Computershare Limited (CPU) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for the Computershare First Half FY '25 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 on our website, and I'm going to take you through the highlights. Nick will then take you through the financials in more detail, and then we'll open the lines for Q&A. And just to remind you, we will be talking in U.S. dollars and constant currency, unless we state otherwise. Now just before we jump into the results, perhaps you could indulge me for a few moments, and I'll show you our long-term track record on Slide 2. Often at this time, we focus on the minutia of the 6-month scorecard, what's up, what's down, but there is a bigger picture of what we have been building at Computershare that I would like to share. As you can see, Computershare has a consistent track record of long-term earnings growth, high margins and rising returns to shareholders. I really think the key point here is that we are building a higher performance Group with higher quality earnings. And you can also see our performance is often more driven by the execution of our own strategies rather than dictated by external macro factors. And again, while we often get caught up in the "will they, won't they" of interest rate moves and hot or cold corporate action markets, et cetera, there is a long-term consistency of performance here, and we have grown earnings through multiple cycles. For over 25 years, we've delivered revenue growth of 15% per annum on average, and an average margin of around 22% and delivered an average ROE of 23% and of course, shared the performance with shareholders through increased dividends. Now I can tell you, it's not always been plain sailing or without challenges, but we have made some clear strategic choices to build a simpler, higher-quality capital-light Computershare, a Group that can deliver consistent results and increased returns to shareholders. And I really think you can see that reflected in the more recent results. Now the key takeouts from the first half are summarized on Slide 3. I'm pleased to say that Computershare is performing well and exceeding expectations. The results demonstrate the continued momentum in our business. Margin Income was probably more resilient than all of us anticipated given the scale of the rate cuts since August, but with multiple earnings drivers, a strong balance sheet and a positive outlook, full year earnings guidance has been upgraded. So moving into the actual results. Management EPS was $0.653, up 18.7%. The 1H '25 results are the first full set of results since the sale of U.S. Mortgage Services, so they really highlight the strong performance of the core businesses. The comparison to last year's proforma interim results, as shown on Slide 5, is insightful. To be clear, the proforma does not adjust the results for 1H '25. And given we sold U.S. Mortgage Services in May '24, we are taking this business out of the pcp for comparative purposes. And we do show both sets of figures, Group and proforma on Slides 4 and 5. Looking at the growth rates in this half against the proforma pcp, management revenue was 6.4% higher, management EPS was over 20% higher and management EBIT ex. MI was close to being up 28%. And while costs increased to service the increase in activity levels and growth in revenues, EBIT ex. MI margins expanded to over 15%, a rise of 230 basis points on last year. Now just moving to the revenue story on Slide 6. Group revenues were up 6.4% against proforma pcp, as I said earlier, and we saw growth in recurring client paid fees and also in our event and transaction revenues. And as I said before, Margin Income was resilient. A simple way to look at Computershare's revenues is in these three streams. Client paid revenue was up close to 5%. These client paid revenues are recurring in nature, typically in long contract engagements, and they account for the majority of the Group's total revenue. Event and transaction revenues, some of which can be more market sensitive, were up over 21% and Margin Income was effectively unchanged, down less than 1% in the half. Now moving to Slide 7. I'll turn to give you the performance of the three core businesses: Issuer Services, Corporate Trust and Employee Share Plans. Each one delivered revenue growth, earnings improvement and margin expansion. Now Issuer Services had a solid half. Total revenue increased by 2.5% and EBIT climbed by 3.6% to $215 million. Margins in our largest business lifted to 36.5% Transactional activity in Issuer Services continued to improve. Dividend reinvestment transactions, sales and DWACS all increased. And with prior period price increases, we're able to grow these revenues by 12%. Excluding Margin Income, we also saw a decent uplift in EBIT ex. MI. They went up by 4%. And Governance Services continues to grow. Entities under management were up 20%, and we continue to scale and seek and try to convert that scale into more profitability down the track. Corporate action fees per event were up over 10%, although volumes were broadly flat across the Group and we were actually down in the U.S. However, the pipeline of corporate action deals do look promising. Pending M&A deal count at the end of December '24 was 21% up on the pcp. And given the typical time to completion, we look forward to these revenues contributing in the second half and also into FY '26. But I think from my perspective, I'm also excited and encouraged by the number of investments in digitization and AI tech and Issuer Services. I think these will create more opportunities to enhance the service offering to clients and also deliver operating leverage as we continue to improve efficiencies and reduce our costs. Now switching to Corporate Trust. They delivered an improved performance, and they also have a positive outlook with further volume growth. Recovery in new debt originations is underway. Revenues