NZX Limited (NZX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the 2023 Full Year Results Call for NZX. I'm Mark Peterson, NZX's Chief Executive, and I'm here with Graham Law, NZX's CFO. Graham and I will take you through the result. As we do most of these times, I'll lead off with the key elements of the results and some broader comments. And Graham will step us through the financials, after which, we're happy to take questions. [Operator Instructions] Before we start, please note the important notice at the front of the Investor Relations pack as the statement applies to all content and comments made by us during this call. Just a few opening remarks. A similar operating environment continued through the second 6 months of 2023, to that, which we talked about when we released our half year results in August last year. Elevated inflation and interest rates remained and that continued to impact our equity markets activity alongside creating movements in asset prices over the year, which flowed through to Smartshares and NZX Wealth Technologies. Notwithstanding the macro environment, NZX has delivered a solid financial result for the year. Earnings, excluding acquisition, integration and restructuring costs, were $40.1 million, which was up just under 10% on last year. If we include the acquisition, integration and restructuring costs, earnings were $38.9 million, up just under 11% on last year. NPAT was $13.6 million, slightly down on last year, largely due to increased interest rates and amortization costs, and Graham will speak to this a little later. We've declared a final fully imputed dividend for the year of $0.031 per share, which brings the full year dividend to $0.061 per share fully imputed. Revenues listed -- sorry, revenues lifted to $108.4 million, up $12.7 million or 13.2% on 2022. Breaking this down at a high level, our capital markets revenues were 1.2% lower than last year. Several, almost offsetting, elements to call out here. Trading and clearing revenues were 11% lower, and we had slightly lower audit or data audit fees and energy consulting revenues were off the highs of 2022. However, offsetting this, we had good growth in dairy derivatives. Indices and data subscriptions and license revenues continued to grow. Smartshares revenues were substantially up, almost 51% as we incorporated the ASB Superannuation Master Trust and QuayStreet acquisitions. Revenues in the core Smartshares business also lifted 24.8%. NZX Wealth Technologies saw funds under administration based revenue grow 21%. Costs were $68.3 million for the year. This was up $9.2 million, which we will unpack fully when Graham speaks. But at a high level, costs within our capital markets business grew by circa $900,000 or 4.7% on last year, which is slightly less than inflation. Cost movements in Smartshares are more complicated. And as we mentioned at our half year results in 2023, the Smartshares cost base has changed as we have integrated the ASB Superannuation Master Trust and QuayStreet acquisitions. Graham will take you through the details. But in short, as we have flagged, we have stopped paying ASB for client support for the ASB Superannuation Master Trust clients we acquired, and that was being netted off in the revenue line or that cost was being netted off in the revenue line. And we've now taken on the staff directly to service these newly acquired clients, which then now comes through in the cost line. Overall, the transition -- overall, through the transition, we have increased our operating earnings at levels that is just slightly ahead of expectations. Inflationary impacts were largely wage-related, and this has impacted Smartshares, Wealth Technologies and our corporate services functions. We've also built out our risk management compliance function across the business to meet increasing compliance burden. Alongside these comments, we have continued to dedicate effort to review and refine our cost base through the year. We've reviewed our headcount and team structures, and we've made changes where these have made sense. And we've also reviewed our supplier contracts for efficiencies in services and savings, which has resulted in benefits to the business. These efforts remain a focus and we are constantly looking for further savings, taking into account our risk appetite, our regulatory obligations and being ready to take advantage of a change in market cycle. As I mentioned, Graham will take you through the financials in more detail shortly. Speaking to Page 6. Many of you will recall us rearticulating our strategy at our Investor Day back in 2022 -- November 2022, where we said our 3 businesses were all targeting greater scale and operating leverage. And for capital markets, we were looking to round out our product range with an additional trading venue and further derivative product. We also mentioned there were benefits for the group by having these businesses supporting one another. The following update for the various business areas should be considered in that context. The business highlights, which have been laid out on Pages 8 through 15, I'll step through these one at a time. The capital listed and raised. We achieved $14.2 billion over the course of the year, which was softer than the previous 4 years. The environment was more conducive to debt capital raisings where $6.8 billion of new debt issuance raised through the market, and this was similar to 2022 levels. Secondary capital raised totaled $7.4 billion, and this also favored the debt and fund markets over equity. ESG and green-designated bonds continue to be in favor by issuers and now account for over 29% of the total debt market issuance. Secondary equity raises were strong in the first half with Ryman and Infratil raising. This didn't follow through into the second half and market conditions made it difficult for IPO activity, which has resulted in postponements until conditions improve. We're not alone in this regard. Similar conditions have been felt across most developed public markets around the world. But the origination team has continued its work seeking out new company listing prospects, which remain at healthy levels, and they are also supporting our issues telling the story to the wider market through our investor events, podcasts, spotlight videos and educational workshops. Our audience for this information continues to grow. NZX and friends from capital markets community are engaging with the government to encourage settings that will further facilitate growth in public markets. We've been encouraged by the Minister of Commerce who has said publicly that his government has capital markets settings on their agenda for the second half of 2024. And NZX remains confident that as economic conditions improve, equity market activity levels should increase. Trading and clearing values were down 