PEXA Group Limited (PXA) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the PEXA Full Year Results Announcement. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. Glenn King, Group Managing Director and CEO. Please go ahead.

Thank you. Good morning. And thank you for joining us on our FY '24 full year earnings call update. I'm Glenn King, PEXA's Group Managing Director and Chief Executive Officer. And with me this morning is our Group Chief Financial Officer, Scott Butterworth. Turning to Slide 2. Before I begin, in the spirit of reconciliation, I'd like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders, past and present, and extend that respect to all Aboriginal and Torres Strait Islander peoples here today. Turning to Slide 3. Today's briefing will begin with an overview of PEXA's FY '24 performance. I will also touch on how we delivered these results and the work over the year to deliver against our priorities. Scott will then walk you through the detailed operational performance and financial results for the group. I'll come back to you and provide a perspective on the new financial year. We will then be happy to take your questions. Turning to Slide 4. The momentum in the business in terms of financial performance highlights can be seen on this page. For example, group revenue, group operating EBITDA and free cash flow all made positive gains, delivered by revenue growth, cost and CapEx management and operational improvements. Non-exchange revenue has improved and now represents 15% of total business revenues, highlighting the growth of our new revenue streams with the PEXA Group, which were non-existent at the time of the IPO in '21. At a group level, our operating margin was 36.5% against guidance of greater than 35%, a 1.7 percentage points higher than the prior year on a like-for-like basis. The exchange continues to be the foundation of the business with improved revenues and margin, which at 54.5% is up almost 1 percentage point on the prior year. Overall, NPATA was $21 million, increased by 22%, and this was driven by a combination of factors, including higher revenue, improved margins, combined with controlled cost growth. Turning to Slide 5. Let me summarize our strategic position today. The exchange business continues to demonstrate its strength and prominent position as a digital infrastructure asset. Its resilience, national coverage and financial performance are testament to this. Digital Solutions, which was previously Digital Growth, brought Value Australia to market to complement the other businesses. We now have a suite of bundled and unbundled solutions to support our customers. This business also achieved operating EBITDA breakeven for the month of June as forecast. International, the build of the platform in modular form for multiple markets remains on schedule with our estimate that up to 85% of the platform build is reusable in multi-jurisdictions. This year, we also successfully integrated the platform into Optima Legal. And following the NatWest announcement, the momentum with meaningful discussions with lenders has accelerated. We currently have additional lenders, including T1 lenders requesting to participate in the Bank of England PEXA testing slots. All these activities are underpinned by approved efficiencies and by the capabilities that we continue to invest across PEXA. Our people, technology and ESG. We continue to be well placed to deliver given our business momentum and our sound financial position. Turning to Slide 6. Across all our brands and segments, we have a broad interconnected customer base of government, financial institutions, lawyers, conveyances and developers. In Australia, we support approximately 160 financial institutions, more than 10,000 conveyancing and legal practitioners, more than 70 property developers and 345 local councils. And in the U.K., we provide services to approximately 18 financial institutions, including 7 out of the 8 largest institutions and more than 2,000 conveyances. Turning to Slide 7. Our consistent goal and strategy is to deepen our customer service and deliver long-term sustainable value in line with our purpose of connecting people to place. To do this in Australia, we support our customers by enhancing our exchange to maintain Australia's leading electronic lodgment platform. We have further extended our relationships with existing customers with property insights and other digital solutions that use our distribution and data capability. And internationally, we are expanding, utilizing our intellectual property to solve customer problems in markets with Australia like land title systems, starting with the U.K. Now turning to Slide 8. In financial year '24, we brought together the PEXA Exchange in the Digital Solutions business under a single Australian leadership structure. And in the year, the exchange platform maintained and strengthened its position. Transaction volumes grew as did our market penetration. Customer satisfaction and platform uptime remained at 90% and 