PEXA Group Limited (PXA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PEXA Full Year Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Glenn King, Group Managing Director and Chief Executive Officer. Please go ahead.

Good morning. I'm Glenn King, PEXA's Group Managing Director and Chief Executive Officer, and joining me this morning is our Chief Financial and Growth Officer, Scott Butterworth. We're pleased to welcome you to PEXA's results for the 12 months ended 30th of June 2023. Now before I start, please note, Slide 2 contains the important notice disclaimer information. I'm going to move on to Slide 3. In the spirit of reconciliation, PEXA acknowledges the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their Elders past and present and extend that respect to all Aboriginal and Torres Strait Islanders people today. We, at PEXA, accept the invitation to walk with First Nations peoples to a better future for us all and invite you to join the movement. Now I'm going to move to Slide 4, and this is the agenda for this morning. we will cover PEXA's FY '23 business review, financial performance and provide some commentary on the company's outlook. At the end, both Scott and I will be happy to take any questions. Now moving to Slide 5. Before we go into further details of our FY '23 performance, I do think it was important to take you through some important context about the PEXA Group. Now for those who are unaware, we began over a decade ago with a key mission to solve the customer imperative. First, our first phase was to build a safe, national, reliable electronic platform by which the purchase, sale and refinancing of property could be facilitated smoothly, reliably and improving the overall customer experience. It was a government -- COAG-sponsored initiative codesigned by industry, government and customers to provide what is now a world-leading property exchange platform that has set the standard not just in the property market but also other registry-like services. Our second phase was building out the PEXA Exchange platform to provide comprehensive coverage across most of Australia. From 2021, we successfully processed millions of property transactions through the PEXA Exchange platform. That's right: Millions. And during this period, we also successfully listed on the Australian Stock Exchange. And we began our expansion of our public exchange platform into the U.K., and we commenced our expansion into additional property digital product and service adjacencies. And now as PEXA Group, we are now into our third and current phase where we have grown our PEXA Exchange platform coverage to 88% of the Australian market. And we've extended and scaled up our property digital adjacent services, which includes leading digital businesses such as Value Australia and .id., and we are now rapidly expanding our U.K. platform into a business with U.K. lenders on our platform. Plus, we are transitioning Optima Legal to the PEXA U.K. Group and exploring opportunities with additional U.K. financial institutions. And all of this progress has contributed to our solid FY '23 results. So now moving to Slide 6. And there are 3 key messages which I would like you to take away from today's PEXA Group results and presentation. Number one, the PEXA Exchange continues to deliver. It is a robust, resilient property platform, and it's performed based on world-class digital infrastructure. In addition to that, as I mentioned, our Australian market share increased to 88% in FY '23. And further to that, we've had disciplined cost management with margin improvement from 52.2% in the first half of FY '23 to 55.1% in the second half of FY '23. Secondly, our growth businesses are delivering and building to scale. Our PEXA Go platform is now live in the U.K. market and processing transactions. The rollout of the PEXA Go platform is favorable to where we were in the Australian rollout. Our Digital Growth businesses are innovative, AI [ inundated ], unique and beginning to deliver revenue and scale. And we have a sizable uptake with a path for sustainable growth. And thirdly, disciplined approach to cost efficiency and capital allocation. We delivered efficiencies this year. We have focused on continuous improvements, which will extend in FY '24 to deliver on our margin expectations. We have strong operating cash flow, and our capital is continually deployed in a disciplined fashion to support strategic growth. PEXA is powering the property markets in Australia and is now underway as a business in the U.K. So moving to Slide 7. Turning to the opportunities that are available to PEXA. We now have multiple diverse revenue streams across 3 core areas, each with a significant total addressable market. So firstly, the PEXA Exchange, our world-leading digital property registration and settlement platform, in Australia has a current revenue of $263 million against a total addressable market of $300 million. Our PEXA Digital Growth business seeks to develop property insight solutions that enrich our customer proposition. The current revenue is now $12 million, which is from next to nothing in FY '22, against a total addressable market of $500 million. That's right: $500 million. And we now have leading digital property businesses, tech and brands, such as Value Australia, .id and our recently acquired business, land insights. We are excited about the business growth opportunity in these areas. And our third business unit is PEXA International, which seeks to leverage our unique IP to expand into major Torrens title markets starting in the U.K., where our business is now operational through both our PEXA Go platform combined with Optima Legal's distribution potential. Our current revenue is now $9 million against a total addressable market of $750 million in similar major Torrens title markets. Like Digital Growth, we are investing for growth, and we have a customer presence through PEXA and Optima offerings in the U.K. We have a clear and consistent strategy to execute and unlock these opportunities. Now moving to Slide 8. Our strategy is anchored in our purpose, connecting people to place, which frames how we work and is underpinned by our values; a purpose that is values-based for our customers, our people, our communities and our shareholders; a purpose that motivates our people. And our strategy is simple: deliver sustainable business growth by enhancing the PEXA Exchange, extending further into the property ecosystem and our customers through product adjacencies and expanding our core capability into jurisdictions with similar customer opportunities to solve and evolving our