9.7% on 2022. Trading activity is still at subdued levels and the key determinant to changing this is the market believing that inflation is under control and more generally, a stronger economic outlook for New Zealand is on the cards. We are confident, as conditions improve, the cash sitting on the sidelines will come back into equities. The overall trading patterns we are seeing are not hugely different to similar markets around the world. Approximately half of the 61 World Federation of Exchange members had a reduction in traded value of 15% or more in 2023. So we are in a market cycle, and we are aligned with what's going on around the rest of the world. Our strategy speaks to rounding out our product offer, which refers specifically to the launch of our anonymous midpoint trading venue, NZX Dark, which will be ready for participants to connect to in early April. We've also continued our efforts to launch NZX20, which is intended for later in the year. We're also mentioning increasing scale in our operations and settlement capability, and we continue to focus efforts in this area. Depository assets in custody grew to $7.9 billion, which is up 25.5% on last year. We're always looking for more participants to join our depository and take advantage of improved market efficiency. And in this vein, we are pleased to have welcomed trustees executives as a depository participant. Information services continued its steady growth trajectory. This revenue line has had a compound average growth rate of 7.5% since 2018. Subscriptions and license revenues grew 7.1% on 2022, which reflects the continued growth in data usage. However, we are starting to see a slowdown in audit and backdated license revenues as these are now being captured in the reoccurring revenue lines. We've also invested in our data and website infrastructure, which puts all our client-facing technologies into the cloud and now gives us an opportunity to create a wider range of data products and deliver these to market via a number of modern technology delivery mechanisms. This will assist in the continuation of the growth in our data services revenue streams. Turning to dairy. Our partnership with SGX continues its strong levels of growth. Lots traded are up a further 35% on last year and revenues totaled $3.6 million for the year, which is up 88% on 2022. Market price volatility and a greater number of end users using the market is driving an increase in lots traded. A favorable exchange rate and increased levels of margin held are also driving revenue growth. GlobalDairyTrade is beginning to see the benefits of the ownership change with new potential sellers showing interest in joining the platform and the planned GDT strategic initiatives are also progressing. Smartshares continues its strong growth track. Despite some global asset price volatility, funds under management as at the 31st of December was about $11 billion, up nearly 33% from 31 December, 2022. This is through a combination of positive cash flows, positive market return and the acquired QuayStreet business coming into the Smartshares hold. Revenues lifted [ 53.6% ] to almost $37 million. We delivered in August, the integration of the ASB Superannuation Master Trust business onto the Smartshares platform and have released significant synergies. Similarly, we have already integrated elements of the QuayStreet business in dispatches with more to come and the distribution opportunity with Craigs Investment Partners is beginning to bear fruit. Anna Scott has joined the team and is driving a focus on balancing the growth opportunities we have, whilst increasing our efforts to improve our operational efficiency. We remain focused on hitting our goal of $15 billion to $20 billion of fund by the end of 2027. The biggest change to NZX Wealth Technologies over the period, besides the 3 client transitions that we achieved, is the winning of 12 new clients over the year. This means our team has a full client transition program in 2024. Our product reputation and the team are seen as strong and reliable by the market and the client transition experience we've been able to provide has been positive. We continue to field new client inquiries. The key challenge in front of this team this year is transitioning all of the new business opportunities we have in front of us and coordinating the transitions around the climate timing constraints. We have more confidence than ever in achieving our target FUA of between $35 billion and $50 billion, and we remain confident about achieving cash flow breakeven by the end of 2024. We continue to take seriously the operating culture we have at NZX. This has and remains a priority since I became Chief Executive. Our people continue to show huge commitment to the business and opportunities we have in front of us. Our staff turnover continues to reduce as the employment environment changes. Operations and technology teams continue to be accurate in what they do day-to-day, and system uptime was again 100% for the second year in a row. Our risk management function is maturing nicely under the leadership of our Chief Risk Officer, Ronnie Redpath, and, if you may, oversight review again showed positive progress across all areas. Staff engagement continues to be strong, and we have recently had a record staff engagement score. We also have a nice mix of age, tenure and gender diversity. Our gender pay gap is 16.6%, which is higher than we would like, but lower than other New Zealand financial institutions. And when you break down that gap to determine where it actually lies, as shown on Page 14, we have different gaps at different levels. Our overall gap is primarily at the senior manager level and is driven purely from not having enough females in those leadership positions. Our recruitment and promotional efforts are focused on improving the situation, balanced with ensuring we hire the very best skills for these roles. You will have noted in our annual report that we are -- that we released this morning, we've added 2 important elements: our remuneration section, which we said we would do at our ASM earlier in the year; and a section on operating responsibly, which includes our climate statement. You will see in there that we speak to all of the required elements of this climate-related disclosures framework. We speak about our dual roles as a listed entity and a market operator. We outlined the results of our stakeholder engagement surveys and the materiality assessment work we undertook. We described how we have integrated our approach to climate strategy and risk into our operating model. And at the same time, NZX continues to achieve net carbon zero certification to the standards Toitu requires. I'll now hand over to Graham to take you through the financials in more detail, after which we are happy to answer questions. Thank you.