increased by 7%, EBIT improved to $260 million and margins expanded by almost 150 basis points to 53%. If we exclude MI, we saw an uplift in margins to 14.7%. And some of you may remember that when we bought the U.S. business, its EBIT ex. MI was marginal. We had a plan like we had in Canada when we entered that market to build the recurring fee base, and it's really encouraging to see that is beginning to come through. Market debt issuance volumes in Corporate Trust have started to recover across most major product lines. New Deal Volume averaged across all these lines increased by around 20% with further recovery to come. CCT client balances were up over 13% on the pcp and the average fee per deal also continues to rise. And we're also on track to deliver the full synergy benefits from this transaction, which contributed an additional $13 million in the half. Now Employee Share Plans delivered another impressive result, with double-digit growth in client fees and transaction revenues. Overall revenues increased by nearly 17%. EBIT was markedly higher at $95 million, and that's an improvement of 39%. And margins went up here as well at almost 41%, that's a lift of over 650 basis points. Our strong equity markets are clearly supporting these high transaction volumes, but the rollout of EquatePlus, our market-leading technology is now largely complete in our North American business, strengthening our market position and creating new client opportunities. Now let's move to Slide 8 and perhaps dig a little deeper on the margin income story for the half. Now as I said before, Margin Income was only down less than 1% at $393 million compared to the proforma pcp. Improved activity levels across the Group drove a $3.3 billion uplift in average client balances in the period. Now this offset the impact of several interest rate cuts, which occurred as the half progressed. Rate cuts midway through the half had a partial impact on MI, and we also detail all the key rate changes on this page. But I think this MI results reminds us that quite often we have to take a broader view on what drives Margin Income other than just interest rates. After a period of higher rates, a lowering rate environment typically drives higher levels of client activity. And we can see that, especially in Corporate Trust, and to a certain extent, in Issuer Services. Now this increase in activity generates higher levels of client balances, which helps mitigate lower yields. Of course, our hedging strategy also helped, as expected. As older terms deposits rolled into new term deposits at higher yields. Now in the second half, we will see a full 6-month impact of the lower rates from the first half and potential further cuts. So we do expect MI to be lower in the second half of the year compared to the first, and Nick is going to touch on that a bit later. Now let's move on to Slide 9, the balance sheet items. Computershare's balance sheet remains strong. This strength creates the flexibility to invest in growth and provide increased returns to shareholders. We will also continue to invest to ensure our high-quality businesses endure through market cycles. And we talked about our commitment to building an enduring business at the AGM. Debt leverage has halved over the past 12 months. We generated strong operating cash flow, and of course, received the proceeds from the sale of U.S. Mortgage Services. Now this has funded our innovation agenda, recent acquisitions, rising dividends, buybacks and of course, our modest CapEx costs. And with the expected buyback of which around AUD 290 million still to go, we expect leverage at the end of the year to be around 0.5x. Now our CapEx number at a Group level was $22 million for the half. Now remember, though, we mostly expense our software development. We are committed to investing appropriately to sustain our performance and expense that directly through the P&L as OpEx. And with our balance sheet strength, we can also pursue acquisition opportunities across our core business lines. We know which businesses we would like to buy, and we're very disciplined ensuring we pay a fair price for them. Now this may take some time. We do expect U.S. Corporate Trust businesses to come for sale. But from a valuation perspective, this probably needs interest rates to come down a little further. So the question then is, are we comfortable with cash accumulating on the balance sheet in the meantime? Yes, we are. We're prepared to wait for the right assets to become available at the right price, and on the right terms. But we will continue to balance growth investments with returns to shareholders. The share buyback program is expected to complete around the end of the financial year. We also announced an increase in our interim dividend to AUD 0.45 per share (unfranked), and that's an increase of 12.5% on the prior interim dividend. Okay. So let's move to the outlook on Page 10. We have a confident outlook for FY '25. Computershare's businesses have momentum and scope for enduring growth. With reduced complexity and the simplicity dividend we get from that, along with multiple earnings drivers, management EPS in FY '25 is now expected to be around $1.35 per share, and that's an increase of 15% on last year. Previous guidance was for management EPS to increase by around 7.5% this year. In the second half, we expect further growth in core fees, similar levels of event and transaction fees and lower Margin Income with the full 6-month impact of the first half rate reductions. Now we have included a table in the deck outlining the changes to our key guidance assumptions. And hopefully, the changes are clear. We now expect EBIT ex. MI to be up around 30% for the year, and we are upgrading Margin Income by around $15 million to $760 million for the year compared to the $745 million we expected back in August. So now I'm going to pass over to Nick for more numbers.

