I'll talk a bit more to them later. EBIT increased 10.7% to $1.143 billion, and the EBIT margin improved 270 basis points to 34.8%, both largely attributable to the higher margin income and transactional revenue growth. Excluding margin income, EBIT was up 21%, and the EBIT ex MI margin improved 210 basis points to 12.7%. As well as the transactional revenue growth, EBIT ex MI benefited from lower amortization expense because of the sale of U.S. Mortgage Services. On a pro forma basis, excluding U.S. Mortgage Services, FY '24 EBIT ex MI would have been higher by around $38.7 million at $349.6 million. Interest expense was up 22% to $163 million. The average cost of debt was almost 7%. Net debt at year-end was $461 million as we repaid $220 million in USPP debt in February and some of our syndicated debt post the sale of U.S. Mortgage Services in May. All of our debt is at floating rates, so it's a natural hedge to margin income as rates fall. Tax expense was also higher, up by almost 12% at $275.7 million, whilst the ETR was higher for the year, too, by 68 basis points at 28.1% due to more Canadian withholding tax payments than anticipated during the second half. Post the sale of U.S. Mortgage Services, we do expect ETR to be a little lower going forward. Management NPAT was up 8% to $704.2 million. Management EPS was also up 8% to $1.167 a share. And adjusting for the FY '24 buyback, it was a little higher still at $1.176 a share. Statutory results are on Slides 27 and 28. Statutory NPAT was $352.6 million, down 21%. This was largely attributable to the impairment related to the U.S. Mortgage Services disposal of $129 million. In addition, amortization of acquisition-related intangible assets of $70 million, acquisition-related expenses of almost $90 million, largely the cost of the CCT integration and $47 million associated with our cost-out programs also impacted the statutory result. We also had to revalue the contingent consideration expected from the KCC disposal following a worsening of its performance outlook, and that also negatively impacted the statutory result by $20.5 million. Slide 11 bridges the almost 9% improvement in EPS from FY '23 to FY '24. The sale of KCC cost us $0.013 per share in earnings, but was more than offset by improvement in both core fees and events and transactional revenue, almost $0.10 per share between them. Margin income at almost $0.097, but the cost of running the business and delivering the higher revenue was up $0.05, whilst interest and tax expenses were also up by $0.047. After including $0.01 in benefit from the buyback, overall EPS was still $1.176 for the full year. On Slide 12, we break out the cost bridge. Pro forma BAU OpEx, that's excluding KCC and U.S. Mortgage Servicing is up 5.6%. This is the balance of the benefits from our cost-out programs of $28.7 million, offset by cost growth to support those higher revenues and inflation across our personnel and third-party expense lines of $102.7 million. Overall, however, OpEx was up just over 8%. This reflects an additional $32 million of costs, which were unusual or less BAU in nature. Around $7 million of this was an investment in establishing a new captive back-office operation in India. These costs will be better absorbed in FY '25 as the operation that gets up to full capacity. Around $15 million were the operating cost of the Solium Capital business we acquired in the U.K. The remaining $10 million with stranded costs associated with the KCC disposal. As Stuart has mentioned, we've launched a new Stage 5 cost-out initiatives to tackle both the KCC stranded costs and those arising from the disposal of U.S. Mortgage Services. This program is targeting $45 million to $60 million of cost savings, which will be delivered over the next 3 years with a cost to implement of around $50 million. Slide 46 provides an update on all of our cost-out programs, and we've also incorporated the CCT synergy projects on this slide, too. So all savings initiatives are in one place. I'll now talk a little bit about margin income, starting on Slide 8. In FY '24, we delivered $837 million in margin income. That's at FY '24 rates on average balances of $29.2 billion. That's a yield of 2.8%. And we expect around $745 million of margin income in FY '25. That's a yield of around 2.6% on average balances of $28.5 billion. To be clear, this excludes money market funds. Now the lower yield in FY '25 reflects an assumption of 4 U.S. rate cuts in September, November, December and January. This is based on curves as at the 22nd of July. Now I appreciate the markets have seen substantial volatility over the course of the last week or so, meaning that the rate outlook is