Thanks, Mark. Before I start, I'd like to draw everybody's attention to the disclaimer on Slide 2, which contains important information and caveats relating to what I would like to cover. Starting on the financial performance on Slide 17. The table summarizes the income statement for the year ended December 2023. Additionally, detailed analysis of the operating result by business unit is provided in Appendix 1, and I encourage you to look at it. I'll just first discuss the results at a high level and then drop down into a bit more detail. Operating revenue increased $12.7 million to $108.4 million. I note that NZX's diverse revenue sources can be seen in the other financial statements. The increase is mainly driven by the impact of the Smartshares acquisitions and Smartshares organic growth with growth in Wealth Technologies being offset by the impact of the tough markets. Operating expenses, excluding acquisition, integration and restructuring costs, increased by $9.2 million to $68.3 million, reflecting the impact of the Smartshares acquisitions, which added a total of approximately $3.6 million in costs, wage inflation and also increase in other costs, particularly for compliance activities. This is a result of an operating earnings before acquisition, integration and restructuring costs rising $3.5 million to $40.1 million. The acquisition, integration and restructuring costs related to the integration of both the ASB Superannuation Master Trust and the acquisition of the management rights of QuayStreet Asset Management. These costs represent incremental one-off external costs, net of capitalized internal costs. The operating earnings after those costs rises $3.8 million to $38.9 million. For the nonoperating expenses, net finance cost increases are driven by debt funding of the Smartshares acquisition and higher interest rates on the subordinated note from the end of June. Depreciation and amortization continues to increase as expected, reflecting both the amortization of management rights relating to Smartshares acquisitions and the increasing wealth technology amortization levels as new clients are onboarded. The share of profit of associates relates to the GlobalDairyTrade investment. Overall, this resulted in a net profit after tax being $3.6 million, which is down $600,000 on 2022. The operating margin then being slightly down at 37%. As I noted earlier, further detailed analysis on the operating results by business unit are in Appendix 1 and certainly encourage people to look at those. Okay. Breaking the result down a bit more on Slide 18. The biggest impact on operating earnings in the current year has been the Smartshares acquisition. There's 2 main impacts. The acquisition of asset management of QuayStreet Asset Management, which completed on the 23rd of February '23, with revenues and expenses being included from that bit. For the ASB Superannuation Master Trust acquisition, we've now got both a full year of operations with that having been acquired in mid-February '22, so about 2 months extra operations, plus we have the impact of the integration, which is pretty important to understand what's going on here. The integration meant that the ASB Superannuation Master Trust moved into Smartshares from the operating model from the start of September, so roughly 1/3 of the year. Post that integration, there's effectively a grossing up of revenue and costs. Within revenue, the transition service fund costs are no longer being incurred and hence, no longer netted against the fund-based revenue. And then within the Smartshares cost base, the additional employees we employ to do those transitional services are now being expensed within existing teams. Overall, the net impact has been the unlocking of a synergy, which we estimate to be about $1.2 million per year. The integration of QuayStreet Asset Management into the Smartshares fund operating model is expected to complete only at 2024. This will have a similar impact on the operating revenue and costs as currently the transition services are being performed externally and netted off against revenues within fund costs, whereas we will employ extra employees to actually do those services within current teams. And it does have the opportunity to unlock further synergies. Okay. Moving to the revenue breakdown -- revenue and expense breakdown. The main factors for the markets revenue, first of all. Capital markets origination revenue decreased, and that's a mix of a couple of factors. The annual listing fee have been positively impacted by price changes, but partly offset by a decrease in equity market capitalization, remembering that it's the market capitalization on the 31st of May each year that drives the annual listing fees for a July to June year. That revenue increase was offset by lower levels of primary listing and secondary issuance for both equity and retail debt, remembering that equity has a higher relative fee than retail debt and wholesale debt and finally, then funds. Secondary markets revenues slightly decreased, which is a mix of there being a significant increase in the dairy derivative revenue driven by the 35% increase in lot numbers. However, that was offset by the lower levels of trading and clearing and, to a lesser degree, margin fees, penalties and depository registry transfer fees that go along with that. Data and insights revenue increased, driven by higher levels of terminal and license numbers, but that was offset by lower levels of the one-off audit and backdated license revenue, which, as Mark has said, we are seeing moving into the recurring categories rather than one-off category. For Smartshares, the revenue rose 50.9% to $37 million. FUM-based revenue