Thank you, Stuart, and good morning, everyone. Before I talk about our actual results, let me start with some comments on Margin Income, starting on Slide 11. So in 1H '25, we delivered $393 million in Margin Income on average balances of $30.2 billion. That's a yield of 2.6%. And in the second half, we expect around $367 million of Margin Income, a yield of around 2.4% on unchanged average balances. To be clear, this excludes client balances held in Money Market Funds. We assume the following rate cuts in the second half. In the U.S., 25 basis points in June. In Canada, 25 basis points in January, (which has already happened) and again, 25 basis points in April. In the U.K., 25 basis points in February. Again, this has happened, and also in May. We now expect $760 million in Margin Income for the whole of FY '25. This is based on curves as at the 4th of February and second half balances in line with the first half. Exit balances for December were also consistent with this level. This represents an overall increase of $15 million in MI for the year relative to our guidance in August. The increase is split evenly over the first and second halves and is largely driven by our expectation that balances for the year will now be $1.7 billion higher than we anticipated in August. These higher balances will deliver an incremental $70 million in Margin Income. The mix of our balances and our hedging activity adds another $7 million relative to our original outlook. This is all offset by a $62 million impact from a lower rate curve. One final point on our MI guidance bridge. In August, we guided to lower MI of $0.137 per share. Today, we are presenting the information in a different way. Today's guidance slide, Slide 10 of our deck, shows only $0.035 per share of lower MI in FY '25. A number of people have asked why the large difference. Let me explain. The $0.137 per share delta in August included $56 million impact from the sale of U.S. Mortgage Servicing and a $36 million reduction across the residual Group. In today's guidance, we have stripped U.S. Mortgage Services out and shown its impact separately. So the $0.035 per share represents the $36 million reduction anticipated in August, adjusted for the $15 million improvement in outlook from higher balances that we have announced today. So $21 million in total, and this equates to $0.035 per share. There is more color on balances and the hedge book in the appendix. We had approximately 53% of our average exposed balances hedged as of the end of 1H '25. This is around $10 billion and will deliver $1.8 billion in Margin Income over its life, $315 million in FY '25 and almost $1.3 billion over the next 5 years. And then on Slides 50 and 51, we include our sensitivity analysis on balances and MI. Slide 50 details 2H25 sensitivities. Assuming the current rate curve, every $1 billion of exposed unhedged balances translates to around $19 million impact on Margin Income. This represents a blended recapture rate above 90% on a weighted average rate of 4.04%, in line with what we are achieving today. And Slide 51 shows annualized Margin Income at varying rate and balance levels. As you can see here, in a 3% rate environment, the current level and mix of balances would deliver around $660 million of Margin Income for the Group in total. This shows how resilient and sustainable Margin Income earnings are. There's more detail about balances in MI on Slides 44 to 49. I will now move on to talk about our financial results on Slide 12. Total revenue for the Group was down 6.9% over the pcp. Ex. Margin Income, it was down 6.2%. Remember, however, these comparisons include the U.S. Mortgage Servicing business in the pcp. Adjusting for this, revenue for the Group versus the proforma pcp was up 6.4% and revenue ex. MI was up 9.2%. As you've heard, this revenue growth was across both recurring client fees, and event and transaction fees, particularly in the Employee Share Plans business. Total costs were down 8.9%, but up 6.7% versus the pro forma. I'll talk a bit more to costs later. EBIT grew to $563.9 million, up 3.3% on the pcp and 6.5% on the proforma pcp. Again, largely due to the revenue growth in client fees, and events and transaction income. Excluding MI, EBIT was up 48.6% on the pcp, and up 27.9% on the proforma pcp. The EBIT ex. MI margin improved 230 basis points on the proforma pcp from 13.2% to 15.5%. Interest expense was down 31% on the pcp, 20.6% on the proforma pcp to $58.8 million, reflecting lower levels of debt. The average cost of debt was just over 7%. All our debt remains at floating rates, and this has acted as a natural hedge to lower Margin Income as rates have fallen during the half. Tax expense was lower, down by 6.4% and 5.4% on the pcp and proforma pcp, respectively. Importantly, the ETR was lower by some 410 basis points at 24%. This reflects a more favorable U.S. State Income Tax profile following the sale of U.S. Mortgage Services, both in terms of the actual