100%, respectively. Importantly, we rolled out more APIs to our FI customers and PMS providers contributing to improved service. All these positive outcomes supported our improved exchange margin. Overall, the exchange in FY '24 had a solid year despite stubborn inflation and relatively high interest rates presenting challenging conditions. Now despite a modest overall contribution and below our expectation, Digital Solutions remains strategically important and is growing. It provides a foundation to build nonregulated revenues as the economy improves when the rate outlook restores investor confidence. And Digital Solutions also delivered breakeven operating EBITDA for the month of June as forecast due to our focus on financial management. Now turning to Slide 9. There has been significant commentary around interoperability. And it is important to note, interoperability requires multiple participants such as banks, land title offices, revenue offices and so on. It is complex with questionable consumer benefits. Now PEXA was formed out of a public private partnership. It is a successful COAG initiative, which materially transform property transactions, delivering continued and ongoing material benefits to all stakeholders and also material value to Australian taxpayers. The PEXA Exchange platform contributes approximately $300 million per annum of savings to industry. While the cost to consumers is as little as 0.01% on an average property transaction. I think this point is absolutely critical, given that we are heavily price regulated, but have been able to demonstrate 90% customer satisfaction and on day settlement for major banks at over 80%. PEXA has continued to invest heavily to ensure innovation and improvements for customers. And we should note that there are also numerous other regulatory priorities supported by PEXA such as the Tasmanian and Northern Territory E-Conveyancing roll out. We will continue to work actively with the regulators on well-thought-through customer-led reform. Turning to Slide 10. Over the last year, U.K. market activity was challenging, which was depicted by lower mortgage volumes and this did impact our business, including Optima, Smoove and delivery against our FY '24 targets. However, green shoots are emerging, and we are seeing conditions improving. We do remain confident of our U.K. aspirations due to our unique position, our platform progress, size of the market, consumer needs, government policy and now our distribution network. Let me touch on the points as reference on the slide. Firstly, our PEXA platform is established, unique and tracking well. We have had several FIs complete testing with PEXA Pay, including 2 of the top 10 lenders, and we continue to progress both onto our platform. progress both onto our platform. Also note, those that have PEXA Pay tested represent approximately 20% of the U.K. mortgage flow. Since NatWest, there is growing interest, momentum, active discussions and engagement with lenders, including the majors. It is clear that FIs want to explore and test the benefits of PEXA. It's important to note that onboarding though, takes time as it includes Bank of England providing testing slots, and those slots are limited. PEXA is working constructively with the Bank of England and FIs to streamline this where possible. Secondly, the strength of our technology and PEXA-U.K. platform progress is demonstrated by Shawbrook Bank's successful completion of a market-leading remortgage transaction within 36 hours. And the PEXA platform delivery is progressing with our U.K. sale and purchase build underway. Thirdly, the acquisition of Optima Legal and Smoove provides us with distribution scale in terms of FI and conveyancing customers and mortgage processing flow. During the year, we completed the integration of Optima Legal into the PEXA tech and are also now working towards the conversion of the customer base onto the PEXA platform. Turning to Slide 11. From FY '20 to FY '24, we have spent approximately $127 million on our international platform, a platform which we believe is unique in its modular design and potential reusability for multiple international markets. In fact, our expectation is that 85% of the platform is reusable in different markets. We also anticipate that the U.K. platform tech spend will reduce over the future years. Now turning to Slide 12. I wanted to highlight our focus on our sustainable business. For example, we made positive steps towards operational efficiencies. Gender parity within our leadership group, strong reputation with our stakeholders and community at large, as well as our continued focus on sound ESG practices. You can see more of our work with today's publication of our inaugural ESG report. This details our ongoing partnerships with organizations such as Homes for Homes, our work on policy reform in areas of housing affordability and our continued maturity in our ESG governance practices. I will now hand over to Scott to walk you through the financials in more detail.

