NZX Limited (NZX) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the 2023 half year results call for NZX. I'm Mark Peterson, and I'm here with Graham Law, NZX, CFO. As per our usual run through I'm now taking you through the result, only offer the key elements of the results and some broader comments, and Graham will take us through the financials, after which we are more than happy to take questions. [Operator Instructions] Graham and I will answer the question following that. Before we start, please note the disclaimer at the front of the IR pack, as that statement applies to all content and comments made by us during this call. The operating environment for the first 6 months of this year has been a continuation of what we saw through 2022. Inflationary pressures and rising interest rates have continued to dampen equity market activity. This has meant that trading and clearing activity levels have remained soft. However, all other areas of our business have performed well. Notwithstanding the challenging environment for equity, NZX has delivered a respectable financial result for the first half of this year. Earnings, excluding acquisition, integration and restructuring costs were $20.6 million, which is up 16.8%. If we include acquisition integration and restructuring costs, earnings were $20.0 million, up 15%. NPAT was $7.0 million, which was down 5.6% largely due to the increase in interest costs and amortization costs, and Graham will speak to this later. We've declared an interim dividend for the half year of [ $0.03 ] per share, which is fully included. Revenues lifted to $54 million, up 16.9% on the first half of 2022. And Graham will talk to the major movements here, but at a high level, adding to QuayStreet accounted for approximately 1/3 of that lift, and including the listing revenue -- or sorry, and other areas of the business, including listing revenues, information sets, a dairy deliveries, Smartshares technology is also lifted. Trading and clearing revenues were at a similar level to the second half of last year and having a diverse range of revenue sources is very much proving its worth as we go through various market cycles. The interesting point to note is the trading and clearing fees was subdued at present, account for a much lower proportion of their total revenues than they did when it first started due to the building of the business. There were 16% of total revenues back in 2017, but are now 10% in 2023 at similar nominal levels. Costs were $33.4 million for the half, which was up 16.9% on the first half of 2022. And on the second half of 2022, costs were up 9%. Again, we unpack the major drivers of this through the presentation, and Graham will talk you through this in more detail shortly. However, the key areas of the cost base change have been adding the QuayStreet business, which accounted to the tune of about 3%, 8.5% relates to personnel cost changes, which includes annual adjustments and compensation and the selling of vacant roles. Other costs lifted at 4.1% and have been managed against inflation. Over the last 12 months, we've been particularly conscious of changes to our operating environment and the pressure that it is placing on earnings. And through this period, we have been active in searching for cost savings that don't impact business resilience or future growth opportunities, and we have made some careful decisions to improve our cost position. Much of these impacts will be seen going forward. Our earnings guidance for the 2023 year remains at $36 million to $40.5 million. And we note on Page 26 of the investor pack, we were tracking towards the upper end of that range. Speaking to Page 6. Many of you will recall us rearticulating our strategy at our Investor Day back in November 2022. And we said our 3 businesses were all targeting greater scale and operating leverage. And to capital markets, we were looking to round out our product range with an additional trading [ venue ] and further derivative product. We also mentioned that there were benefits of the group by having these businesses supporting one another. The following updates from the various business areas should be considered in that context. The business highlights, which have been laid out on Pages 8 through 15 of the pack, and I'll take you through those as follows: $7.2 billion of capital listed and raised that was a solid result for the half given the environment. We had 2 large capital raises with Ryman and Infratil and a very strong half for debt issues with [ 2/3 ] of that being green with sustainable bonds. We expect the debt market to continue to be strong through the remainder of the year, and we are aware of a couple of potential IPOs that will be clearly dependent on market conditions. Our team remains active in looking for listing product prospects, covering the equity [indiscernible] and fund asset trusts. Our [ Asia ] and market promotional activity continues to be very strongly through our LinkedIn, podcast, virtual investor events, a YouTube channel and various panel discussions that we either host or participate in. Listener numbers, entering the channels continues to grow, and we are becoming very effective in assessing issues to progress alongside our participant community. Trading and clearing values lifted slightly from H2 '22 levels to $18 billion for this half with the lift driven largely from institutional investor activity. However, trading activity that's still at subdued levels and the key determinants are changing us as the market believing inflation is under control, and more generally, a strong economic output is on the cards. We are confident that as