rates for the period as well as a revaluation of our U.S. deferred tax assets due to this changed profile. Going forward, I expect the Group Management ETR to settle down at around 25%. Management NPAT was up 16% to $383.6 million. That's 17.2% better than the proforma pcp. Management EPS was also up by the same rate to $0.649 per share. And adjusting for the 1H '25 buyback, it was a little higher at $0.653 per share. Statutory results are on Slides 27 and 28. Statutory NPAT was $287.8 million, up 174%. This was largely attributable to the impairment related to the U.S. Mortgage Services business in 1H '24. Statutory earnings also benefited from lower management adjustments, in respect of integration expenses and restructuring programs in 1H '25, which were lower by $21.6 million, to $46.8 million collectively. I expect management adjustments to be relatively flat through the second half, but then reduced again in FY '26 as some of our programs come to an end. The gap between management and statutory earnings should close materially over the next couple of years. Otherwise, statutory earnings were impacted $36 million by the amortization of acquisition-related intangible assets and a further $15.7 million from an accounting modification of a margin income hedge. This latter point relates to a transaction where we blended a number of low-yielding hedges into a higher-yielding longer duration hedge. It made sound commercial sense to do this. However, accounting standards required us to recognize a non-cash loss for the first half of the overall period of the new hedge arrangement, which will then reverse into a non-cash gain in the second half of the arrangement. This is an accounting technicality on how to treat modified hedge portfolios. The second half FY '25 charge will be around $6 million with further charges of approximately $12 million in both FY '26 and FY '27. From FY '28, the charge will reverse with noncash gains being booked through to FY '32. We intend to book both the non-cash gains and the non-cash losses below the line and the net effect of both the gains and losses over time will be 0. Slide 13 bridges the 18.7% improvement in EPS from 1H '24 to 1H '25. The sale of U.S. Mortgage Services cost us $0.06 per share in earnings and the lower Margin Income had a $0.05 per share impact. However, client fees and event and transactional revenue, net of the higher costs of running the enlarged business were up $0.063 per share. Lower interest and tax expenses benefited us by $0.037 per share, whilst the combined accretion impact was $0.015 per share. That's $0.011 on our FY '24 share purchases and $0.04 on our 1H '25 share purchases. Taking all of this into account, management EPS was $0.653 for the half, $0.103 up on the pcp. I'll now unwrap costs on Slide 14. Proforma OpEx, that's excluding U.S. Mortgage Services is up 4.6%. This is the balance of the benefits from our cost-out programs of $32.1 million. offset by BAU cost growth of $37.3 million and investments of $27.2 million. The BAU cost growth was a combination of general inflation and costs to support higher volumes across the business. Investment of $27.2 million included approximately $8 million in costs from an incremental 5 months of ownership of Solium U.K. The remainder was investment in both technology and people, largely in the Corporate Trust business to support growth and the transition from Wells Fargo. On the cost-out side, we delivered around $13 million in operating synergies from the Wells Fargo Corporate Trust acquisition, whilst our Stage 5 cost-out program delivered $15 million in savings across the business lines and corporate overheads. The remainder was from Employee Share Plans and U.K. Mortgage Services cost-out programs. Both of these projects will compete -- complete in the second half. Stranded costs arising from the disposals of the U.S. Mortgage Servicing business were around $20 million in the half. You can see these costs in the Technology Services and Operations segment P&L on Slide 34. Total stranded costs are around $40 million, and we expect to see this cost eliminated over the next 18 months. Slide 42 provides an update on our cost-out programs. And Slide 15, then shows how we expect the second half to unfold. Earnings from operations, excluding MI, should be around $0.10 per share higher than the first half. That reflects the usual second half seasonality and Employee Share Plan vesting periods as well as the continuation of the first half's momentum and benefits from cost out. Margin income will be lower, as you've heard, reflecting a full half at lower rates. Which will, in turn, benefit interest expense. Tax expense will be a little higher due to some second half Canadian Withholding Tax expenses. And finally, the accretion benefit from first half purchases will be around $0.05 per share, with Management EPS for the half being around $0.70 in total. This is around 10% higher than the pcp. I'll now hand back to Stuart.