Thank you, Glenn. As Glenn indicated, I will now spend some time taking you through the group's financial performance over the past year. In general, we've taken a good step forward with our results this year, reflecting our focus and discipline. Before starting, could I please ask you to turn to Slide 14. As the slide shows, this section is presented on a pro forma basis unless otherwise stated. To assist with comparability between periods, the pro forma analysis contains the full FY '23 and FY '24 effects of the operating businesses acquired during that period. As published information for our business is contained in the appendices to this pack. I turn now to Slide 15, which sets out PEXA's overall financial performance for the year. Revenues increased by 10% on a pro forma basis, reflecting growth in the Exchange, Digital Solutions and Smoove offset by lower revenues in Optima Legal. Operating expenses were well controlled, growing by only 4% on a pro forma basis. This was the net result of the benefits of our productivity enhancement program, offset by the effects of capability investments and underlying cost inflation. Pro forma operating EBITDA increased by 22% and EBITDA grew by 15%, with the difference relating to specified items, which grew during the year, as will be discussed in a few moments. Reflecting the positive revenue and expense draws experienced by the group, our operating EBITDA margin expanded by about 300 basis points during the year. CapEx was broadly flat at around $69 million, with spend on regulatory matters, API building and integration activities being offset by lower spend on customer enhancements. Given this profile, operating cash flow yield increased by 4 percentage points during the year. Turning now to Slide 16, I want to spend a few moments on the various line items below operating EBITDA. Firstly, specified items increased by about $9 million during the year. Restructuring costs were up about $10 million to $11 million, driven by redundancy costs of around $7 million and noncash impairments of around $4 million. This increase was partially offset by a net $3 million reduction in other costs, mostly associated with professional services fees. Secondly, depreciation and amortization costs increased by about $13 million. This was due to the carry forward effect of assets constructed in the current and previous periods and the amortization of assets obtained through our recent acquisitions. Slide 40 provides more information on the drivers of amortization during the year. Thirdly, net finance charges fell by about $0.4 million during the period despite an increase in average debt. This was due to higher group and source account balances and a higher earning rate on these balances. Lastly, income tax expense fell by about $9 million during the period. This is largely due to the nonrecurrence of the tax credit write-off that we experienced in FY '23. However, you will note that our effective tax rate remains high. This is because of the tax expense attributable to our profitable operations in Australia and the losses incurred in the U.K., which out of conservatism, we only partly tax affected. I will now review the performance of our underlying businesses, starting with Slide 17 and the Exchange. As you can see from the slide, we experienced a modest around 70 basis point increase in market level transactions during FY '24 relative to FY '23. However, PEXA volumes increased by 1.6% over the period, reflecting an increase of about 1 percentage point in our market penetration. The increased volumes were skewed to the more profitable transfer segment with our refi mix falling by around 300 basis points in the period. Having said that, as shown on Slide 18, there has been some unevenness in transfer volume activity across our various jurisdictions, reflecting the individual economic circumstances of each of them. Overall, National PEXA transfer volumes reached the previous peak of first quarter '22 levels during the first quarter of '24. And this was led by growth in Sydney, Brisbane and Perth and in the Queensland regions, offset by slower growth in Melbourne and Regional Victoria and in South Australia. Turning now to Slide 19. These market and other dynamics have had a favorable impact on our economics. Exchange revenues increased 11%, mainly due to CPI-linked repricing at the beginning of the year and improved transaction mix with smaller effects from market growth and improved coverage. Expenses grew by 9%, reflecting inflation and the cost of investing in capabilities such as risk management, sales and support for our customers and data management. And these were offset by one-off cost improvements and ongoing efficiency benefits, as well as the effects of capitalization. Overall, operating EBITDA increased by 13% and EBITDA rose by 12%. Specified items for the Exchange mainly reflected restructuring costs. CapEx was relatively flat with increased regulatory spend, including on the interoperability program and on our API suite being offset by lower spend on customer enhancements and support, including running down the spend associated with our Salesforce implementation project, which occurred in FY '23. The effect of these movements was that the Exchange's operating EBITDA margin increased to 54.5%, an increase of about 80 basis points and its operating cash flow yield increased by around 220 basis points to reach 41.6%. I'll now turn to the performance of Digital Solutions, starting with Slide 20. Overall, the year saw good improvements in customer demand for Digital Solutions products, particularly pleasingly, ID's proposal pipeline grew and a subscription win rate was generally solid. We also saw a good uplift in new business sales across our product portfolio, while subscription churn was well managed. As a result, we saw improved revenues across the period, underpinned by a growth in subscription revenue alongside growing levels of project activity. To put this in a business context, ID benefited from record revenues during the period and Value Australia made its inaugural sales, including to major banks. Land Insight also settled well into the portfolio, taking its first-ever financial institution sale, and we continue to support demand for transaction solutions such as workflow and FX products. Slide 21 sets out the economics of Digital Solutions. As you can see, pro forma revenues grew by 8%, even after absorbing the nonrecurrence of a large one-off transaction fee that we received in FY '23. transaction fee that we received in FY '23. Notwithstanding the positive momentum during the year, we had been targeting a higher revenue outcome for this business. However, to offset the shortfall in our expectations, we did take steps to achieve half-on-half reductions in the business's operating costs, which fell by $7 million in total over the period. The cost reduction reflects 4 factors: First, professional fees fell, reflecting the end of the various market entry studies that we performed in FY '23. Second, we managed our discretionary expenditures more tightly. Third, we benefited from our productivity enhancement program, particularly with respect to removing overheads and duplication. Fourthly, we were able to benefit from the investments made in group-wide infrastructure, such as data management. Overall, these effects mean that we have been able to break even in the business at the operating EBITDA line as we exited June '24, and the business' operating loss narrowed by $4.6 million in the second half. You will note that specified items did step up during the