conditions improve, the cash sitting on the sidelines will come back into equities. The overall trading patents we are seeing are not hugely different to other similar markets around the world, and our strategy speaks to rounding out our product offer, which refers specifically to the launch of our [indiscernible] trading venue. And that's on track for the first half of next year as well as the relaunch of NZX20, which is intended for 2024 as well. We also mentioned increasing scale in our operations and settlement capability, and we continue to focus efforts in this area. Depository assets and custody grew to $6.7 billion, up 5% over the half, and we're always looking for more participants to join our depository and take the advantage of improved market efficiency. And that's why, we're pleased to welcome trusted executives as the depository participants over the period. Information Services had another strong half with all the areas, which includes royalties, subscriptions, licenses, embassies, audit revenues and connectivity, reporting growth. Professional terminal numbers are still at record highs, and revenues rose 15.4% on the first half of 2022 and flat on the second half of 2022. Remembering the second half of 2022 had significant order revenues, which distorts the overall comparison. Turning to dairy. Our partnership with SGX continues to go from strength to strength. Lots traded are up a further 31% on the same time last year and revenues have lifted to $1.6 million for the half, which is up 87% on the first half of 2022 and 49% up on the second half of 2022. Market price volatility and a greater number of end users using the market is driving an increase in lots traded. Our favorable exchange rate and increased levels of margin held are also driving the revenue growth. Global dairy trade is expected to influence its expansion of strategic initiatives over the next 3 years, after which, we will see the benefits of those initiatives. Smartshares continue the strong growth track. Fund as of the 30th of June this year was $10.7 billion, up 29% from the end of 2022. This is through a combination of positive cash flows, positive market return and the acquiring of QuayStreet business coming into Smartshares fold. Revenue is lifted to circa $18 million, which is up 57% on the first half of 2022 and up 38% on the second half of 2022. A big focus for Smartshares has been the integration of ASB Superannuation Master Trust business, which is [indiscernible] as we speak. We have already integrated elements of the QuayStreet business in the Smartshares with more synergies from systems and operational activities to come. We continue to drive hard towards that $15 billion to $20 billion fund target and with improved operating leverage. We're also looking forward to Anna Scott joining as the CEO of Smartshares in early September. The biggest change to NZX Wealth Technologies business over the half is the increased pipeline of new business. Our product, reputation and team have seen as strong and reliable by the market. We have won 5 new adviser clients with their businesses transitioning on to the platform in the second half of 2023. This is alongside our current significant contractor business, which we continue to progress transition efforts and as well as the further opportunity to [indiscernible] as we close out [indiscernible] processes that we've thought of. The key challenge in front of the team at the moment is transitioning all of the new business opportunities that we have in front of us and coordinating the transitions around the client timing constraints. We have confidence in achieving our target of between $35 billion to $50 billion, and we also remain confident about achieving cash flow breakeven both by the end of 2024. Given our business momentum, finding a strategic partner to assist the growth of the business is no longer a priority. Building an effective operating and diverse culture within our business has been a key priority since I became Chief Executive. Special mention must go to [ Bill Montes ], who this week retired from NZX after 37 years of outstanding service. Our people continue to show a huge commitment to the business and the opportunities we have in front of us. Staff turnover is reducing as the employment market changes. Operations and technology teams continue to be accurate. Our risk management function continues to mature. The [indiscernible] oversight review showed positive progress across all areas. Staff engagement continues to be strong, and we have a nice mix of age, tenure and gender diversity. Our gender pay gap is circa [ 17% ]. But when you break it down, as shown on Page 14, we get different gaps at different levels and is driven purely from not having our females in those leadership positions. Our recruitment and promotional efforts are focused on improving the situation, balance by ensuring we hire to [indiscernible] their skills for those roles. Our strategy and approach to ESG is progressing at a healthy pace. As a climate reporting entity, we are working hard this year on our reporting under the mandatory climate-related disclosures framework. We are also concluding a materiality assessment of stakeholders that will assist in informing our strategy and setting longer-term emissions targets. In the meantime, NZX continues to achieve net carbon zero certification to the standard that [indiscernible] requires. And as we mentioned in our[ AGM ] in April, our remuneration reporting will take a step up in the 2024 annual report. I'd now like to hand over to Graham to take you through the financials in more detail, after which, we're happy to take questions.