Thank you, Nick. So just let me conclude, and then we'll get to questions. We're pleased with the results and to be able to provide a guidance upgrade. I certainly don't see these as peak earnings. Some parts of the business are yet to fully fire. In the second half, we'll see momentum across our business lines, stronger Corporate Action pipelines, continued recovery in debt issuance, of course, the benefit of new client wins. And of course, we are working on removing the rest of the stranded costs that Nick spoke about. We assume first half equity market conditions prevail and interest rates continue to come down, but we can grow earnings in a falling rate environment. The results also validate the strategies we've been executing to strengthen our business and build a high-quality capital-light Computershare with increased returns. And I would say the quality of our earnings is so much better than it was a year ago, 2 years ago and on average over the past 10 years. Going forward, we will continue to build a Computershare that endures, a business that can perform and deliver superior returns across multiple economic cycles, a business built on trust, technology, long-standing client relationships and execution capability. And I'd just like to say thank you to all the Computershare team for their contributions and of course, to our customers and shareholders for your trust and support. Now let's open the line for questions.

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

A couple of questions, if I can. Maybe just starting on Corporate Trust, the base revenue fee growth was fairly impressive, 6%-7% up. Just wondering, Stuart, if you can provide us with some thoughts and color sort of in terms of where you're seeing momentum. I'm particularly interested in the segments that kind of matter most, the U.S. Corporate Trust business in terms of issuance momentum and sort of whether or not you believe there's still a lot more of a rebound to occur in those segments?

Yes. Thanks, Kieren. So just -- I mean, in Corporate Trust, it was really sort of new deals coming to the market that really drove the revenue growth here. And, I mean, if you take just a step back and look at debt issuance in the U.S. across sort of the four broad categories. Where you've got mortgage-backed securities, whether it's residential or commercial, you've got corporate debt issuance, you've got munis and then you've got other asset-backed securities. And you can see that through calendar year sort of '23 and into early '24 -- certainly in '23, there was a decline. You had higher rates. There was less new issuance. And what we've seen is -- in the third quarter of '24 and moving through the fourth quarter of '24 calendar year in the U.S., of course, that, that issuance volume has continued to grow. Now they're not at the peak rates that I've seen in terms of that debt issuance. But you are seeing the products that are important to Computershare, the mortgage-backed securities, for example, that really helps with Margin Income, et cetera. That's got pretty strong year-on-year growth. If I look at sort of fourth quarter '24 and just on sort of MBS, for example, versus fourth quarter '23, it's up over 40% compared. So that's positive. And I think a lot of that is that declining rate environment. When we were talking to our customers, it was rates change and they're not changing. It's still a little bit high. We entered into that lowering rate environment, and that's really sort of driven some of that issuance. I look at other products in asset-backed securities, just looking at fourth quarter '24 versus fourth quarter '23, there's over 35% increase year-on-year growth of just that debt issuance volume. So I think that bodes well in terms of a bit of recovery within the CCT business, not quite there yet, but -- and also a little bit of pricing for Computershare as well. We are pricing the core fees rather than just relying on Margin Income, trying to get higher fee per deal. And in fact, our fee per deal during the period of time was 11%. So I still think that there is a decent amount of recovery to go within our Corporate Trust business, but it's great to see that starting to come back.

Okay. And the fee increases, when do they sort of fully cycle through? Is there still a benefit into second half '25?