operating model to underpin a productive and engaged professional team, build on values of better together, making it happen and count and innovate for good. Now over the next few slides, I'll touch on some key overview points about our business and strategy. So turning to Slide 9 and starting with the leading PEXA Exchange platform. Exchange in the year continued to demonstrate resilience and robustness despite the property market headwinds. And it's amended its place as important national digital infrastructure with 88% market transactions, which was up on the prior year, with strong growth in ACT and Queensland, a positive customer score of 81 and 3.7 million transactions processed for the year. We are also now underway with Tasmania, exploring new -- Northern Territory and we expect further transaction growth in WA. Now moving to Slide 10. The strong capabilities we have built in Exchange has enabled us to appropriately extend into adjacent property products and service solutions through our Digital Growth business, [ broad ] services that have now delivered $12 million of revenue, 9x year-on-year growth. And let me say, our guidance is that Digital Growth will break even at the operating EBITDA level for the month of June '24. Importantly, the scaling of our emerging digital businesses provides basis for further growth in Australia and the U.K. Now let me take you through a few points on the U.K., as shown in Slide 11. The U.K. business is building, scaling and operational. We have achieved this based on the Australian PEXA Exchange learnings. We have built and have approved a new payment system integrated into the Bank of England, PEXA Pay. This payment system specifically supports property settlements in the market. We have 9 banks tested on this payment system. Our PEXA Go platform, which is our settlements, platform has onboarded 2 financial institutions in the year, which are now successfully transacting remortgages. And it is important to distinguish there are differences between the Australia and the U.K. markets. So therefore, we acquired Optima Legal, which supports our ability to bring remo volumes onto our PEXA Go platform and understand how [indiscernible] operate and refine our solution to better support these customers. In terms of building scale and momentum in our U.K. business, I can also advise, we are in discussions with some of the U.K.'s largest lenders, some of which are already on the Optima Legal platform, such as Virgin Money and Nottingham Building Society; and some which are not, such as Metro Bank. We are not currently at liberty to disclose other lenders currently, but discussions are underway. So moving to Slide 12 to illustrate the positive comparable position of the U.K. rollout when compared to Australia. While there are differences, we are trending well on our U.K. development to the equivalent time period when we were rolling out in Australia. And a few examples to call out. We have developed a PEXA Go platform that works. We have worked through the market dynamics and identified clear customer and regulatory imperatives for our PEXA platform. We have built scale and distribution potential through our U.K. acquisition, and we have managed through our financials and plan to deliver. We are pleased with our progress and the momentum we have underway in the U.K. Now turning to Slide 13 and briefly noting the FY '23 market environment. As flagged at the half year, the results this year in the Australian property market were challenging due to the Reserve Bank's round of interest rate rises with house prices and transaction volumes receding from the highs in FY '22. This was partially offset with the increase in refinancing activity, yet refinancing has lower margins and fees for us on the PEXA Exchange platform. In addition to that, the U.K. market also saw a slowdown in prices and remortgaging activity. Yet, as illustrated on Slide 14, we, at PEXA, proactively responded to the market conditions whilst building for future value. Part of our response included management actions targeting usage, productivity and pricing, which resulted in a positive $24 million impact. At the same time, we continue to build for future value through growth investments, which resulted in a $19 million impact on EBITDA. Now turning to a high-level segment view of our performance, shown in Slide 15. This slide shows despite slowing markets, we have achieved a solid and credible response. Our total group business revenue rose 1% to $283 million with growth from our emerging Digital Growth and International businesses [ offering ] lower PEXA Exchange revenues. Our Exchange revenues did decrease 6% to $263 million due to challenging market conditions. However, and importantly, our second half margins improved from 52.2% to 55.1%. Our PEXA Digital Growth delivered revenue of $12 million, as I said, a ninefold increase year-on-year. And our PEXA International progressed well with the acquisition of Optima Legal in the U.K., delivering initial business revenues of $9 million. So turning to business review for FY '23 on Slide 16. We are pleased with the [ considerable ] momentum and a couple of callouts. PEXA Exchange has achieved an average market share of 88%, up 2 percentage points. PEXA Digital Growth has commenced preparation for commercialization of a number of businesses, including Value Australia service with a number of MOUs in place. And PEXA U.K. is progressing well with the group's remortgage offering in place, PEXA Go live and successfully launched with a number of financial institutions and a number of other financial institutions in discussion. In addition to these, we are also exploring other international markets. Now going to Slide 17. None of this would be possible without our people, customers and the value we are providing to the communities in which we represent. And you can see the strength of PEXA through the highlights on this slide. For example, we have a highly engaged team as represented by a 77% engagement score and recognized through numerous industry awards. Now going to Slide 18. I'll now hand over to Scott to talk through our FY '23 financial performance in more detail. As you will all be aware, Scott, who has worked as a CFO in major listed businesses in both Australia and the U.K., was appointed to the role of Chief Financial and Growth Officer in May and assumed his role from 1 July. He is a highly credentialed finance executive, having been with the PEXA Group since November '21 and has been instrumental in delivering our group strategy. He has added significant bench strength to the organization. So over to you, Scott.