a little lower today compared to then. But if we cut the curves in our forecast today, FY '25 margin income in isolation would be around $20 million lower at $725 million. But to be clear, I say in isolation because this doesn't include any counterbalancing benefits. So for example, if rates are lower, our natural hedge in terms of lower interest expense kicks in. When it comes to nonexposed or interest sharing arrangements with clients in a lower rate environment, we'd look to manage payout rates to clients, reducing the amount that we pay out. And we'd also expect balances and other activity to increase further as we saw in CCT in the second half. So as we think about the risk of lower rates in the curves, it's important to retain a sense of context. We have options and levers available to us to mitigate any risk of lower rates in general. But getting back to our FY '25 outlook. Altogether, the impact of rate cuts on our FY '25 forecast is $136 million whilst the sale of U.S. Mortgage Services reduces MI by further $56 million. These negatives were offset by growth in balances and an improved balance mix. When we adjust for the sale of U.S. Mortgage Services and its balances of $1.5 billion, we still expect growth in average client balances above this of around $800 million in FY '25. That's an extra $500 million in Corporate Trust and $300 million in Issuer Services. These higher balances are in line with our June exit balances and what we've seen through July. Higher balances add $33 million in margin income in FY '25, whilst we also expect a slight change in mix away from non-exposed. This adds a further $29 million in margin income. As a result, we expect a decline in the exposed non-hedged yield of 45 basis points to 4.37% and a reduction in the non-exposed yield of 13 basis points to just over 1%. We also expect to increase the hedge book by $700 million as we look to get similar protections into our foreign currency balances as we currently have in U.S. dollars. This will help improve the average hedge yield to around 3.1%. In FY '24, it was 2.93%, whilst the exit hedge yield is marginally over 3%. We provide some further color on balances and the hedge book on Slide 7. You can see here, balance -- total balances were up 9.2% over the second half in FY '24. Money market fund balances were 13% higher. CCT was 7.8% higher. And whilst legacy Computershare was down 2.7%, this really reflected the sale of the U.S. Mortgage Services balances. Excluding U.S. Mortgage Services, legacy Computershare balances were flat to the first half. And aggregate client cash balances, including CCT, were up around 4% versus the first half. We had approximately 50% of our average exposed balances hedged as of the end of FY '24. This is around $9.3 billion, and we'll deliver $1.5 billion in margin income over its life, $273 million guaranteed in FY '25 and $1.1 billion over the next 5 years. And as I said earlier, we're in the process of adding approximately $700 million in additional hedging. This will add a further $39 million in hedged yield in FY '25, driving hedged MI to $312 million and the hedge book to 57% of our exposed balances. We'll continue to be fairly conservative on our hedging, so expect us to remain in the 50% to 60% range. There's more detail about balances in MI on Slides 48 to 53, including some increased disclosure on how the hedge book on unwinds over its life. I'll now wrap up my comments with a look at our balance sheet and cash flow on Slide 13. In the period, we generated $612.3 million of free cash flow. That's an EBITDA to cash conversion rate of around 60% at actual rates. We spent $43 million on CapEx, whilst net spend on MSRs was $76 million. These were sold as part of the U.S. Mortgage Services disposal and obviously, we'll no longer see this drain on our cash flow going forward. The U.S. Mortgage Services disposal delivered $577.8 million in cash, with the difference to gross sale proceeds being the transaction expenses and the cash included in the tangible assets of the entity being sold. We spent $27 million on other acquisitions. That was largely to Solium U.K. deal. The dividend was $312 million, and the share buyback cost us $211 million. Net cash flow was $640.1 million. And as I said earlier, we ended the year with net debt of $461.4 million, an improvement of $568.5 million versus the pcp. Net leverage was 0.36x. Looking forward, we will fund the acquisition of the BNYM Corporate Trust business in Canada and complete the buyback in this next financial year. Taking both these into account, as well as the higher dividend, I'd expect net leverage to be similar at this time next year. I'll now hand back to Stuart.