Well, yes. So the fee increases, it really comes down to some of the minimums that we actually do, right, because just based on these products. So what we're talking about here is new deal -- so new issuance rather than prior issuance. And we've put in a fair amount of minimum fee levels that hadn't existed there before, et cetera, et cetera. And I think that's what's helping drive some of that sort of fee structure within that business as well. And then you also have deals which is actually based -- pricing can be based on BPS, right? So with some larger sizing deals that actually come through, that's good for us on pricing because we are seeing higher average deal sizes as far as debt issuance is concerned. And when your fee has got a little bit of a relation to bps as well, that also helps.

Okay. A second question just on the transactional and event revenues. I think you've highlighted 21% growth in the [ PAC ] on pcp. Obviously, very good trading activity in Employee Share Plans and likewise in Registry with all the broker fees up. I think you touched on some fee changes in that segment as well. So just -- I guess the question has two parts. When were the fee changes? Were they just through this first half '25 and there's further benefit to go? And secondly, I'm just interested in your thoughts on volumes across those more transactional volume lines. We've seen very buoyant equity markets, particularly off the back of the U.S. elections. So your confidence, I guess, in trying to cycle what is a very good number into the '26 year?

Sure. So look, just very, very quickly in terms of some of the fee elements, a number of these sort of structural fee increases were actually put in in FY '24, but the volumes weren't there. So you didn't see as strong an impact. So as that higher sort of pricing sort of comes through where we do have a bit of pricing power and the volumes increase, that's where the contribution becomes higher. So there were sort of prior periods of price increasing, but now with the volumes on that component. But I'm going to talk a little bit also about how I see some of that transactional activity, especially in, say, Issuer Services because Issuer Transactional Revenue is actually a lot more diverse perhaps than what you would see in Employee Share Plans. And Issuer is actually influenced by a greater range of drivers. So in Share Plans, it's typical equity markets, investing events, which will drive the transactional revenue, and that transactional revenue will be sort of essentially trading fees and FX. In Issuer Services, as I said, there is a greater range of drivers. There is shareholder sales, there's dividend reinvestment plan transactions. There's what we call DWACS, which -- and we have escheatment transfers. There's a broad range of those. And volume drivers actually vary by transaction type. For example, Shareholder Sales is probably the one correlating with equity markets, so that's similar to plans, whereas DWAC fees in the U.S., for example, are linked to IPOs. Dividend reinvestment plans are influenced by the frequency and also the size of dividends, et cetera. So there's actually a greater sort of broader mix than just equity markets. And I think as a result of that, that's why we have some confidence to see this kind of flowing through. And I think that when -- also on the transaction stuff, there's also a question about corporate actions, and I'm sure you had a question about that as well. But I think because of that broad base and the sort of greater range of drivers in Issuer Services that we actually see in some of that recovery is how we think that will certainly flow through into the second half and into '26.

Your next question comes from Ed Henning from CLSA.

I guess the first one, I'd just like you to touch on a little bit more just around the investment. Within that, are you targeting continued cost out? Are you, obviously, investing in systems? Where you're investing in systems? Can this drive above, or get you to gain, market share? And what divisions are you targeting there so you should see a potential increasing growth rate on the revenue side? As a first question, please.

Yes. Thanks, Ed. So look, I mean, obviously, we make investments right across all of our businesses. But we do have some exciting things happening in the Group in terms of deployment of new platforms and use of new technologies. We'll be refreshing the entire front end and reporting capabilities that we have for all our issuer clients globally. I have a vision for a single Computershare application for shareholders, regardless of where you might hold your stock around the world and make it easier for us to be able to deal with over time, replacing these types of technologies. And I think that's very important that our customers know that this is Computershare's core business. We're willing to invest in it. They can see that progress. We're not in it for a short period of time and then looking to get out of it. So we have to actually drive that. And that is resonating in the marketplace. We can see that with a number of sort of client wins of material-size companies. It's certainly in the Northern Hemisphere, might be less important to the price-sensitive small caps, but the ones that help the business continue to grow with a large number of shareholders, that's important. The other area of investment is really trying to take advantage of the -- some of the newer technologies that are actually coming out, which will help us, one, provide better service to our customers and their shareholders or their employees, but also help reduce the cost to serve within Computershare and really trying to help with that margin expansion. So I know that there's -- you read about AI every single day and all the rest of it. There are tools out there that help our inbound call centers be able to route calls, skill-based routing has sort of taken a leap forward recently. They use some of the sentiment analysis on calls with our customers to be able to sort of escalate out to supervisors in an early -- sort of earlier in the call cycle. And it just leads to higher quality experience and getting to the right people to have their questions answered. And as I say, that will actually help us reduce our operating costs and as I say, help us drive margin expansion as well. There are lots and lots of areas that we also invest in, in our entity management. We've just rolled out sort of a large language model and AI over that, which will help customers ask natural language questions to obtain data about all their entities that they may well control. So rather than sort of clicking down on menus or extracting reports, they can just ask that in a natural language way, and that will help us maintain and grow market share in these markets. So there's actually a lot of exciting things happening across the Group. And as someone who has technology at their heart, it really excites me, and I get a chance now with the simplicity dividend of no more Mortgage Services of dabbling in a few of these projects. So that's super exciting. So lots going on.