period. This reflected a modest increase in earnout costs and primarily the cost of restructuring the business and the noncash cost of impairing some of the businesses' initial in-house built products. We've also started stepping down our CapEx, particularly in second half '24, albeit there's still some work to do in FY '25 on building out Value Australia's capabilities. The effect of these changes is that the business's operating EBITDA margin and operating cash flow yield improved during the year, particularly in the second half. In other matters, we have previously guided to a revenue target of $50 million for Digital Solutions. This was based on organic and inorganic activity. As previously said and in line with our capital management framework, we are not currently planning any material acquisitions for this business. As a result, rather than focusing on a revenue target, management's objective is to drive appropriate returns from our existing portfolio of assets and achieve value-creating capital-efficient pathways towards scale. The effect of this is that we are withdrawing the previous guidance provided for Digital Solutions. I will now turn to Slide 22, which provides a snapshot of market activity in the U.K. As you can see, market remortgage volumes have remained at below trend levels as U.K. consumers have adopted a wait-and-see attitude to the Bank of England's rate cycle. There has also been somewhat of a trend away from fees assisted remortgages of the type performed by Optima Legal towards cashback offers. Sale and purchase volumes have been impacted by similar interest rate issues as well as the short recession that occurred in the September and December quarters of 2023. However, we did see a pickup in housing market activity during the June '24 quarter. As additional context for the performance of International, Slide 23 describes the movements in the PEXA platform sales pipeline in the U.K. As Glenn stated, we announced on May 2 that we are working with NatWest and another large lender in the U.K., and our work with them remains ongoing. Additionally, we have gained agreement from 2 large banks and 4 smaller ones to conduct Bank of England testing of the payment flows associated with our platform. Further activity also includes working with an additional 2 smaller institutions to bring them on to our platform. Finally, PEXA remains focused on working towards our ambition of achieving 25% to 40% Remo market share and 25% sale and purchase market share. There is momentum and engagement with lenders. Building on this, our desire and focus is to work towards achieving these market share goals on a run rate basis by the end of calendar '25 for Remo and 2027 calendar for sale and purchase. However, because of external factors beyond PEXA's control, the timing of when these market share aspirations may be achieved is inherently uncertain. We note that management and Board continue to heavily scrutinize our progress in the U.K. and the expenditures that we are incurring in respect to the market. A further update will be provided at our first half '25 result. I'll turn now to Slide 24, which sets out the results for International. Pro forma revenues were relatively flat over the period. We saw a 16% pro forma increase in Smoove revenues, largely due to improved sale and purchase volumes repricing during the period and improved search revenues. However, this was offset by lower Optima Legal revenue, mainly due to lower market activity and lower average market share than in FY '23, albeit there was improvement in this latter metric during the year. Operating expenses did step up during the period by 9%. This was mainly due to the investments we made in PEXA U.K. as we increased our platform development and commercialization activities. Costs in Smoove were flat with the impact of staff reductions offsetting cost inflation. Optima Legal costs were also flat with the benefits of the capacity release made in first half '24 being offset by the cost of improving the business's employee proposition and normalizing bonus arrangements. We also saw specified items increased by $3.3 million during the period, mainly due to the cost of integrating Optima Legal and restructuring activities. CapEx was relatively flat with increased sale and purchase development and integration costs offsetting lower spend on building our remortgage proposition. Overall, operating cash outflows increased by $8.8 million over the period, mainly due to increased PEXA U.K. operating costs and Optima Legal losses. I now want to return to group matters and discuss our cash flow as a balance sheet shape as set out on Slide 25. As you can see, the effect of our improved profitability, together with improved working capital management and flat CapEx has led to an increase in cash flow conversion and consequently, free cash flow. Overall, free cash flow increased by about 175% to reach $38.5 million for the year, and we ended the period with a cash balance of $90.5 million after paying down about $10 million of debt in the second half. Slide 26 sets out further matters relating to our balance sheet. Firstly, as you can see, we reshaped our debt facility during the period, replacing our previous arrangements with a longer tenor more flexible and larger facility. Secondly, we have also benefited from an increase in average cash balances associated with our own group cash balances and our third-party source account to about $380 million and an earning rate that has improved by 150 basis points over the period. Turning now to Slide 27. Our improved earnings and relatively flat net debt has meant that we have continued to see -- continued to see a trend of balance sheet deleveraging that started in the first half of '24. Importantly, our net debt to operating EBITDA ratio improved by 0.3 turns during the year. We did see a decline in the time to interest cover ratio on a gross basis from 7 times in FY '23 to 5.4 times in FY '24. However, adjusting for the effects of interest income from our own balances and the source account, this ratio does remain at comfortable levels with an adjusted ratio of 18.8 times up from 15 times in the previous year. Much of the improved performance of the business has been underpinned by the results of our productivity enhancement program, which is set out on Slide 28. Overall, our work on improved operating model design, better ways of working in technology, capacity release of the U.K. and better non-labor expense disciplines has allowed us to generate cash, that is to say, OpEx and CapEx savings with an annual run rate benefit of about $16 million. These have been used to fund the investments in the business and deal with headwinds associated with foreign exchange, particularly in relation to operating expenses. In closing, our financial performance improved sharply over the year, whilst we've also improved our strategic position. Given that, I would like to turn to Slide 29. Our framework -- Glenn, my colleagues and I are very cognizant of the need to manage shareholder capital wisely to create sustainable long-run returns for all shareholders. Our framework for achieving this is set out on this slide. As you can see, we have met the targets we set ourselves for FY '24. However, as Glenn will discuss, we remain focused on delivering additional capital efficiencies in FY '25, including finding appropriate capital-light mechanisms to support growth, provided they create value for all shareholders. I'll now pass over to Glenn, who will provide some closing perspectives, including our views on the outlook for FY '25.