Thank you, Mark. Before I start, I'd like to draw everybody's attention again to the disclaimer on Slide 2, which contains certain important caveats related to the information we are about to cover. Starting on Slide 17, I'll provide an update on the 2023 acquisition of QuayStreet Asset Management. And the acquisition drives scale in the Smartshares business and enable synergistic benefits to be realized, in particular after the ASB Superannuation Master Trust integration of the investment management function completes this weekend. The QuayStreet acquisition in time will complement Smartshares existing systematic and passive managed product offering. It does include a product support and distribution agreement, under which we are currently developing new products to create investment partners, focusing on the financial aspects. Smartshares is responsible for QuayStreet products, the investment management and all client relationships, create investment partners, provide certain back office services, which we are expected to transition in 2024. The remaining integration and transaction costs are being considered together with the modernization of Smartshare operating model, for example, the client portal and CRM systems. The financial contribution for the [ 4 ] months since acquisition, was operating earnings of $1.7 million and net profit of $0.6 million as outline the balance sheet treatment, which is also detailed in the financials. Moving to Slide 19, talking to Slide 20. As the table summarizes the income statement for the 6 months ended June 2023. Additionally, I'd draw your attention to further detailed analysis of the operating results by business unit, which was provided in Appendix 1. Starting with operating revenue. It's increased to $54.0 million, which is up 16.9% in the first half of 2022. This reflects NZXs' diverse revenue sources, which can be seen in [ $5 billion ] financial statements, and I previously detailed these in our December 2022 investor presentation. Breaking the revenue down further. The main factors for our markets business are, firstly, the capital markets origination revenue increased with annual listing fees having been positively impacted by price changes, partially offset by the overall decrease in market capitalization. Remember there's the market capitalization on the 31st of March each year, that drives the annual listing base for the following July to June period. This revenue increase was partially offset by lower levels of primary listing and secondary issuances. Remember that equity has a relatively higher [indiscernible] retail at -- also where that comes from. In our secondary markets business, revenue decreased, whilst there was a significant increase in very derivative revenues, both driven by the 30.7% increase in lot numbers and increased margin revenue. They resulted in higher -- sorry, higher margin revenue resulting from higher interest rates. However, that increased revenue was more than offset by lower levels of trading and clearing value and to [ assure ] margin fees internally. The data and insights or information services revenue increase was driven by terminal license numbers as well as a high level of audit and backdated license revenue. For the Smartshares business, the revenue rose 56.9% on the previous half year, $13.0 million. Fund-based revenue continued to grow in line with increased average fund, which is a combination of the acquired fund, positive market returns and positive net cash flows. There is also some revenue related to prior fund financial years. Number-based revenue has increased also, reflecting the increased investment numbers from the acquisitions. Other revenue includes stock lending and interest income. For Wealth Technologies, the revenue rose 6.2% at $3.0 million. Administration of [indiscernible] revenue increased, reflecting the mix in average fund, which has actually remained the same at $10.4 billion. The net development phase and deferred income reflects -- deferred income reflects the levels of customization of [indiscernible] to deploy. Moving to the operating expenses. Excluding acquisition, integration and restructuring costs, these increased to $33.4 million, an increase of 16.9%. These basically at a high level reflect through factors. Firstly, our investments for growth, including acquisitions, the acquisitions BAU activity, for example, QuayStreet out of approximately 3% to the cost base as well as the inflationary pressures. Most of our cost base relates to personnel costs in the first half of 2023, this increased 16.0% relative to the first half of '22. This was driven firstly by wage inflation, pay raises, on the 1st of January were approximately 5.5% to 6%. And additionally, the increase costs for any [indiscernible]. Secondly, the average number