continues to grow in line with average FUM, which is a combination of the acquired FUM, positive market returns and positive net cash flows, which are shown on Slide 12. And there are a bit of a breakdown on those positive cash flows and there are some outflows related to the QuayStreet acquisition, which we anticipated when we acquired it, that are netted off in that number. There's also some revenue that relates to prior FUM years to recognize in the current year. Member-based revenues also increased, reflecting an increase in investor numbers from the QuayStreet acquisition and offset by a reduction in insurance admin fees with that administration function now being performed by the insurance company. The other revenues in Smartshares relates to stock lending and borrowing and interest income. For Wealth Technologies, the total revenue rose 13.8% to $6.8 million. For the administration fee-based revenue, that was in line with the increase in average FUA, which again, is a combination of new clients being migrated on to the platform in 2022, in particular, positive market returns and positive cash flows. Again, that's shown in the earlier slide, Slide 13. Wealth Technologies also has development-based deferred income, and they're really to the level of customization specific to particular clients' requirements. Now moving to the operating expenses and the breakdown of cost categories further. Over 62% of our cost base relates to net personnel costs and that increased by $5.9 million over 2022. There are 3 cost drivers of that: headcount, wage inflation and the levels of capitalization. The most significant driver has been the impact of Smartshares acquisitions, which I've already talked about. Though specifically with regard to personnel costs, the QuayStreet acquisition added 10 FTEs. I note that when QuayStreet moves to the Smartshares operating model in 2024, we expect further hires to undertake the tasks that are currently performed under this transition service agreement. Additionally, the ASB Superannuation Master Trust integration required an additional 7 FTEs to perform the transitional services that we overtook from ASB from mid-August. And then finally, we added an additional resource into the risk and compliance function, which is required as the business grows both organically and through these acquisitions. Other increases in headcounts were in Wealth Technologies, which was up 2.9 FTE due to less vacancies at the year-end. I do note that in 2024, I expect there might be a temporary increase in headcount as we accelerate the migration velocity of additional FUA from a current client. Corporate and IT headcount rose by 7.5 FTEs, reflecting a lower level of vacancies, particularly in the project-related resources and additional roles in finance policy, IT operations to support the business as it grows. These increases were partly offset by lower headcount in the regulatory co business due to vacancies and the level of resource requirements. Our wage inflation was approximately 5.5% to 6%. Pay rises are effective from 1 January each year and there were increased costs for new hires in terms of like-for-like replacements. And finally, lower levels of capitalization, particularly in Wealth Technologies, where we had some noncapitalized effort in the half -- the first half of the year that I talked to in the half year results, where we migrated our old clients between the legacy platform and on to the new platform. Moving to information technology costs. These increased by $0.7 million, reflecting primarily the change -- the acquisition of QuayStreet. Bloomberg Database license fees increased the IT cost by $0.8 million. Remaining costs were down. They reflect the combination of IT, cost inflation, FX movements and our efforts to manage our costs and review our IT contracts during the year. Other operating expenses have been managed tightly as well with increases relating to both the operating costs associated with ASB SMT acquisition and QuayStreet acquisition. Statutory and compliance costs were higher due to higher level of FMA levels because of the increasing FUM levels in Smartshares. Nonrecoverable GST also has an impact because of the increasing size of Smartshares. We do have additional premises costs with the extra headcount now being accommodated in Level 14 of the Capital Market Center in Auckland. We've also seen insurance premiums, travel and director fees increases during the current year. We do remain mindful of the cost base and cost control continues to be a priority. We're continually reviewing headcount and project priorities to ensure that we deliver our strategy and supplier contracts are also being reviewed across the business. Acquisition and integration and restructuring costs are largely related to the integration of ASB Superannuation Master Trust and QuayStreet Asset Management acquisition costs.. The nonoperating expenses, net finance costs are higher due to the QuayStreet acquisition being funded by debt and the acquisition treatment of the unwind of the present value on the earnout, Also, our subordinated note rolled on June -- in June 2023 with some cost expense and the interest rate being reset from 5.4% to 6.8% and that's fixed until June 2028. These were partly offset by interest income on various cash balances, which has been positively impacted by the increasing interest rates. The depreciation and amortization expense is higher. This is in line with our expectations as outlined in previous investor presentations, reflecting a full year's depreciation or amortization on capitalized items in 2022, specifically, Wealth Technologies completed new client migrations. We continue to expect further increases in '24 as migrations complete and also it has increased in the current year due to the new Auckland office Level 14 and the ticker in Auckland and the new signage. Additionally, there's increases in amortization of management rights for both Smartshares acquisitions, QuayStreet's acquisition amortization commenced obviously in mid-February; and to a lesser degree, a full year of the ASB amortization, which commenced in mid-February 2022. The share of profits of associates reflects our investment in GlobalDairyTrade. GDTs 3-year expansionary strategy plan is expected to result in NZX share of profit and associates to be around breakeven until GDTs strategic initiatives successfully mature. The effective tax rate is higher than 28% due to a combination of nondeductible items such as amortization on the ASB management rights, accounting versus tax valuation differences and the share of the associate profits being added tax. All right. Moving to the balance sheet on Slide 22. The key points to note here are, firstly, cash include balances that are not available for general use. There is the Clearing House $20 million for risk capital. And also, there's approximately $2.8 million of quasi-regulatory capital for working capital requirements. The funds management business also has $1.9 million of working capital requirements under its FMA [ MS ] license and the Asian regional passport. I note that these Smartshares balances are significantly down in prior years as a result of a synergy opportunity that was identified and crystallized through the QuayStreet acquisition. The next point to note is the impact of the QuayStreet acquisition settlement in 2023. The QuayStreet intangible management rights and goodwill being recognized on noncurrent assets. interest-bearing liabilities increasing for the debt financing of QuayStreet acquisition and other -- and the other current and noncurrent liabilities increasing for the earnout provision payable if certain FUM flow targets are hit, and finally, the deferred tax balances rising for the acquisition accounting. The final point notes the disclosure of the interest-bearing liabilities, the subordinated notes, first election date having passed in June 2023 and the notes rolled to the next election date of June 2028, which means the subordinated notes are again classified as noncurrent. The acquisition loan facility has $22.5 million to fund the QuayStreet acquisition as bank facilities, and these are due to expire in February 2025. Moving to CapEx. The 4 graphs I have here are all the same scale just to show relativity. Starting top left and working clockwise. For trading, clearing and energy systems, the CapEx levels are dependent on the specific systems' life cycle. At present, there are no large projects underway, and we have enhanced our trading system for [ NZX Dark ], the midpoint orderbook and NZX20 Index Futures as well as automating functionality in the depository. For property, plant and equipment, in 2022, we expanded the Capital Market Center in Auckland on to an additional floor to accommodate Smartshares growth. And in '23, we have completed the replacement of the ticker and the rooftop signage. The other software relates to the normal life cycle replacements for IT equipment and software as well as the implementation of our strategic storage solution. For the growth businesses, Smartshares has enhanced systems requirements spend for the integration of the ASB Superannuation Master Trust. In 2024, the QuayStreet integration will require different enhancements to the cloud portal CRM digital tolls, for example, and we'll also look to modernize our operating model. And then finally, Wealth Technologies is our largest area for CapEx and the business continues to migrate new clients and maintain its product offering, and we continue to expect this level of CapEx to continue for a few years as we contract new clients and migrate them to the platform. Slide 24 summarizes cash flow for the year. Operating activities cash flows increased. Net profit after tax adjusted for noncash items such as depreciation and amortization as well as working capital movements. Investment activities reflect the settlement of the QuayStreet acquisition as well as the capital expenditure that I just talked about on the previous slide. Financing activities mainly reflects the debt raised for the acquisitions as well as the dividend payment participation in the dividend reinvestment plan, the other financing activities, including the subordinated notes, refinancing and lease payments. Overall, we're conscious of Wealth Technologies' cash burn and are targeting cash flow positive by 2024 for that business unit. Moving to Slide 26. And our fully imputed final dividend is $0.031 per share, which will be paid on the 20th of March. The dividend payout ratio was higher than policy and the business is focused on future earnings to support those dividend levels. The dividend reinvestment plan is available for the final dividend and the shares will be issued at a 1% discount. That leads me to the 2024 earnings guidance. The NZX's 2024 earnings guidance will be in the range of $40.0 million to $44.5 million. As always, a note, the earnings guidance is, of course, subject to the usual market caveats that I've listed on the slide. We lay out the 2024 strategic priorities and numerical targets that fit into this earnings guidance on the next slide, together with their external dependencies. I specifically note that these aren't financial forecasts. Progress towards achievement of these deliverables can be monitored within our shareholder metrics, which we publish monthly. That concludes our presentation, and we'll now open it up for questions.