Thank you, Glenn, and thanks also to those who have joined the call today. Turning first to the performance of the overall PEXA Group as outlined on Slide 19. Revenue for the group increased by 1% or $3.6 million over FY '22. This was achieved despite a net $15 million decline in Exchange revenue, with our emerging Digital Growth and International businesses contributing $19 million of new revenue to the group. Operating expenses increased by $38 million over the period. To break this down a little, $22 million of this increase is associated with the businesses we bought in the period: .id, Optima and Value Australia. Around $12 million was driven by investing in the capabilities of our emerging businesses as they began to scale over the period. Additional cost growth was primarily driven by capitalization effects and a range of smaller cost items and inflation. Pleasingly, our efficiency and productivity efforts generated in-year benefits equivalent to 3% of FY '22's cost base. These movements have led to the group's operating EBITDA margin moving from 48% in FY '22 to 35% in FY '23. As previously outlined by Glenn, this represents the effect of investing in future value creation by the group, partially offset by strong management of key levers whilst digesting the effects of macroeconomic uncertainty in our major markets. Before turning to the performance of our individual businesses, I want to address 3 items below the operating EBITDA line as set out on Slide 20. Firstly, you will see that we have set out the specified items for FY '22 and FY '23. These are items that are officially unusual and/or nonrecurring in nature that they should be separately called out. A full delineation of those items for FY '23 and '22 is contained in the appendices on Slides 40 to 41. However, as you can see, these items declined by $7.5 million over the year. This was primarily due to the nonrecurrence of FY '22's IPO costs, partly offset by a range of M&A and related strategic costs incurred during FY '23. Secondly, depreciation and other transaction increased by $8.5 million due to both our organic investment in our Exchange and emerging businesses as well as increases associated with businesses we bought in the period. Lastly, you can see a very large jump in our effective tax rate, which, together with the reduction in EBITDA, explains much of the decline in NPATA. This was driven by the need to write off certain noncash R&D tax credits following Link's in-specie distribution of its PEXA shares. I will now turn to the performance of each of our lines of business, starting with Exchange revenues, costs and CapEx on Slides 21 to 23. Summarizing the key themes, firstly, as stated previously, Exchange revenues declined by $15 million or 6% over the year. This was driven by a combination of declining market volumes, particularly during the second half, and an increase in the mix of lower-revenue refi products. These market movements had the effect of reducing our revenues by the equivalent of $36 million, to partially offset them by the equivalent of $20 million we benefited from repricing decisions made at the beginning of the year as well as encouraging further Exchange usage in the ACT and Queensland. We managed our cost base effectively with a particular emphasis on managing our labor mix and driving efficiencies in our nonlabor costs. As a result, despite the decline in revenues, we held the margin -- the reduction in year-on-year margins to 1% and remained within our guidance range of 50% to 55%. Margins also improved sequentially in the second half. We increased our investment in the Exchange by $11 million during the year. These investments resulted in improved resilience and cybersecurity, over 250 customer innovations, additional customer APIs and the fulfillment of regulatory-related requirements. Slides 24 and 25 deal with the progress made by our Digital Growth business over the past year. Again, I'll summarize the key revenue, expense and CapEx themes covered by these slides. Revenues for Digital Growth increased by $10.3 million or 9x over the period, mostly in the second half. Much of this was driven by the acquisition of .id, which gave us 9 months of revenue during the year. However, it is pleasing that we've seen an acceleration of .id's revenue trajectory under PEXA's ownership as the business takes advantage of the distribution and other resources that we can provide. Outside of .id, we have also had good initial traction with our suite of organically developed data and digital solutions with their revenue increasing by 2.6x relative to FY '22. Costs did increase in this business over the year, reflecting about $8 million of costs added through acquisitions and additional costs representing investment in the capability of the business as it starts to grow. To partly offset this cost growth, we generated efficiencies equivalent to 17% of FY '22's costs. This helped to improve operating margins by nearly 390 percentage points over the year as the business started to scale. The increase in specified items for the period reflects the impact of restructuring activity and transaction and integration costs associated with investments and acquisitions made during the year. CapEx was largely flat over the period. However, the mix of capital expenditure did change over the year as we ramp down development for some of our existing organic products, commenced work on new products and started work on commercializing Value Australia. I turn now to the revenue expense and CapEx performance of our International businesses as outlined on Slides 26 and 27. With the acquisition of Optima Legal, we've now started to generate revenue in this business for the first time. However, Optima's revenue performed at a lower rate than typical for the business. This was for 2 reasons: Firstly, there was a marked post-January slowdown in overall market remortgage activity as banks and consumers digested the effects of the Bank of England's changes to monetary policy. Secondly, as widely noted at the time, Capita plc suffered from a range of technology-related issues around the end of the third fiscal quarter. As a former member of the Capita Group still consuming Capita-related services, Optima was also impacted by these issues. The combined revenue effect of these issues was around $5 million to $6 million in the period, noting that we have lodged a claim for the Capita technology-related issues with our insurers. Operating costs associated with our international activities increased by $22 million over the period. Around $14 million of this cost increase was associated with Optima Legal. The remaining cost uplift is driven by the spend on resources required to further build out our international PEXA Go platform as well as undertaking business development and other related sales activities. Specified items increased by $8 million over the year. It is mainly related to the costs associated with acquiring and integrating Optima Legal and the associated strategic positioning activities that we have undertaken. CapEx increased by $6 million over the year, largely reflecting increased expenditure on PEXA Go. The cash effects on the group's performance are set out on Slide 28. Pleasingly, the group's operating cash flow generation was only $6 million lower than in FY '22 despite the $27 million reduction in cash adjusted EBITDA over the period. This was due to the favorable impact of net working capital movements as the effect of certain prepaid IPO costs incurred in FY '22 were not repeated in FY '23. Reflecting the investments noted earlier, CapEx consumed about $67 million of our cash flows, up by $17 million relative to the previous year. Much of this was for the Exchange and for International. We spent a further $52 million on investments, including 24 [Technical Difficulty]