Thanks, Scott. As illustrated on Slide 31, we believe the economy still has areas of weakness, although we see growth slowly improving both here in Australia and the U.K. For example, there are positive economic fundamentals in Australia, including population growth, housing demand and specific government policies supporting housing. Given this, we remain focused on sustainable growth and on the drivers of our business that we can manage. Turning to Slide 32. Our priorities for FY '25 are all extensions of our strategy. for FY '25 are all extensions of our strategy. In Australia, we will continue to focus on increasing our exchange national coverage and enhancing our service to meet the needs of our customers, including greater product reach. We will support regulatory matters while developing innovative ways to meet our customer needs. In the U.K., we will continue to build out our international platform and deploy sale and purchase capability and integrate our Optima Legal, Smoove and PEXA service. We aim to progress the onboarding of lenders, and this will be done against a backdrop of reducing our cash spend in the U.K. and improving the overall U.K. financial performance. At the group level, we will continue to build our capability that supports all areas of our business, such as ensuring platform security and resilience across all markets, developing talent to grow our business, performance efficiencies and ensuring capital finds its way to the most productive activities across the group. Turning to Slide 33. This slide summarizes our road map in the U.K. and the streams of work underway during FY '25. Scott has already touched on the platform build over the next few months, after which we expect to have sale and purchase and material Remo capability in the U.K. market. In tandem with the platform rollout is the onboarding of customers. This is not just a lender base but also conveyances. Now turning to Slide 34. Our FY '25 guidance is covered on this slide. I'd like to highlight that inclusive of Smoove, we expect an increase in group revenue of between 13% to 19%. Group margin greater than 34% compared to 31% for the prior year. Net interest expense broadly aligned to this years' experience and cash outflow in our international operations to fall to a range of $55 million to $58 million. The group's effective tax rate is expected to remain elevated in FY '25. This reflects the tax expense incurred in respect of our Australian operations and our conservative approach to tax affecting losses in the U.K. This view assumes that relevant tax laws and regulations, policy approaches as expressed in tax rulings and guidance notes, and our own business mix, taxation procedures and judgments remain consistent across periods. Now turning to Slide 35. In closing, we have made progress on our strategy and execution, improved our financial performance across our group and remain focused on disciplined and sustainable growth. We have a clear focus on FY '25 priorities and performance expectations to ensure we are well positioned for the future. With that, you would have seen my earlier announcement today of my intention to retire as Group MD and CEO of the PEXA Group by the end of FY '25 after an incredible 5 years. I've been extremely humbled and proud to lead this unique Australian-owned organization, building on the legacy of the foundation set back in 2010, through the IPO in '21, the entry into the U.K., the continued national coverage of our secure property exchange and diversifying our value proposition to our dedicated and loyal customers. I look forward to continuing to lead the organization to deliver on our strategy as we facilitate an orderly and smooth transition as part of the group Board's succession planning framework. I want to acknowledge the wonderful support I have received from the Chair, Mark Joiner, our highly engaged and experienced directors and my colleagues on the executive past and present, and including particularly Scott. Importantly, thank you to our shareholders and our fantastic team who I've been proud to work with and who I will continue to work with over the coming year. We have a wonderful purpose, which drives excellence in our collective pursuit to connect people to place. With that, Scott and I are happy to take your questions.