Thanks, Nick. And just a quick summary wrap up before we get to questions. So at Computershare, we think we're very well placed to deliver growth. Our focus in Issuer Services is really to continue to broaden the service offering integrating entity management, company secretarial and Registry services as we see that resonating in the markets where we've tested it. We'll also continue to roll out our technology innovations to drive efficiencies and also enhance service. In Employee Share Plans, we will continue to roll out our EquatePlus product in the U.S. and Canada and continue to invest in the products and features of this offering. We'll also integrate our recent acquisition and move these clients onto our platform. In Corporate Trust, we should see some recovery, and we'll also invest in technology solutions to drive market share in some products and continue to focus on the synergy deliveries. And I continue to believe we have roll-up opportunities in this space. At a group level, we will focus on cost-out programs to reduce some of the stranded costs from these disposals we talked about. And we've also got well-developed plans to achieve this. With business growth, investment in technology, lower interest costs as long as these cost-out programs, along with our hedging policy to give us some protection when rates start decreasing, we are well placed to deliver growth in FY '25. Now that's it from the presentation elements. And we'll now move on to questions.

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

Look, the first question I had was next year you really start to step out some of the cost-out opportunities. Can you just talk about the underlying cost growth of the group? You talked about BAU this year of kind of 5.6%. Do you think that can drop and it should be kind of slightly below inflation overall on cost growth, including obviously ext U.S. Mortgage Servicing business? But on overall, I guess, including all the cost out that you're bringing through on the synergies is the first question.

Ed, thanks for the question. Fundamentally, yes, we do believe that as we go to '25, the cost well below that sort of BAU OpEx. We announced our cost-out drivers. I mean a lot of the costs in Computershare's personnel costs, which -- and some interesting things around third parties and some of their sort of approaches to cost of driving things up in the short term. But with a range of our programs are well underway, we do expect that to reduce through FY '25 and continue to fight that fight.

Okay. That's great. But you still anticipate cost growth as opposed to absolute ex U.S. Mortgage Servicing cost for...

Well, just to be clear, I mean, if we exclude, if we -- including the U.S. Mortgage Servicing business in FY '24, we'd expect the cost to fall in FY '25. There will be absolute cost, lower cost in FY '25.

Yes. I was saying excluding that, just on an underlying basis, we should expect some modest growth, but hopefully below the BAU that you disclosed today just given your...

Yes, it will be modest growth, somewhere it will be between, I would say, 0% to 3% in FY '25.

Okay. That's very helpful. And then just a second question on the revenue. Obviously, you talked about very strong ex MI growth of 15% for next year. Can you just touch on where you're seeing the strong pockets of revenue. Obviously, the event-based business, it's only been higher in '21 before. Are you seeing any headwinds there? And where are you seeing the strong growth come through?

There's a number of things that are going into that ex MI prediction for FY '25. When we talk about sort of momentum, we've got a range of things happening within Issuer Services. We have increased market share in some areas, which will help drive some of that growth. Employee share plans, I mean, obviously, it was quite a standout year as far as transactional volume was concerned. The question is, will that stand up. Now part of that is going to be equity markets. But I think that will be similar levels, maybe a little bit below. It really depends on what's happening within that particular space. But we continue to see client wins within employee share plans and opportunities there. Corporate Trust ironically, in a slightly lower rate environment, a little bit more stability, we should actually see more securitization coming through, which will drive revenue growth within that particular business line. Then you tie that across with the cost-out programs that we have within the group, just in terms of running efficiencies sort of wrap that up, that really sort of is the key to how we think EBIT ex MI will be up next year.

Your next question comes from Andrew Buncombe from Macquarie.

Just the first one is on the strength of the balance sheet. So it's obviously very well placed. Can I just ask why the buyback is not being run harder, but also should we expect an extension of the current program to be announced at the February results?

Andrew, thanks for the question. So first of all, just on the buyback. So we announced AUD 750 million or so buyback program. We've done a little bit less than half of that at the moment just in terms of a run rate. And the intent would be is we can continue to be in that market until the beginning of September. And then we'll just follow that one through and look to complete that one through FY '25. I guess just a pace question. I mean I wouldn't read anything into the pace. I think that there's lots of times where we have to be out the market in blackout periods and when we're setting prices for DRPs, when we have information on sort of larger scale M&As and other bits and pieces over the years. These are the reasons why you can't always be in the market every single day. So it's just -- it's a little bit of a plotting along, right? But we'll probably run it at a similar pace throughout FY '25, but expect to complete the full buyback in that period of time. Yes. And I think that just gives us a little bit of flexibility in terms of committing to do it, but also allows us to look at our capital. Because when we look at the balance sheet, and you're right, it's very, very strong. There's a question of what you're going to do with it. And we've always taken that sort of balanced approach to using that self-funding of capability in Computershare to support growth for inorganic acquisitions. We also have some of our investments in tech and others. And then we balance of returns to shareholders through a combination of the buyback and also the increase in the dividend. And as you're aware, we don't have any franking credits at the moment. And so we try to balance the buyback and the dividend. So we are committing to continue with that buyback and sort of going through the formal process to announce that out once it comes to an end in early September. And then as far as February is concerned, the Computershare Board will look to where we are, whether any acquisition in the pipeline and the status of them and make a judgment call about whether we want to do more then.