This is the conference operator. We have temporary lost connection with the speaker line. Please continue to hold, and the conference will recommence shortly.

Apologies, everyone, for the drop out there. I'll just restart on Slide 29. As described in that slide, notwithstanding the cash consumption over the year, the group's balance sheet remains on a sound footing. Debt metrics remain within appropriate levels, and we have about $35 million in undrawn facilities. Net finance costs remained manageable with the effect of increasing loan interest rates being partially mitigated by the interest on source and other cash balances. Having been involved in much of the group's development over the past 2 years, one of my highest priorities as incoming CFGO is to ensure we have a strong and disciplined approach to managing our shareholders' capital. As set out on Slide 30, Glenn and I are highly committed to ensuring that the group's resources are invested for long-term value creation. We have a clear framework to managing the allocation of capital to appropriate opportunities across the group and for reporting on the outcomes of those allocations. At present, and as suggested by the growth expectations built into our market trading multiples, we believe that applying this framework suggests that disciplined investment in our new business activities will create long-term value for the group. Of course, if this would not -- should be no longer the case, we will take appropriate actions to ensure the efficient deployment of capital on behalf of our shareholders. In closing, the group has turned out a solid result for the year. We produced a strong margin outcome for the Exchange despite foreign revenues. Our PDG and International businesses are beginning to scale, and we created good operating cash flows. I'll now hand over to Glenn to provide some closing comments and perspectives on our outlook.

Thank you, Scott. Now just turning to Slide 32. I'll provide some thoughts on the outlook and where our priorities are for the year ahead. To support Scott's comments, we are committed to maturing and scaling our business through a clear set of productivity enhancement levers. We have scaled our business rapidly. And as our operating environment remains uncertain, we will prudently review our expense base to ensure we remain efficient and continue to ensure that we deliver for our customers. There are several things that we've been progressing already, and this has delivered efficiencies this year. We will be maintaining this momentum as we head into FY '24. These initiatives will cover our purchasing scale, our increasing use of technology, such as AI, and different initiatives that support productivity. I will now outline our focused priorities for FY '24. Turning to Slide 33 shows the key strategic initiatives under each of our pillars of enhance, extend and expand. For example, we'll continue to enhance the PEXA Exchange to be in a competitive position, growing transaction coverage, including working with Tasmania as planned for launch in FY '25, maintaining critical resilience and maturing our service proposition through accelerated API connectivity, all the whilst ensuring regulatory compliance. We will continue to extend our reach by deepening our service and distribution across key customer segments in Australia. This includes commercialization of Value Australia and building our digital business scale. And we will continually expand our International business in the U.K. with both PEXA and Optima Legal, seek to sign up more financial institutions by converting Optima Legal remortgage flow to PEXA and build on the work of our PEXA Go platform in purchase and sale. We will also continue to explore other Torrens title markets. We will deliver these initiatives through disciplined execution, productivity enhancements, secure and reliable services whilst delivering on our customer, shareholder and people expectations. Now turning to Slide 34. Notwithstanding this -- the ongoing challenges in the property markets, we expect the PEXA Exchange to continue its resilient performance, delivering strong cash flow and operating EBITDA margins in a consistent 50% to 55% range through FY '24. We expect our Digital Growth business to be operating EBITDA breakeven for the month of June '24. We also expect to manage our investment in our emerging businesses, Digital Growth and International, through a combined $70 million to $80 million, which remains broadly in line with our FY '23 results. And as we continue to build out our range of business units, we are increasingly focused on the group margin. The group margin currently sits at 35%, and we expect this will be a floor for our performance in FY '24. So to conclude, and turning to Slide 35, we are delivering on our promise. That's right: We are delivering on our promise. These results demonstrate we're doing exactly what we said we would do. We are in a phase of investing for future growth. We're using the expertise and experience built up through the development of the world's first digital property exchange to build new adjacent revenue streams. It shows the resilience of our business model built on the consistent high-margin performance of the Exchange and growth from new revenue streams. To close out, I'd like to leave you these key takeouts: one, the PEXA Exchange continues to deliver and has demonstrated its resilience in the face of challenging market conditions; two, our growth businesses are delivering and beginning to scale both in Australia and the U.K.; and three, we are focused on executing against our strategy with a disciplined approach to cost efficiency and capital allocation. Can I thank you all for listening, for your attention. And on behalf of Scott and I, we would be happy to take questions.