Thank you. [Operator Instructions]. The first question comes from Elizabeth Miliatis from Jarden.

Good morning. Just the first one on the U.K. market share targets. You have noted there, you've reiterated your targets, but it sort of sounds you're flagging that there might be a bit of a miss potentially just given market forces, which aren't in your control. Are you able to sort of give a bit more color on that? You very convinced that you'll hit those targets or, yes, just why sort of that, sort of step back slightly in terms of your messaging there?

Thanks, Elizabeth, and welcome back from your leave, and appreciate your question. I think there's a couple of things here. Glenn set out on the FY '25 slide for the U.K., those matters that we control directly. And we are going very, very hard at achieving those milestones. There's also a set of things that we influence, but we don't control. And the biggest of those is the rate at which large banks in particular sign on to contracts. So, we control the sales process, and we're working very, very hard on that sales process, but we don't completely control when a bank will respond to every part of that sales process. So instead of providing a definitive date, what we've decided to do is provide here are the dates we're going to push very, very hard towards, but also let people know that there is aspects of this process that we can't control and don't actually directly influence. And therefore, there is some uncertainty about when those dates might be hit. But you shouldn't read that as management stepping away from working very, very hard to achieve these outcomes.

Elizabeth, it's clear. Now the thing I would add to Scott's point, on the control aspect. We delivered on the PEXA integration into Optima Legal as we expected and targeted by May this year. So, we control that. That has certainly allowed us to enable customers who use the Optima Legal to come on to the PEXA tech, if they're tested with the PEXA tech. NatWest and that other major are customers of Optima Legal and have tested with PEXA tech, and we are progressing with that. What I can also say is that the interest has progressed in a positive way. And what I can also say is that the momentum is progressing also positive, and we'll be able to give a more fulsome update on our progress at the half year results.

Just to finalize a bit of that response there, Elizabeth. There isn't an endless piece of capital string here. So, ourselves as management and the Board, in particular, scrutinized very heavily our expenditure in the U.K. and want to see continued progress in a sensible way towards these sorts of objectives. Now clearly, we're not going to keep throwing capital into a solution if we don't think we're going to get to where we want to achieve it. But that remains an ongoing set of scrutiny across the company.

Okay, got it. And then just around just some of the smaller businesses that you've acquired. So, like Smoove, Optima and also the Digital business. Can you give us color in terms of path to profitability at an EBITDA level? Is that something we should expect in '25 or beyond? I think, obviously, Digital breakeven in the month of June, but just a bit of color around how we should sort of forecast those bids, because they are -- can move the needle quite materially.

Yes, sure. Maybe I'll start off with Digital Solutions, Elizabeth. You saw we had a good last month of the year. And in fact, you'll see in the appendix, we provide a monthly view of the EBITDA or operating EBITDA for that business. And in fact, the positive variance that we saw in the last month was actually due to revenue, not cost. That gives us a good sense of the businesses on the right footing. Its primary goal over the course of this year is to make sure it's making a good use of our own distribution channels as is possible. And you would have seen from the customer slide that Glenn went through that when our distribution channels are working, they work very well. Our job is to make sure that they're working effectively all of the time. So, we think that business should continue on a profit trajectory in '25, maybe not a substantial profit trajectory because there's still a bit of growth investment to be done. But we're not expecting that business to lose money. And there is a bit of CapEx to be done as well. On U.K., first of all, with Smoove, that business is traveling ahead of where we had expected it to be. And we've been pleasantly surprised by the operating leverage in that business to the sale and purchase market. And so that sale and purchase volumes continue to tick up in response to the policies done by the new government and by the Bank of England rate cut cycle. We would expect to see profit improvement in that business, whether it quite gets to profitability during the course of the year. I'm not sure yet. On Optima Legal, the biggest issue we need to face in that business is making sure we bring down the breakeven point for that business. And we took a good step forward in improving productivity in that business by about 130% at least on one metric during the course of the year. We need more productivity improvement to bring down the breakeven point. And that, I think, particularly relates to some of the overheads in that business. Again, whether that gets us to full breakeven during the course of the year, I don't know, but we are expecting a good step forward in the profitability of that business during the year.