And that kind of leads on to my next question, just around the cost outlook. You talked about margin expansion. Obviously, that comes from costs and revenue growth. Can you talk about beyond '25, you've still got some synergies coming through. You've still got some stranded costs that will come out. How should we think about the cost growth with you continuing to invest in your business? Should it be growing kind of below inflation? Or can you see it go backwards? Or with the investment, is it kind of around inflation and where the margin growing is more on the revenue side with you benefiting from the things you just talked about?

Yes. Thanks, Ed. So the -- over the medium term, our operating costs should grow just below inflation. That's what we target and our cost-out programs should enable us to deliver that. So I would anticipate that we will be closer to inflation -- sorry, closer to flat from our cost-out programs over the next 3 years. And then over the medium term, we'd be more just below inflation. The -- of course, the challenge will be from other revenue growth areas. And so that -- any additional cost over and above that will be really aligned to revenue and volume growth. That's what you saw in the first half. So if you look at our cost out -- our cost out offset our inflationary costs in the first half, and then we had some investments that we needed to make. But over time, we expect the jaws to continue to widen and margins to expand.

Your next question comes from Nigel Pittaway from Citi.

Just first of all, a question on the margin balances. I mean, obviously, you're sort of flagging the pickup in corporate actions. You're expecting transactional activity in Issuer Services to remain strong. You're talking positively about debt issuance and yet you're guiding to sort of the same average balance for FY '25 as you are for first half. So just wondering, are there any factors that you are expecting to work in the opposite direction? Or is that just sort of an element of conservatism in the guidance?

Look, Nigel, we take a very consistent approach to guidance on balances. There's always a number of moving parts, and we can never be 100% certain as to what will happen when. And so we've taken a consistent approach with how we've done it in the past that providing our exit balances are in line with the average balances for the prior period, that's what we guide to.

All right. That's clear. Moving then maybe on to Slide 7, just where you show sort of the incremental revenue and EBIT ex. Margin Income. One thing that does really strike me there is across all the divisions, the actual margin, EBIT ex. MI margin you're getting incrementally on the growth in revenue is really, really strong. I mean you're sort of looking at Issuer Services, 78% versus an average of 21%; Corporate Trust, 49% versus an average of 15% and Employee Share Plans, I think it's 81% versus an average 34%. So I'm just wondering, it's probably some of the factors you've already talked about like pricing and stuff. But what is that actually telling us there? Is that a reflection of -- mostly a reflection of the improved pricing? Or is it just the deals that you're doing are higher margin? What's that really telling us?

Yes. Look, I think, obviously, there's lots of different moving parts in the business. But trying to run a more efficient organization from an operational perspective, holding our line from a pricing perspective in terms of the critical nature of the services that we provide and as a result, should be sort of compensated appropriately for it and et cetera. And so it's a combination of pricing. Some of these businesses, you have higher transactional revenue and they tend to be more margin accretive than sort of just sort of core fees, et cetera. So, look, they are -- it's good to see them heading in the right direction. We've got more to go in terms of just -- in terms of volume, et cetera. But I think that it does go to that sort of core Computershare where we're building something that's really high-quality, capital-light. We've got high levels of recurring revenues. We've got the sort of transactional revenues, but we also are really focused on customer service and providing really strong outcomes for our clients and as a result, get high client retention. And as a result of that, I think you see that coming through in the margin.