Second question, what's the latest thinking on the U.K. mortgage servicing book? That's been something that's been discussed for potential edits for some time. What's the latest thinking there?

Yes. So it's been a bit of a challenge to sell the U.K. Mortgage business. And just in terms of the growth in buy-to-let has been challenged for a while. And as a result, we've had a number of parties that look at the business, but their ability to be able to stand it up, et cetera, has been a concern. I mean what is interesting in that business is, I think there'll be a little bit more consolidation in the marketplace for the first time in a couple of years or some reasonable-sized mortgage books that will be available. And I mean that business has done a cracking job using tech and pulling out costs over the years for Computershare. So we've got a -- we can see a very clear runway for another sort of 4 to 5 years of profitability in that business, albeit modest, and it's not a significant management distraction. So Andrew Jones, who runs that for us in the U.K. does a really great job. There is still interest in the business. There are still people actively looking at it, and we're in discussions there. But with a combination of being very well placed to top up the book, through some of the mortgage asset sales, continuing the cost out there and also working through some of the interest in the book, it's not a huge pain point for Computershare. But it certainly is on that list of assets that we feel would be perhaps better owned elsewhere, but it's going to wait for the right buyer and at the right moment. That's really what's happening in that business.

And then just a final one for me on the other side of the coin. When you're looking at M&A opportunities, what are going to be the most likely divisions that they're aligned with in the next 12 to 24 months?

It's really the 3 core businesses, which is Issuer Services, Employee Share Plans and Corporate Trust, we have an active pipeline in terms of -- in all of these divisions in terms of running our eye over the assets. We are being fairly patient in terms of making sure that the right assets, it's going to be the right return for Computershare shareholders. And clearly, we're paying the right prices. We're doing a lot of work in the background to be able to create the appropriate regulatory structures within Computershare to be able to participate, for example, in Corporate Trust throughout Europe. So you should expect over time to see acquisitions, certainly bolt-ons through Issuer Services to expand offerings and also Employee Share Plans, and perhaps slightly larger potential acquisitions throughout Corporate Trust. So the focus is across the 3 core businesses in terms of driving growth.

Your next question comes from Nigel Pittaway from Citi.

I'd just like to delve a bit further into your views on the transaction activity, if you could. I mean, obviously, you've mentioned I'm back a bit in plans, but obviously, an Issuer Services, there was in Corporate Actions in the second half. And you talked about some of the other regions not yet [ barring ], and you're obviously flagging $300 million increase in balances in Issuer Services next year. So if can just sort of get a bit more sort of color behind -- the thinking behind all that? Do you think some of the other regions are right for picking up soon? And how should we think about these dynamics?

Yes. Thanks, Nigel. So just a few sort of insights on Corporation Actions, what we saw. I mean, generally around the global M&A deal volumes were sort of down 18% between '23 and '24, right? However, global M&A deal value was up, and the average deal value out there was between $45 million and $54 million. So you've got less transactions but higher sort of deal volume. I mean in Computershare, in '23, we processed 1,664 corporate actions across all different classes of corporate action. And in '24 we did 1,673. So we only did 9 corporate actions more than we did the previous year. But obviously, a lot of that was driven by the U.S. where there was above average size of events. We did work for Johnson & Johnson, a Walmart stock split, some of the Broadcom acquisitions, et cetera. So that was sort of driving that. You sort of break these numbers down. What we did see was in the U.S., it was only a 6% increase in the number of jobs that we did. So it wasn't huge. In Australia, it was actually up 10%, but Hong Kong and Canada and the U.K., they were all down low single double digits as far as the number of corporate actions. So when we kind of sort of project that out and think about what that corporate action transaction volume will do, and we look at a number of data points, when I was looking at pending M&A which is global deals announced, but they're still pending. When I was looking at that last year, there was quite a few sort of cash and stock-based offers on the table. And I think there's still pretty healthy activity waiting to materialize across all markets are up. And a lot of these sort of larger ones are much more cash-based rather than just stocking cash base, which does help with the balances. So -- and I also think, depending on cost of debt, et cetera, it creates a little bit of confidence and momentum. So that's a little bit of color on the world of corporate actions. I mean, obviously, the only downside that we have at the moment is really what's happening with the IPO markets, new listing and IPO really, we did 121 of them in '23, and we only did 78 of them in '24. And when I dive down, is that a market share issue, what's going on, it's really just a number of IPOs coming to the marketplace. Elsewhere in transactional revenue, you go over to plans, as mentioned, they had a cracking year. The number of units is still hanging up. Will it be as high? We don't think so. We think it might come off a little bit. We've seen equity markets come off a little bit, but the underlying number of units still remains very high. And then also remember, anyone that gets stock and it comes to vesting in the Northern Hemisphere, have to pay the tax on vesting, right? So there's always a transaction for the most part, unless they're going to fund it themselves. So that will help create that transactional revenue and FX as well. But, yes, so that's really some color around Corporate Actions and other sort of transactional stuff. On the events, stakeholder relationship management was obviously had a sort of better half. That's always been a little bit lumpy. We'll see what happens there as far as the sort of mutual fund sort of proxy is concerned. But anyway, that's transactions and events.