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

I've got a couple, if possible. Just firstly, the change in the U.K. CEO. Can you just touch on what happened there? And also just on the U.K., you haven't given us many signposts for '24. What do you actually expect to deliver in '24? And when do you expect this division to break even? Is it still around '25? Or has that been pushed out a little bit as things are taking a little bit longer?

Firstly, thank you, Ed, for your question -- all your questions. So firstly, let me just touch on our U.K. CEO, James Bawa. He was responsible at establishing PEXA's early presence in the U.K. and got us up and running, and we have achieved significant momentum to get to this stage. James decided to take the opportunity to pursue other endeavors and opportunities, and he will be leaving at the end of August. He's been a strong leader to get us to this stage. He's worked with us for a couple of years and worked very hard to actually get our platform up and running. But we're now at a different stage where we've acquired Optima Legal. And with the PEXA U.K. business, we're bringing that together under one U.K. country head. And we're working through that at the moment, and we're in a good place to announce something in the near future. The second thing in terms of -- let me just take you through in terms of signposts or a bit of areas in terms of what we're progressing on. The first thing, we're well placed in the U.K. And as I mentioned, Ed, the platform -- PEXA Go platform is up and running and is progressing well if you compare it to the Australian time lines. Secondly, we've got financial institutions already processing remortgages on that platform, which is important, and we've got a number of other financial institutions lined up. Thirdly, with Optima Legal now, which we're building into the broader PEXA U.K. business, we're now looking to put our PEXA tech into the Optima Legal business. We're looking to get some remortgage flow from Optima Legal onto the PEXA Go tech platform, and we're working with a number of financial institutions as we explore that out in FY '24. As I flagged, 2 of those are Virgin Money and Nottingham Building Society. So we'll be working those through in the FY '24 period. But we're also talking to a number of other financial institutions, such as Metro Bank, who does not operate on the Optima Legal platform. But let me also say, in addition to that, as I flagged, when you look at the guidance lens, we've given an indication of what we expect to invest in the U.K. and Digital Growth businesses, which is pretty much in line with the FY '23 period. But the other guidance I can give you, as I flagged, is we're also looking at the group margin, and that group margin at a floor would be around 35%, which is consistent with this year as well. They are the key areas I can give you guidance on. If I would say then to wrap up, we are in a good place. We understand that our platform is working and that we are in a good place in terms of the customer and the regulatory imperatives. We're in a good place because we've got distribution, and we're in a good place as we're delivering on everything we said we're going to do.

And just one more on Optima. Firstly, when will the systems be -- your systems be integrated with Optima? And then secondly, once that's done, how long will it take a bank to sign up and then test so then you can actually see revenue in the door? Is it a short -- a couple of months period? Is it a 6-month period? I'm just trying to get the lag of when people sign up once it's all up and running with Optima.

A couple of things on this one, Ed, and I'm not going to give you in terms of definitive time lines [indiscernible] 2 months, 3 months. But I think the first thing to consider is we already have customers now as customers of Optima Legal. So as we've flagged, we've got 6 of the 8 major banks already using the Optima Legal business. So we're in discussion with those in terms of how can we ensure we deliver a better experience using the combination of Optima Legal and the PEXA platform. We're already working through at the moment of how do we bring the PEXA tech into the Optima Legal business. And over FY '24, we'll give some indications of how that is actually progressing. And we would also expect to get some remortgage flow from Optima Legal onto the PEXA Go platform. And I would also expect that the remortgage flow on the PEXA Go platform will increase from what we had in FY '23. In fact, I'd be pretty disappointed if it doesn't increase it. And as that does progress, we will [ share ] that.

Your next question comes from Josh Kannourakis from Barrenjoey.

First one, just a point of clarification around the NPATA and, I guess, reconciling to an underlying NPATA number. Obviously, there's the tax sort of movements. But should we be assuming on a normalized and, obviously, income tax around the cash tax rate of sort of 30% that, that NPATA number this year on an underlying basis would have been around 50? Could you just give us a bit of clarification on that?

Yes. Thanks, Josh. We -- last year, the effective tax rate was circa 32%, and we didn't have any R&D tax credit write-offs. I would expect over time that we would converge down to the statutory rate. The only small piece on that would be U.K. tax rates given we've had an increasing portion of the business there. But that won't be a material effect in the next couple of years, I would have thought.

Yes, got it. So just -- I mean, is there any way just to put it because I think a few people are just trying to clarify what sort of underlying NPATA would sort of be circa this year if you were sort of in a normalized tax environment.

I would use 30% tax rate to normalize it, and then you just have the depreciation to run through.

Yes. So about $50 million NPATA underlying to take out the one-offs.

Thereabouts. I think we saw your note earlier. It seemed to be in line with the sort of things we were thinking of. But if there's any -- we'll take another look at that if there's any departure and that will, obviously, come back.

Yes. Okay. No, that's fine. And then just in terms of the base tax -- the Exchange business. Obviously, you're cracking margin into the second half. Can we just talk about a little bit some of the, I guess, some of the restructuring or cost -- and how should we be thinking about sort of the cost base into next year for the PEXA Exchange business?

So the -- a lot of the specified items in the Exchange this year were either for some regulatory work that we undertook during the period. or associated with restructuring and redundancy, [ not a ] business that consumes a lot of those strategic sorts of costs on an ongoing basis. So what I would say is that we've -- if you were modeling it, take the approach that we've achieved this year, I think. That's not guidance, by the way. That's a modeling approach.