Your next question comes from Julian Braganza from Goldman Sachs.

Maybe just a quick follow-on, Nick, on the expense comment. Just the underlying expense growth ex. the cost out sort of just on a high-level calc around 9% this period. Just want to understand the comment you made just going forward over the medium term that costs should be held below inflation in the absence of any cost-out programs. [indiscernible] just tying that together. So is that suggesting some drop off in terms of investment over the medium term? And then secondly, what's the revenue growth is that comment aligned to? Just to put a framework around -- if revenues exceed a certain level, then we can expect costs to accelerate? Just to understand that context.

Thanks, Julian. Let me try and unpack it. Firstly, we've got a number of programs that we're currently running that have not yet delivered the full benefit. So our Stage 5 cost program, our digitize -- some of our digitization programs will deliver efficiencies over the next few years. There's still synergies and efficiencies to come from our value creation program in the Corporate Trust acquisition. So there's a number of programs there with material cost savings that should come through over the next couple of years. So that's the first one. And they will both help keep cost growth below inflation. Obviously, the revenue growth that we think will come over the medium term, we can't completely predict exactly what that will be or where it will come from. And so there may be additional investments that we may need to make from time to time, subject to what that -- where that growth will come from. But by and large, as I said earlier, we expect margins to expand as we take cost out and as revenue grows through the normal course over the medium term.

Okay. Great. Okay. Great. Just a second question going more into FY '26. I'd just be interested, I guess, given where we stand today and given where the business is performing organically ex. Margin Income, just the levers or the moving parts you're seeing into FY '26, just define growth. And I mean a comment -- a question around that is just where are these businesses performing relative to mid-cycle? And what are the sort of pluses and minuses you might expect given the strength we're seeing to date? And when can we expect capital deployment to come through?

Yes. Look, I think in terms of cycles, you kind of go back to the revenue profile. The majority of our revenues are certainly recurring long-dated contracts, et cetera, et cetera. And then you have some of the transactional elements and you think about the cycles. I mean, if you think about corporate actions, corporate actions at the moment is well below mid-cycle. In fact, both M&A volumes and corporate action volumes in the period were actually 30% lower than what we saw in 2021 peaks. So certainly sort of lower on the cycle. I think the Corporate Trust sort of debt issuance has a little bit more to go as certain products and recovery in terms of more mortgages in the U.S. and confidence there, and that will result in more sort of securitization of some of that debt. So I wouldn't say that, that's sort of mid-cycle yet. In Employee Share Plans, you would argue that perhaps the trading volume is a little bit above mid-cycle as well. So it is a bit of a mix. But as I said, I don't think that everything is sort of firing. I think there's sort of more to go in a number of areas across our businesses. And we try to drive both the core fee revenues. And I think in the half, we made a good start in the year. It's sort of driving both these core fee revenues up. And then obviously, some of the more event and transactional activities where I think on balance, we're actually below mid-cycle at the moment across everything. Yes. So I think that should sort of end up flowing through into the second half and into '26. All things being equal, of course, equity markets, et cetera.

Our next question comes from Andrew Bunker(sic) [ Buncombe ] from Macquarie.

Just one from me. Just interested -- and apologies if I missed it earlier, but just interested to get your thoughts on the net debt-to-EBITDA levels into second half '25, but particularly into FY '26.

Yes. Andrew, we think that the net debt-to-EBITDA ratio at the end of FY '25 will be around 0.5x. That reflects getting largely the buyback done around the end of this financial year.

Unfortunately, that does conclude our time for questions today. I'll now hand back to Mr. Irving for any closing remarks.

Well, look, first of all, thank you very much. It was a pleasing result, a good start. It's obviously nice to upgrade. As you heard me, I don't think we're at peak earnings. I think there's a decent amount of volume recovery across a range of our businesses. But ultimately, it's really the long-term picture, which is our key focus. It's that higher quality, capital-light Computershare that can evolve through the cycles. And that's really what is -- sort of what we're trying to build at the Group. So thanks very much for joining us today. I look forward to seeing many of you over the coming days on the road. Thank you.