Great. And then maybe just a question on the FY '25 guidance bridge on Slide 9. I mean, if my the envelope math to right, that suggests about a $70 million saving in interest expense in FY '25. So just firstly, is that about right? And secondly, are there any other assumptions going into that like debt repayment? Or can I just sort of clear about exactly what's assumed in that 8.8% move?

Yes, the $90 million number that you've got, Nigel, sorry, the $70 million number that you've got is about right. So right? My expectation is interest expense will be sort of in the mid-90s next year. That assumes that the current net debt position remains broadly flat. Remember, the guidance is predicated on there being no more buybacks, so we built the guidance, assuming no buyback now, obviously. So with trading profits, you'd expect debt to drop down within the guidance, but then it will be offset by any share buybacks that we make over the course of the year in practice. We've deliberately guided on an ex buyback basis.

Okay. So in reality, if you've seen the buyback, that might not be quite as big a reduction, but you're not really assuming any more payments of debt down or anything, it's just sort of closing balance and what you think the interest rate, okay.

Your next question comes from Simon Fitzgerald from Jefferies.

Just my first question relates to M&A activity as well as the really related to the $2.6 billion of acquisition capacity. I would imagine that Corporate Trust Services would be in your preferred acquisitions. Maybe if you could just talk about how you could do that without materially increasing your exposure to margin income, what options might be available to you? Would this be sort of more shifting some of those balances into money market funds, for example?

Yes. Simon, thanks for the question. I think strategically, at the group, we do look in value acquisition is a little bit different. Those sort of companies that don't come along with any margin income at all. But ultimately, they're also very, very expensive. So when we assess particular businesses that are all sort of fee-based or recurring revenues, you're paying quite a WACC as far as an EBITDA multiple on these particular businesses. But we also are a little bit careful in terms of our exposure to margin income and corporate trust business, as you know, does have that exposure to margin income. What's important when we look at Corporate Trust businesses is we don't want to pay any multiple on current margin income amounts. We kind of normalize that out as part of any discussions and negotiations. And it gets a little bit-odd in so much a number of these businesses are actually departments of banks, and they just get allocated amount of margin income back and more often than not with our active treasury policy, we can actually enhance the margin income in that business, even if you just assumed rates were sort of flat because just the way in which some of that sort of allocations go within these financial organizations. But when you look at these businesses, you don't want to pay out right at the peak. For us, it's much more about looking at the quality of the underlying business, the underlying core fees. When we acquired the Wells Fargo business, we talked about our aspirations to increase the trust fees, the underlying trust fees, a little bit like we've done within the Canadian business over the time. When we bought the Canadian business 24 years ago, loss-making on an EBIT ex MI basis. That's not the case now. And what is interesting from me in that Corporate Trust business and sometimes gets lost in some of the noise on the numbers, the amount of new issuance has been pretty low because of high rates, et cetera. But generally speaking, on a lower number of deals in the marketplace, trust fees have held up. And the reason they've been held up is because we are trying to shift more into that trust fees rather than the margin income. I kind of went off a little bit tack there, but that's how we sort of see acquisitions in this space and how we deal with the margin income element.