Yes. Yes. I guess a lot of people would be looking at it thinking in an environment where we might see potentially volumes higher, is there any reason why some of that second half margin could continue on? Or is there any big step changes in costs that we should be thinking about into next year for the PEXA-based business?

The great thing about the Exchange is it's a very high fixed cost business. So the unit costs of operations tend to drop pretty sharply when volumes increase and margins widen. Similarly, though, this year, we've been able to manage nonlabor costs pretty effectively and also our labor mix pretty effectively. The way we're thinking about cost growth overall in the company is about making sure that ex acquisitions, the cost growth is no greater than inflation so that we find productivity improvements both -- and efficiency improvements both in our labor and nonlabor costs to keep us within that [indiscernible].

Got it. And so if we did get a recovery, just theoretically, into next year, there's not a significant change in the cost base within the PEXA Exchange business?

We'll manage it to a margin of 50% to 55%.

Your next question comes from Brendan Carrig from Macquarie.

Maybe just a follow-up to Josh's questions there. Just on the core Exchange, obviously, the strong outcome on the OpEx. Just noticing the big tick up in the second half CapEx. Should we expect that for the second half rate going forward? Or should we think that, that should ratchet down? I think 25 to 30 was kind of the CapEx range that was -- we were told to sort of consider for that business. Because it just seems a bit elevated. I'm just wondering sort of why it's so high and what kind of projects that is being spent on.

I'll talk to the projects first. We did a bit of a step-up in the second half on some of our regulatory requirements. We also brought a number of our projects to a close around some of the customer innovations I touched on earlier, some of the API work that I touched on earlier. What I would think about is what Richard has previously said about overall spend in the Exchange, which is around about 20% of revenue, including the relevant OpEx, and I don't see any particular reason to depart from that notion.

I think, Brendan, just to add to Scott's point, and we've been consistent on it, we have to keep investing in the Exchange, but we'll do it in a very prudent, disciplined way. You can't do it on a -- do too much, but you can't do too little. So some of that also ties into some of the expansion areas in, for example, in the Tasmania to explore that, or Western Australia where we're looking to increase the number of volumes through the platform. Thirdly, some of the areas such as the APIs, that removes a number of friction points. And then also, you've got the broader side as I mentioned. That's going to be continuing on, but we're always doing it within an envelope.

Okay. That's clear. And then maybe just moving on to revenue in the core Exchange. Obviously, fairly progressed through the current quarter, and you obviously have a 6-week plus line of sight. Maybe just any comments that you'd like to provide around the progress on the revenue front in the core Exchange to date and anything we should be considering just from a penetration or uptick in WA and/or Queensland and things like that, that we should think about?

No. What we've done there, Brendan, is we've given you the guidance on the 50% to 55% margin on the Exchange. I think a couple of things that we can just comment. Obviously, the property market still got some interesting dynamics going on in terms of [ sale and transfer ] and refi. Just got a bit of refi coming through. The margin, as you'd expect from the past couple of years, we have been working with WA where we've got a lower share. So market share, we've been doing more work on getting some transactions digitalized, which we expect that to come through in the first half of the year. But the thing I would say is that when we are doing our full year results at the AGM, so the AGM later this year, we'll give a guidance of what the first half looks like.

Okay. And then just one more quick one, if I may, just on the U.K. Can you just provide a little bit more of an elaboration as to why the penetration rates are so low in terms of only 2 out of the 9 banks that have tested have signed up? And you mentioned those other 3 banks, so it feels like there's some progress there. But what is the impediment that they're pointing to? Because, I mean, we can debate whether you're tracking to progress or not, but it certainly feels like things are not progressing as quickly as they may have. It feels like the bank resistance is probably the stumbling block there relative to where market expectations were.

[ There's probably ] a couple of things to say on this because [ we've got ] guidance [indiscernible]. I am more comfortable on where we are now than what I've ever actually been in terms of the PEXA U.K. business. And the second element I'd add to it is if you go back to the investment pack, which you obviously [ will have a look ], if you do it on a comparable basis with Australia, we're in a pretty strong position. That's the second element. The third part I'd say is in terms of those 2 financial institutions that we're on. We've got more releases coming out that [ will bear more volume ] to go through that. The fourth part is now that we've got Optima legal, that gives us a distribution footprint to be working with a number of financial institutions that are already customers, and we're actually working through with those organizations on how we can actually improve the experience via Optima Legal and the PEXA Go platform. And Virgin Money is a classic example of that. But we're not just relying on that. There's the other organizations, such as Metro, that are already working through us in terms of coming on to the PEXA Go platform that are not customers of Optima Legal. So I wouldn't say that there's resistance at all, Brendan. What I would say is actually, it's continually working through the execution and delivery, and I think we're at a really solid base.

Maybe [ going out ] another way, sorry. What was the holdup then from the 2 banks that you said were going to be signed up by 30 June or we're targeting to be signed up by 30 June given sort of neither of those ultimately have signed up at this point?