We've got a question from Kieran Carling.

Mark and Graham, can you hear me okay?

Yes, we can, Kieran.

Great. Just first question from me is in regard to your FY '24 Wealth Tech FUA target of $35 billion to $50 billion. You mentioned that you're still very confident in achieving that. I'm just keen to understand what your -- what consideration you've given to the recent JBWere merger and Hobson Wealth transaction just in reiterating that target?

Certainly, we've looked at all factors, both signed-up clients that we have, the prospects that we're working closely with, and I guess, at the same time, to the discussions that we can have with those businesses. So we've incorporated that thinking into the targets. We will continue to work with the FirstCape guys. We'd obviously be excited about a bigger opportunity there. And obviously, we've got to continue to work with [ For Barr ] as to how they integrate Hobson, but we think we can bring some value there to that business as well. So work in progress in that regard. But certainly, when we think about cash flow positivity, we've incorporated that thinking into this year.

Yes. Kieran, just to add to that, on Slide 13, I did, for the first time this year, talk about our annual recurring revenue. Bear in mind, that's for revenue plus development revenue on Slide 13, where at 31 December, we were on $7.1 million. We've got contracted and in-progress migrations that account for about another $3.1 million of revenue. We do have other contracted clients where the migration is targeted to be in 2024, but we haven't anchored it yet necessarily with the plans on those. So we remain confident based on the clients that we've signed up and that, that will come through and there is opportunity in the pipeline for more.

Great. I guess next, just if we look at your dividend in FY '23 of $0.061 per share, that's close to 145% NPAT payout, which is well above your policy range. And it's the second year that this has happened in a row. And I guess, given your guidance for FY '24, yes, it's likely that if you held dividends at $0.061 per share, again, you're going to be paying out above your policy range. So I'm just keen to get your thinking on how sustainable the current trend is and maybe what we should look for in FY '24.

Yes. I mean our policy is to take a look at it over a period of time, not on one particular year. So I do highlight that. So we are conscious of where we see the future track going. The second consideration in the current year, one, we're very cash flow positive, so we are seeing amortization being significantly higher than cash -- free cash flow, should we say. So an alternative dividend policy would be based on free cash flow. So we are comfortable that it's certainly a payable level of dividend for us. What we see is the future growth opportunities for the growth businesses and the current market cycle will turn at some point. So we want to see through those cycles and that growth and keep a stable dividend is our approach.

Okay. And then just the last one is, can you provide us with a bit of a steer of where you see CapEx and net debt finishing up this year? Obviously, CapEx across the group pulled back in FY '23 from FY '24 levels?

Yes. And look, that was very specific on the fit-out of the Auckland Capital Market Center over the 2 previous years. Those graphs are really designed to try and highlight what's one-off in nature. Simon, could you jump to the CapEx graphs? For the trading and clearing and energy systems, we're trying to be a bit more low and slow rather than big buying. The patterns there of gray and yellow top left are really trying to show one in every [ 8 ] year, you have to have a big upgrade. We're trying to move that more to a continual upgrade that you see a flattening rather than a peak and trough in it. The top right one, you can see the peaks of the fit-outs. In '24, we will have a fit-out of the Wellington office as we relocate to 1 floor from 2. It won't be anywhere near the size of that. It will be significantly smaller, but we'll be up on '23. Wealth Technologies will be around the same level as '22 and '23 with one caveat. We are putting on an extra sprint team to try and bring some of that extra ARR into '24. So you will see a slight elevation there. On Smartshares, it will depend on the level of integration that is needed for the systems to bring QuayStreet in and the changes in the operating model, but it may not be as big for the QuayStreet business as it was for the ASB business. So overall, I'd expect it to be marginally up on '23 levels, but significantly lower than the amortization that you see through going through the P&L, which is increasing because of the Wealth Tech capitalization.

Next question is from Mark Robertson. Got a question from Dave Storms.

Hello. Can you hear me?

Yes, we can, Dave.

Perfect. First one, I just want to start with -- I appreciate you both given the guidance. How should we think about that cadence throughout the year? Should it be pretty evenly split between 1 half and 2 half as it has been in years past? Or is there anything you think we should keep an eye out for that would mess with us?