of employees increased by [ 8.5% ] compared to the first half of last year. This arose from lower vacancy levels as the labor market tightness sort of ease and you had a -- headcount has mainly been Smartshares, which you've seen a headcount rise of [ 135 ] FTEs from June 2022. Those are the resource, both the operations of the acquisitions, i.e., BAU recurring activity and also the integration projects and their nonrecurring roles. Plus, there is additional headcount in the corporate services area and that really is to support both the Smartshares and Wealth Tech businesses and the current level of projects across the business. And then finally, the final factor impacting personnel costs was the lower levels of capitalization, particularly in Wealth Technologies where there have been some noncapital effort in the first half of '23 to migrate all clients from the legacy old platform to the new platform, and that is now complete. Our Information technology costs increased 7.9%, reflecting inflationary increases, movement in FX rates on U.S. dollar contracts in particular, and the fact that we have Bloomberg front and middle office systems acquired through the QuayStreet acquisition, and we're in the process of being amalgamate into our current [indiscernible] basis. The other operating expenses, we managed pretty tightly with the increases specifically relating to the ongoing cost of the acquisitions. Premises operating costs increased as we completed Level 14 in the Capital Market Center. Insurance premiums continue to increase directives fee have the uplift from 1 July '22. Travel, which has increased significantly post-COVID and drives about 1.3% of our expense increase as we start to get back more into a normal business routine. And then as our businesses grow noncoverable GST and statutory compliance costs, particularly for Smartshares and Wealth Technologies continue to grow. Overall, this has resulted in operating earnings before acquisition and integration and restructuring costs were $20.6 million, an increase of $16.8 million over the first half of '22, sorry, that's 16.8%. Acquisition integration and restructuring costs related to the integration of the ASB Superannuation Master Trust and the acquisition and integration planning of the management rights were the QuayStreet Asset Management. These costs represent incremental on of external costs, net of any capitalized internal costs, in other words, the incremental impact. That results in operating earnings after acquisition information and restructuring costs of $20.0 million, being 15% higher than the first half of '22. The nonoperating expenses include for the net finance costs. These are higher due to the QuayStreet acquisition being funded by debt and the current treatment of the unwind and present value discount on a -- pretty exciting item. That was partially offset by interest income or various cash balances being positively impacted by the increase in industry environment. And I also note that our subordinated notes in June 2023, mid June '23 for a 5-year period, and the industry is fixed up to June 2028, moving from 5.4% to 6.8%. This will increase the interest expense in the second half of the year. The depreciation and amortization expenses are higher. This is in line with our expectations, as we've outlined in previous investor presentations, reflecting a full year's depreciation and amortization on the items capitalized in 2022, specifically, Wealth Technologies completed planned migrations, which we expect to increase into '23 and '24 as further migrations are completed and the New York [indiscernible]. Additionally, there are increases in amortization for the management rights of Smartshares acquisitions for the QuayStreet Asset Management amortization commenced in mid-February '23 and to lesser degree with a full period of ASB Superannuation Master Trust amortization, which had commenced in February '22. The share of profits of associated relate to our investment in the GlobalDairyTrade business, GDT. GDT expansionary strategic plan over the next 3 years is expected to result in NZX share of profits of associates being around a bit even more [indiscernible] on strategic initiatives successfully mature. The effective tax rate was higher than the statutory rate of 28% due to a combination of nondeductible items such as amortization on the ASB Superannuation Master Trust management rights, accounting versus tax valuation differences, share of associated profits being out of tax already. As a result, the overall net profit after tax was $7.0 million, buying 5.6% on the first half of 2022. The operating margin is flat at 38.1%. And as I noted earlier, detailed analysis of these operating results by business units is provided in Appendix 1. Moving to the balance sheet on