That's helpful. Just a question for you, Nick, then just thanks for those elements margin income in terms of the levers. That's very helpful. You mentioned another $500 million in balances would cover the change in iOS curves as well. Just so we can get a better understanding. Can you also talk about the sensitivities to the nonexposed balances?

Yes, look, on the nonexposed -- Simon, I mean, look, a large part of that nonexposed book is in our deposit protection service product in the U.K. and in our Employee Share Plans -- share safe product. And those are pretty stable books. I won't expect to see much change there. Obviously, if rates drop on share, you might see a little bit of a little reduction in new saving activity. But typically, it's a long-standing product, and we've seen lots of employees enjoy that and participate in that over the years. And on the DPS side, it's been growing pretty much at 2% to 3% for the last 15 years. So pretty, pretty stable regardless of rate environment. The real sensitivities are on the Corporate Trust side in terms of general new issuance and the likely volumes that we'll see coming through that business. The Corporate Trust clients have tended to be a little bit more sophisticated and challenging in terms of the rate that they, wanting a rate on the balances that they hold with us. But the sensitivity really goes back to market activity, and we anticipate as rates come down, there should be a little bit more impetus from the market from a group perspective. And so you might see those nonexposed balances grow. And to your point, $500 million in balances probably covers the risk and some of that would probably come in that it would be for in the nonexposed.

Okay. All right. And just one final question in regards to the corporate trust balances that you're forecasting for '25. The additional $500 million, is that backed by mandate wins? Or is this your view of the environment and where you think you'll end up?

Look, it's pretty much where we exited the year, Simon, where we are through July. So yes, it's back up by activity and business mandate wins through the second half.

Your next question comes from Andrei Stadnik from Morgan Stanley.

Can I ask my first question is on the tax rate. It seems like the 26% to 27% guide is a little bit better than what The Street has baked in for FY '25. Can you comment a little bit about that and how sustainable that rate might be?

Yes, Andrei, we think the rate is pretty sustainable in assuming that there's no major sort of tax reform in any of the major markets that we operate in. It's really a reflection of a cleaner, simpler business in the U.S. post the sale of U.S. Mortgage Servicing and some at a state level where we have got a significant activity reducing their state income tax rate. So it's largely driven through the U.S. And yes, right now, assuming no changes from government perspective, we think is sustainable.

Can I ask around the trust? The revenue ex margin income had a clear rebound in the second half compared to the first half. Can you talk a little bit about what's driving that? Is there any seasonality in that? Or should we be really thinking that the second half of '24 is a better building block to look into FY '25?

Yes, I think that's right. As I mentioned on the call earlier, the first half was pretty low, but we always said in this business, a little bit of stability goes a long way in terms of confidence and issuance, and we did see momentum in the second half. Some of the products, the deals coming to the market. Our sort of new deal volume was skewed a little bit to the second half. And it's not really a seasonality issue. I think it was just a timing in the market issue with our clients in terms of issuance.

Your next question comes from Matt Dunger from Bank of America.

I was just going to follow up on Corporate Trust, and I understand some of the uncertainty there around the weaker debt issuance and when that's going to recover. Are you able to give us a sense as to what you're factoring in for revenue growth in the Corporate Trust business in FY '25?

Look, we don't sort of guide specific businesses to exact sort of revenue growth targets, Matt, but I think we are optimistic on it. I think, I mean what is interesting is the overall amount of debt being issued hasn't actually changed that much when you kind of calculate it out. But the number of -- it's a smaller number of larger deals, right? So that's sort of underlying structural growth trend and debt, amount of debt being issued still very much intact, but it was just getting done with less deals. And in the first half, as sort of debt runs off and gets repaid, some of it will get paid, some of it will just get sort of pushed out, there's always that sort of runoff effect. And with a number of new deals across a lot of our products didn't match with the runoff through the first half. But in the second half, it started to increase and the net book actually debt would laterally improve. We did try to provide some additional disclosure in terms of number of mandates won in the period and the total number of mandates that we're actually managing in that business as sort of new disclosure on these slides. And we continue to see that sort of second half momentum continue through certainly in the first month or so of this financial year. So that's where we've got confidence that it will return. Yes.

And if I could just a follow-up around the significant deleveraging you've taken the gearings, traditionally provided some hedge on the margin income going forward, how are you thinking about the optimal level of leverage, noting you're talking about $2.6 billion of capacity there. Is there an optimal level?