I think that in terms of the best response, probably the best thing to actually flag you is that we've got a number of customers on Optima Legal. And let's just say some of those might be an overlap, Brendan, that's probably the best response I'd give you.

Sorry, Brendan, maybe just to add to what Glenn is saying. I think you're looking at this from the context of PEXA would be the only thing that a bank has to do. The reality is in the U.K. in the first 6 months of this year, most retail banks, if not all, were entirely consumed by the FCA's new Consumer Duty regulations and pretty much most of the available management bandwidth and change management capacity within a retail bank in the U.K. was devoted to Consumer Duty issues. That came into effect at the beginning of July for on-sale products, legacy products a year later. Just -- we don't know this. But I suspect the fact that, that round of work has started to come to an end has led to the sort of conversation -- has led and enabled the sort of conversations that Glenn has just described.

Yes. Got it. That's useful, Scott. No, I mean, so just management bandwidth and bank bandwidth is one of those sort of -- a bit of an impediment. So that's useful.

Your next question comes from Roger Samuel from Jefferies Australia.

Okay. I've got a couple of questions. Firstly, just going back to PEXA Exchange. Have you changed the capitalization rate of your development costs in FY '23? Because I noticed that you've got that $3.8 million step-up on Slide 23. And yes, I note that your -- that the amount that you capitalized was around 50% in FY '22. So I just want to confirm if you changed the capitalization rate in FY '23.

I won't -- we don't really think about capitalization rates as such. What we do is we look through each project, where is it at in its life cycle, what's the sort of work that we're doing on that project and then capitalize it accordingly. And what we did have over the course of, particularly, the second half is a set of work which link itself more to capitalization given the stage of those projects than it did in the first half. But we don't sort of think about an overall capitalization rate for the company.

Okay. Got it. And my second question is on your guidance for FY '24 for PEXA Exchange. So the margin of 50% to 55%, while you've been making around 54%, sort of top end of that guidance range, are you implying that you may put some costing as the property market improves in FY '24? So yes, so you may be -- so there's a risk that you may go down to that 50% level?

No. No. Firstly, it's a range, 50% to 55%. If you take the first half, it was at 52.2%. When you take the second half, it was 55.1%. So that's the first element just to note. The second, which is a significant improvement, let me just say, the second thing that we're also conscious of is the property market. So if the property market doesn't improve in terms of sale and purchase, which is a higher-margin product [ through to us ] and it's more on the refinance side, we had to take that into consideration from an income-generating aspect as we also consider some of the investment element. But what I can also add to it is that we're very [ considered ] with our due diligence and what we're going to do in terms of operating within an envelope as well. And that's why we're saying it's within the range of 50% to 55%.

Maybe further to add to [ Glenn's question ], because of the fixed cost structure of the Exchange, you'll naturally -- as volumes vary, you'll naturally get some variation in margin off the back of that. Now this year, we've taken a range of steps to offset the effect of volume and mix issues, as you saw from earlier in the presentation. One of the reasons why we're undertaking our productivity enhancement program is to provide the appropriate level of activity to offset some of those swings and roundabouts during the course of the year.

Your next question comes from Elizabeth Miliatis from Jarden.

The first one is just on the lenders that you've already sort of tested [ it off by ]. You've given us now a number of names, which kind of points to [ 3 ] small market share across all of them except for Virgin Money. Out of the ones that you've not sort of flagged to us thus far, could you give us a color of how big they are and [ whether -- be it ] large, medium or small or even better yet, how much market share they might collectively make up?

First, Elizabeth, thanks for your question. I think a couple of things just to think through. Virgin Money, in its own right, and I know you pointed out market share, but let's just talk about Virgin Money, they're an important financial institution. They're a retail clearing bank, and they operate across multi dimensions in the U.K. So I would not underestimate them as a financial institution. The second element, Nottingham is also not necessarily a small financial institution, too. So if you look at the building society opportunity you got nationwide, Yorkshire Building Society and Nottingham, Nottingham is a reasonable-sized financial institution. The third area that I would add and note, Metro is also a good institution to be working with. I would also add that we are working with 6 of the 8 major financial institutions on Optima Legal. I'm not going to be talking about which ones they are and where they're at in terms of coming on in our journey. But let's just say that we've got a relationship with those financial institutions as they are already customers of the broad PEXA U.K. group. I'll leave that with you to work out where we're actually going with those organizations.

Okay. And then just another question on the U.K. I know there's somewhere in the slide deck that the TAM for the U.K. has been sort of restated at $500 million. I think in the prospectus and also at the Investor Day, the total U.K. TAM was closer to $720 million. So just wondering what exactly has happened with that revision? I suspect it's just due to pricing given population would have only expanded over the last few years. So yes, just getting a bit of color on what happened there.

Yes. So again, on elements of our TAM, you have to take it into consideration, firstly, on the calculation on pricing dimension, but also in terms of what volume is going through at that particular time. So that's an important consideration. Similarly, if you take on the Australian element, there has been movement in terms of number of volume [ or widgets or ] units going through Australian transaction as well. We take that into consideration. So if you take $263 million off of $300 million, that's where you get your 88%. So you do get a bit of movement of that. The other element you can also look at, these remortgages in the U.K. in the past year also dropped, and that also has a contribution in terms of movement of TAM. And the final element when we talk about the $500 million versus $750 million, $750 million is also inclusive, at this particular point in time, of Canada and New Zealand and the U.K.