Slide 22. The key points to note are: firstly, the cash balance and [ close ]balances which are not available for general [indiscernible]. The clearing high [indiscernible] the $20 million of risk capital and approximately $2.3 million of [indiscernible] regulatory capital. Secondly, included there also is the funds management business has $1.6 million of working capital requirements under its FMI [ debt ] license on the Asian regional fund transport. I note that the -- this balance is significantly down on prior periods as a result of a synergy opportunity identified and crystallized through the QuayStreet acquisition. The next point to note is the impact of the QuayStreet acquisition that settled in February. The key straits and tangible management rights and did well recognized in overall current assets. Interest-bearing debt, that will be increased for the debt financing of the acquisition. Other current and noncurrent data will be increasing for the earnout provision payables or the fund inflow targets [indiscernible]. And the final point on the balance sheet is the disclosure of interest bearing debt liabilities. The subordinated notes first election [indiscernible] was in June 2023 when the notes were rolled forward. The next election date is in -years' time, which means the subordinated notes are again treated as a noncurrent item. And I'll now turn that over. Moving to Slide 23. The CapEx expenditure in the 4 graphs are all the same scale to show relativity. For trading, clearing and energy systems, the CapEx levels depend on specific systems life cycle. Our presence there is no large upgrade projects underway, and we're enhancing our trading system for NZX Dark, the mid point order book and NZX20 Index Futures. For property, plant and equipment and other software-related software -- they normally relate to normal life cycle replacements of IT equipment software. In 2021, we established a Capital Market Center in Auckland. And in 2022, we expanded on to an additional floor to accommodate Smartshares growth in '23. We have completed the replacement ticker and the [indiscernible] top signage on the Auckland Capital Market Center. For both businesses, Wealth Technology is our largest area of CapEx and the business continues to migrate new plants and maintenance product offering. We continue to expect the level of CapEx to be at a similar level for the next few years as the contracted new clients are migrated to the platform. And Smartshares has enhanced system requirements for the integration of the ASB Superannuation Master Trust. The QuayStreet integration will require enhancement of the plant portal and CRM visitor tools, and we will also look to modernize our operating model as part of our process. Slide 24 summarizes the cash flows for the period. Operating activities increased cash flows reflect the net profit after tax adjusted for noncash items such as depreciation and amortization, which have increased and that into the amortization associated with the acquisitions. There's also the working capital movements. The large movements between H1 and H2 each year reflects the timing of the annual listing being participant fees the billing collection cycle, which occurs in H2. We're conscious of the Wealth Technologies’' cash burn and are targeting to be cash flow positive the month as assumed by year 2024 based on the current migration pipeline. Investing activities reflect the settlement of the QuayStreet acquisition as well as the capital expenditure that I've just talked to in the previous slide. Financing activities mainly reflect the debt [indiscernible] was to pay for QuayStreet acquisition as well as the dividends paid net of anticipation in the dividend reinvestment plan. The other financing activities in place the support deal of note refinancing costs and payments. Slide 26 then. And our fully included final -- fully included interim dividend is $0.03 per share, which will be paid on the 5th of October. The dividend payout ratio was higher than policy and the business is focused on future earnings to support dividend levels. The dividend reinvestment plan is available for the interim dividend and the shares will be issued at the 1% discount, which leads me to the earnings guidance for 2023. NZX is maintaining its full year '23 operating earnings guidance in the range of $36 million to $40.5 million. The first half financial results indicate that we are tracking towards the upper end of that range. As always, I note that this earnings guidance is, of course, subject to the usual market caveats that are listed on this slide. That concludes our presentation, and we'll now open it up for questions. So at the moment, there's no questions. If you'd like to ask a [indiscernible] got a question Dave. I'm just taking [indiscernible].