If you break the business down, Dave, into that capital markets, Smartshares and Wealth Technologies or those 3 separate buckets, I guess we would be planning on markets being reasonably even from a cash flow point of view. We obviously received our cash in the second half for our annual listing fees. But broadly speaking, our assumptions would be reasonably even. We are subject to cycles, but we don't try and predict those. And we also -- it's very hard to predict, obviously, when new listings come on. So we assume a more even pattern. Smartshares, similarly, we've assumed a pattern, but obviously, we've got some integration activity and that does drive a little bit of one-off change. But I think from your point of view, it would probably be wise to assume constant patterns through the year. Similarly, with Wealth Tech, the changes for Wealth Tech, we've got transitions that will drop in the first half, and we've got further transitions that will drop in the second half. I think from a broader point of view, I assume that's going to be relatively even. But obviously, you'll get color in the half year as to how we go in the first half. So hopefully, that's a little bit of color there. From a cost point of view, again, I'd be probably forecasting sort of even splits across the year. We're not looking to -- apart from bringing on the FTE to support the QuayStreet clients as we transition away from the current arrangements with the seller of that business, we're not looking to hire any extra FTE, but we will have the normal cycles through the course of the year. Hopefully, that helps.

That's very helpful. And then just sticking with Smartshares and that integration process, just logistically, is there anything that could move that forward from Q4 '24 or conversely later and push it into 2025 that we should be aware of? And then additionally, are there any synergies that we could maybe see before or after that targeted integration date?

Yes. So QuayStreet, we've already achieved the synergy on the IT, Bloomberg, I talked about the jump in the IT cost in Bloomberg for QuayStreet. The 2 databases were merged in October last year. So there's a synergy coming through from late in the year related to that. The synergy -- the remaining synergies for QuayStreet is about the supplier operating model and getting on to the current Smartshares operating model and off the transition arrangements. Bringing it forward is harder in that you're dependent on third parties, i.e., our current suppliers, you need windows and usually have to book from 6 months out. So that's unlikely. Pushing it back, there's always risk of delay, always risk of delay, particularly when you're dependent on your suppliers. You're talking about moving billions of dollars, you don't want to risk moving it over a weekend and making a mistake, everything has to be aligned and perfect. So there's always that risk, David.

Understood. That's very helpful. And then just one more for me, more of a macro question. How are you thinking about the inflationary pressures, specifically related to wage inflation? I know you touched on it, but is there anything that you can do to kind of get ahead of that as you're obviously bringing on more full-time employees for great reasons?

Certainly, Dave, we're seeing in New Zealand here a changing in cycle around employment. Obviously, we've come out the back of COVID and there was a real demand for skilled labor and that did drive wages in New Zealand. We're seeing a tailing off of that now, and I'd imagine other businesses in New Zealand are starting to see that. So wages we're thinking, will probably be less or there'll be less inflation that we've had last year. However, New Zealand is still subject to some pretty sticky local inflation more generally. Whilst we're trying to manage a lot of that through, as we said before, relooking at supplier agreements, finding efficiencies where we can, reducing those where we can and we've also been very disciplined around our projects and the selection of the ones that really fit the strategy and probably parking some others that would be good to do, but not necessarily absolutely essential to do. We're trying to manage the impact, I guess, of sort of sticky local inflation with this other mechanism. So probably just starting to taper a little bit. At a more macro level, you can see the inflation rates that the Reserve Bank's trying to manage. There's obviously the domestic inflation and there's the inflation that comes in from offshore. Offshore seems to be sort of dropping a little bit. Domestic seems to be a bit sticky. So New Zealand's got some work to do to get on top of inflation, but it feels like we're certainly close to that point.

Yes. Just to add to Mark's comments, I did mention on the way through, our pay rises are effective from 1 January. So you do have a full impact of the year. Last year's was roughly in that 5.5% to 6% range. This year's is sort of 3.5% to 4%. So you will see that impact coming through in the current year numbers. The risk is more where a vacancy turns over, where we have specialized individuals that we have to hire as there are non-average inflation, shall we call it, in those particular roles for specialists, be it IT specialists or lawyer specialists in particular.

Next up will be [ Andrew Hodge ]. Andrew, I also see that you've sent through a written question. Can I recommend that you ask your questions verbally?

My question is, can you please explain how transitioning QuayStreet to the Smartshares model from active to passive is going to mean that you need to hire more headcount? And then also how you see margins going for this business since you'll obviously have to cut fees since you'll be moving away from an active model?