Yes, it's a good question. You speak to some market participants, and they say that in a market like today, you shouldn't have any date, you should run cash positive. You speak to others and they'll complain it's a lazy balance sheet, right? So we probably sit there in between. Obviously, the deleveraging was pretty fast this year. The proceeds that came through from the sale of Mortgage Services. We have signaled the intent to patiently do acquisitions that are strategic and also accretive to the group. So as that rolls out, you probably likely see that it would creep up. I mean, absent -- I mean just doing the buyback and the dividend and all the rest of it and if we did no acquisitions, it would probably remain at a similar level to what it is today, but you will see that just tack up as we deploy capital inorganically in the group. Now we used to sort of run this of 1.75 to 2.25 sort of neutral zone, but the markets have changed a little bit since we did that. I think that it's prudent to have that lower gearing at the moment. And it also gives the group real optionality. And that optionality is that balance that I talked about between ability to spend money for -- to drive growth and investments in the business, but also these returns to shareholders.

Your next question comes from Andrew Adams from Barrenjoey.

Just a couple of quick ones. Can I just -- can I confirm that the ex margin income growth to 15% on the actual '24 base. But if we strip out the U.S. Mortgage Services and sale, you're guiding to about 1% to 2% EBITDA ex margin income growth?

It's on the '24 base. So it does include U.S. Mortgage Services in the base, Andrew, but it's up by more than that. It's more than 1.2%. It's about -- it's up to 5% to 6%.

I'll send through the numbers to reconcile that one. And just on the hedge balances, we kind of got back to 100% of cash rates as the yield you're doing. And I guess now we're back below 85% of cash rate. So how do we think about the yield that you can deliver now going forward? Should we be doing 10% to 20% discounts on cash rate? Or what's your thinking there?

No, I think if you look at cash rates. The weighted average cash rate is around 93% of our overall yield. And we'd anticipate that in a falling rate environment, we'll probably trend back to around 90% of cash rates. So I think 93%, 94% is where we've kind of assumed in '25. I think that's pretty reasonable. We're still close towards 100% right now, but it will drop down over the course of the year, I expect. On the hedged yield, hedge yield is 3 -- is heading to 3.1%. But look at 5-year swap rates, 10-year swap rates, they're still a fair bit north of 3.1%. And so my expectation is that the hedge yield will continue to slowly inch up as we -- as all the hedges churn and are replaced by newer ones. So I think the hedge yield over the medium term in the sort of 3% to 3.5% range is where that will head to and then on the exposed yield, trend back towards 90% of cash rates.

All right. Great. And then just quickly on the costs, I guess, we kind of guided to BAU OpEx growth of around 3% last year, I guess it came in at 6% or even if we include the projects. So we're guiding again to that around 3%. What gives us confidence this year that we can kind of hit that cost guidance? Or we can kind of add the [indiscernible] blow out last year?

Well, I think firstly, you got to remember in terms of last year, there was growth in revenue. So some of that cost growth was to deliver the improved revenue. And remember, our EBIT and our EBIT MI margins both saw expansion over the course of the year. So yes, we saw greater cost growth than we guided to, but we also saw -- it was more than offset by revenue growth. So I think we're going to have that in context.

Should think about that going forward. If we're going to pick up in revenue, maybe that cost guidance will be bit higher too?

Yes. I think look, I think that's a fair point. In some of our, if transactional revenue grows, for example, there are costs to deliver that. If events pick up, there are costs to deliver that. And so when we look at costs in isolation, we sometimes miss that point. But more, in general, I think cost growth at inflation or below inflation is absolutely reasonable given the cost-out programs that we've got in train. And what we're starting to see in the broader market, I mean, we've seen -- we've been under pressure from a wage perspective over the last 2 to 3 years and those sorts of pressures are starting to dissipate. So I think those broader inflationary pressures that we've seen in the market the last couple of years, as I say, are lessening. So that gives me confidence.

That is all the time we have for questions today. I'll now hand back to Mr. Irving for closing remarks.

Yes. So thank you very much for taking time to go through the FY '24 result and also see how we think the world as we move into FY '25. Nick, Michael and I look forward to seeing a lot of you over the next few days to go into a little bit more detail on some of the underlying businesses and also some of the achievements throughout the group. Thanks very much for your time.