Just a quick question around the inflationary pressures. I know you mentioned that you're staffing up in Smartshares. What does it look like to you once Smartshares is fully staffed? And is there any sense of how long it will take to get there?

Yes. It's not necessarily a case of stopping. The acquisition has resulted in acquiring additional headcount and additional headcount is related to supporting the operation activities that were previously undertaken by either ASP or Craigs in their operational functions. So as we keep that business on, we have to increase our operation headcount to support that. So it's more [indiscernible], there are still transaction -- transition services being undertaken by Craig, which we expect to migrate in 2024. There will be some additional headcount associated with that. On the flip side, we won't be paying certain transitional service costs on the way through. So there's a trade-off where the balance is right. So rather than just focusing on the -- headcount, it's the cost trade there. So I would say other than the acquisition-related activity, the business is appropriately staffed. And as it grows and takes on new business, there are certain trigger points where we are our own people, but there's a [indiscernible] to the business.

And I might also to add, Graham, that as we take on these new staff of ASP and of Craig, you'll see the costs come through our operating expenses line, but the offsetting factor will actually come through our revenue line.

Yes, correct.

Very helpful. And one more for me, if I could. Just on Wealth Tech, as you continue to obviously put CapEx into that, how do you see the leverageability of the Wealth Technologies business going forward as you continue to invest in growing that business?

Certainly our view at the moment is, it is staffed to grow and absorb growth. It's quite leverageable in the sense that the operational team there when they perform the functions for a number of businesses already it is just more data that they would process typically. Remembering also, we offer a couple of different products to Wealth Tech. So one is, obviously, a full service model, where we do complete the operational activities. And as we get bigger, we might have some incremental growth in supporting extra clients. But the other element that we offer is a fast product to clients where they take the operational activity and they just use our systems in which case that becomes very, very leverageable.

No, just the staffing levels there are for the that -- are related to the level of migrations that we have on the card for the next couple of years. A question now for [indiscernible].

I just wanted to just double check something on the fund-based revenues first margins. Obviously, there's been a fairly material uplift even from the second half. And given when you acquired the QuayStreet. Is most of that uplift from that fund? Or is it from broader market? Or what's kind of the big adjustment there?

It's a combination of probably -- the 3 factors. So I tend to compare it to the first half of last year. So the acquisition of ASB Superannuation Master Trust occurred in the year February. So you essentially have an extra month and 3 quarters of revenue I have delivered to that transaction. QuayStreet was again at February with just over 4 months of revenue related to QuayStreet. I believe that the year-end a quantified what the expectation was. And as we've said, $1.7 million in earnings that come through. So we mentioned that ratchets up in the revenue line. But there is underlying growth from what I'd call the non-acquisition or the BAU part of that business. It has had significant fund growth across the 6 months from year-end that has driven the increase in that part of the business. And it's approximately, I don't have the exact number of fronts [indiscernible] the market return on cash flows is approximately $600 million in the first half of the year for being a new part of the business.

Okay. And just the comment you made about the transition services into Smartshares from mid-'24. Can you give an idea of what the impact of that will be from that point?

Yes. I mean at that point, the QuayStreet business comes into our effectively operating cost base. So as Mark pointed earlier, at the moment, the transitional services are -- the costs are method off against revenue. Going forward, we'll actually incur the cost in our expense growth. So expenses go up, revenue goes up more. We are working through how we integrate that in and what's the best way. So I can't get clear definitive what it should be. But yes, we would expect there to be synergies on the move, given the scale that we have that this acquisition allows us to have. And part of those synergies are created literally in the coming week as we finish off the ASB Superannuation Master Trust. Integration and investment management now comes into a wider investment management team. Up until this point, it's been done by ASB. So we should see a change in the revenue of Smartshares [indiscernible] from September onwards purely because we now bring in something that we were paying for previously.

Are there any additional questions? I think there's no further questions. Obviously, we're more than happy to take bilateral questions after this. Graham, myself or Simon Beattie, who runs our Investor Relations team. But otherwise, thank you very much for listening, everybody. We appreciate your support, and have a lovely day. Thank you.