One further point to add, which is at the time when the prospectus was [ restruct ], the sale and purchase market in the U.K. was at all-time high. And that was a function of various COVID-related initiatives that the U.K. government are taking at the time, including stamp duty relief. Those incentives are now being wound entirely back, and there has been a reduction in sale and purchase activity in the U.K. as a result. Still at higher levels in Australia, but nonetheless, quite down from the record levels in 2020.

Which is one of the areas that affect -- to [indiscernible] Scott's point, [indiscernible] dimensions as well. One of the good things is that we know from the market that we're operating in is, firstly, there's population growth, that housing demand exceeds supply. We also know there's going to be continuation in Australia, U.K. and other markets as well of needing to build more transactions. And further to that, there's going to be some growth in valuations in climate risk associated areas, all things that we're well positioned to take advantage of appropriately.

Okay. Can I just ask some follow-up questions on the TAM then? So that TAM is then, as of today, is not on sort of through cycle volumes and maybe as at pricing today? And then just secondly, what kind of pricing are you assuming within that TAM? Is it at similar levels for the Australian pricing? Or is it a pretty meaningful premium, which, as I understand, that's where you'll be stitching your pricing out in the U.K.?

Elizabeth, I think that's getting down to a level of detail that's not appropriate for these conversations.

Your next question comes from Scott Russell from UBS.

A couple of questions, please. Firstly, the slide about the Optima volumes and the impact of market and the outage, can you clarify what you're trying to say here with the actual run rate, that 3,800 transactions per month? Is that -- are you indicating that that's sort of the new normal heading into FY '24? Or is the previous kind of -- I think it was 6,300 transactions a month, are we [indiscernible]? So just not quite sure of the message.

The way to think about this is the Slide 19, where it shows Optima and then a reduction from Optima, which is the [indiscernible]. I think that shows Optima at around about $14-odd million ex that movement. That was for the 7 months. I would think about it on that basis. The business ran at around about 21%, 22% market share prior to the outage at the end -- over the first few months of the year. So I'd be thinking about that would be a natural level at which the business should be operating, and then it's a question of where is the remortgage market going.

So Scott, just to clarify, are the ramifications of the outage now behind you?

Yes, they are.

Yes, they are. They are. So [ they are ] the businesses that Optima Legal is now processing transactions, Scott.

Okay. When -- you mentioned that you're able to guide down to the operating EBITDA line in the 35% floor going forward. But in the most recent results, some of the noisy items are actually below that, and you ought to have some visibility into some of these. So that [indiscernible] maybe a bit of guidance on the specified items, particularly around integration costs, which was the $19 million, wasn't it, and also the amortization. What should we expect in the next couple of years of those items?

Yes, yes. Let me provide a few thoughts on those. First of all, you would have seen the biggest driver of the specified items has been the M&A activity we've undertaken and the associated strategic and integration activities that have been [ attended upon it ]. I think you can take from that, that those specified items will cycle in relation to that sort of inorganic activity. Now it's difficult to -- as you would expect, it's difficult to predict M&A because it depends on when the opportunities present themselves to a way that's value accretive. I think on the amortization point, it's difficult to draw a mechanical extrapolation from this year because around -- there's been a reasonable amount of the money that we had to amortize this year has been inherited from businesses that we've bought. But equally, though, the intangibles associated with those businesses also contributed a fair bit of non-amortizable goodwill. I think in the round, I would expect a modest uptick in amortization over the next year or so, but I wouldn't extrapolate from the increase in the total level of intangible assets that you've seen on the balance sheet this year.

Okay. And just on those U.K. integration costs, I hear you on the M&A being less predictable. But in terms of [ trading ] Optima, I think that was AUD 11 million in a year. Is there more of that to come?

Not at that rate. There's still a few things we're doing to exit the TSA arrangements that we have with Capita. That should be largely, if not completely, done by the end of this financial year -- sorry, this financial half. That would imply we wouldn't be running at anywhere near that same rate over this year.

Okay. And just to confirm, all of those specified items are in the $70 million to $80 million of development spend across the emerging businesses this year?

No. No. That's [indiscernible] at the operating cash flow level, which is prespecified items. And that's the same as the $70 million to $80 million this year across those businesses.

So the $70 million to $80 million, just to clarify, I think last year, that included operating cash flow. Can I clarify now that it's the sum of operating [ expenses ] plus CapEx?

Yes, it includes the CapEx, of course, but not specified items because they're unpredictable.

That concludes our question-and-answer session. I will now hand back to Mr. King for closing remarks.

Look, again, I just want to say thank you for everyone who's actually listening to the call. We really appreciate the questions. We believe we've delivered a solid result. We're well positioned for FY '24 and as I mentioned, with the guidance of 50% to 55% on the operating EBITDA margin of the Exchange, a floor of 35% group margin and also in terms of the $70 million to $80 million in terms of investment for our growth businesses and then lastly is breakeven -- operating EBITDA breakeven for the month of June '24 for the Digital Growth business. That's our guidance for the year. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.