Andrew, the thing that we're focusing there on QuayStreet is it's not the active-passive thing that drives the headcount, it's actually the client servicing cost. So currently, client servicing occurs inside the business that we acquired QuayStreet off, but obviously, we've got to bring some of that function into the Smartshares side, and so that's the driver of it. And I guess the integration piece, we specifically talk more about the operating model that the QuayStreet business is based on. So we're being less focused on the active-passive story and more focused on getting the cost onto our platform. More generally on QuayStreet, we're really pleased with the way that's going. Performance has been good in the funds and we're really starting to see the benefits of the distribution agreement with Craigs. So we're actually quite excited about what's in front of us there for that business.

Yes, just to add to Mark's comments. Yes, I did refer to it as a supplier operating model. The supplier arrangements for the old QuayStreet business are based on roughly $1.5 billion of FUM, whereas we now have $11 billion plus of FUM. And that obviously has a purchasing power associated with it.

So just so I'm clear, so is the plan to maintain QuayStreet as active then?

We've got a plan that we're just working together with the Craigs Investment Partners team on the type of product that we want. So currently, the business is performing well, we want to keep that rolling and we will continue to review how that works going forward and develop the right type of products for the investors that come through Craigs. So the current piece is to focus as it is, but we continue to review just exactly how we will develop that product strategy further. But we'll do that in conjunction with Craigs.

And second question is just in relation to the pay rises you talked about and your comment about hiring externally. Obviously, there's higher costs. If -- can I compare the internal wage increases, which would have been sort of 5.5% to 6%, and then now 3.5% to 4%, if you're hiring people into the vacant roles, how much of a higher salary count -- percentage change are we talking about for those people?

We're trying really hard to be very disciplined around external hires. We're trying to promote local -- sorry, internal folk into roles where we possibly can and give them that development opportunity. In that regard, obviously, we wouldn't be subject to that external pressure. What I think Graham was trying to highlight is we do have some very specialist roles and to the extent that they become available, which we're not sure what those might be or how many those are, but they're not many, is the broad story. But if we were, we might be subject to a little bit of specialized wage inflation there. But we're not deliberately or have not gone through at that level of detail. I think Graham was just highlighting a risk rather than necessarily an actual that might occur.

So you're at almost 340 FTEs. Do you have an idea of where you expect the business to flatline and then sort of before it starts to sort of taper and you get, I guess, the benefit of having a fixed labor pool?

Yes, well, certainly I think we're targeting maybe another 3 or 4 FTE into the QuayStreet piece to support that. But broadly speaking, that would be the only change of significance that we would expect. We'll get our normal sort of volatility, if you like, in staff, and you will have people leave and we'll have people come just at normal levels. Although I think I mentioned at the beginning that we're seeing turnover stats reduce. So it's not going to change a huge amount from where we're at, at the moment. And we will end up with opportunities as we bid in a more consistent operating model across Smartshares. We expect to be able to find efficiencies through that process as well.

Yes. The only caveat, as I mentioned there, was we do plan to put on an extra sprint team to bring in some current [ FUM ] quicker in 2024. But that's only a temporary thing. So at half year you might see it up a little bit for that, but that's only temporary.

But there's a specific focus for it as well.

So I've got a couple of written questions from [ Andrew Hodge ]. NZX Dark, can you explain what this is and how it'll work?

Yes, sure. So NZX Dark is effectively the equivalent of what you might see in Australia called Center Point. So it's an anonymous midpoint order book. It's an additional trading venue to the lit market that we see in New Zealand at the moment. And it allows effectively orders to come to market, get traded on the screen at the midpoint of the lit market, but done anonymously. It's a market venue that is quite common around the world and certainly in Australia, Center Point has been around for a little while. So this is our version of that. I guess the impact of that is that some activity from investors can use that market that will then be counted as on-market activity, which drives a higher percentage of on-market activity that when investment managers look at the amount of activity on-market and think about how they manage their exits of positions and the timing of those, then they'll be able to take account of that in their calculations. So it should spawn a little bit of liquidity. Obviously, the market cycles are sort of a more dominating impact there, but it just gives us another feature to help drive liquidity growth.

Andrew's second question was, can you just tell us what self match prevention is about?

Yes. So self match prevention is a feature where if you have active trading firms in the market, the last thing that they want to do is buy and sell to themselves. That's a breach of rules. So this is a piece of technology which prevents that.

Any further questions from anyone?

Well, okay, if there's no further questions, certainly, we appreciate everybody taking their time to listen. In the usual manner, we're very happy to take questions directly. We note that we've got a number of meetings already booked in the schedule, but otherwise, we thank people for their time and interest in the business. Thank you.