Probably the thing that I also had, Scott, is that, Elizabeth, which you would have seen there. We have a very clear focus on what we can control in terms of the cost base on all those respective businesses, and we're seeing that come through. The thing I would add on the Digital Solutions one, noting that the size of it in the small dimension, we are winning business and Value Australia is an example of that where we won first T1 bank this financial year. We've got another T1 bank that's using Value Australia is from a consulting perspective. And we do also have expectations of continued growth as an example in Value Australia within the first half of the financial year.

Okay, awesome. I do have more questions, so I'll jump back in the queue. And all the best, Glenn, and congrats on retiring. Enjoy the golf course, I suppose.

The next question comes from Brendan Carrig from Macquarie.

I just wanted to maybe delve a little bit deeper into the revenue guidance and sort of compositionally, if you could maybe step through some of the assumptions that are underpinning that guidance. So, I mean, let's take out Smoove because you probably get a, call it, AUD 20-odd million uplift just from the annualized impact of Smoove. But just -- yes, I just would be interested to know what other assumptions from the other businesses and or the Australian exchange business market assumptions that you have in there? Because yes, U.K. exchange revenues would be a good thing to flag as well, please?

Maybe I'll start, Glenn, and Brendan, thanks for your question as well. I think it's been highlighted, there's quite a few moving parts in the economic environment, both in Australia and the U.K. And the way we've thought about that is to pick a viewpoint, which is for modest improvement in the economy in both jurisdictions over the course of the next year. But we do -- think call out there is downside risk. So given that on the Exchange, as you know, we reset the price come 1 July, and that's based on the CPI print at the end of March, and that was just over 3%. And then from a volume perspective, it varies a little bit from year-to-year, but in general, we see volumes grow at more or less the long-run GDP rate for Australia, for the want of a better assumption. Our Chief Economist, Julie will probably tell me there's a lot more other factors than that, but I suspect that's our central thesis. Then as you say, there's an annualization effect from Smoove. We are continuing to expect revenue growth in the Digital Solutions businesses. There's a couple of points in that ID being the biggest business. We think that set itself up very well this year. But we do think there is more opportunity, both within its existing customer set and also in servicing PEXA's Exchange customers, particularly in the FI sector. Value Australia, as Glenn called out, we see good growth opportunities in the banking sector for that product and also for land insight, both with its own developer customers and PEXA's developer customers and also financial institutions. And then lastly, for Optima Legal, we are expecting an improvement in revenue in that business, partly driven by continued improvement in share back up towards its natural market share around about 20% to 22%, and also improvements overall in the level of remortgage activity. I think that's actually the biggest flex factor for Optima at the moment because whilst the Bank of England cut rates about 4 weeks ago, we're not yet seeing a flurry of remortgage activity in the U.K. following that rate cut. But having said that, most people in the Northern Hemisphere are on summer holidays at the moment. So, we'll see what the autumn brings.

I think the bottom line now, Brendan, is we are expecting to see improvement across all business lines from the revenue.

Okay. And is there anything factored in for U.K. Exchange revenue? So, when NatWest - if they do start transacting in FY '25, should there be any revenue coming through? Or should we be thinking about rebates or maybe revenue is more of an FY '26 story for the International Exchange business?

There is modest revenue already being earned in the Exchange because Hinckley and Shawbrook have come off their payment holidays. Shawbrook's still paying a bit of a discounted rate. That said, it's relatively modest levels. We expect an uptick though in our budgets for FY '25 for the Exchange. It's definitely not at sheet station levels, but we are expecting to see some sort of contribution from that part of the business during the year.

But you're right, Brendan too, in saying that it's really '26 type '27 periods, the key points. The other thing just to flag, we do anticipate that we'll be able to share more in the half year.

Okay. That's good. I'll jump back in the queue. And Glenn, if I don't see before, again, congratulations, and hopefully, we chat again soon.

Your next question comes from Annabel Li from Goldman Sachs.

I've just got 2. So, I think, firstly, on margins with the pause in interoperability and obviously, you've got the recovery in transfer volumes. Should we be expecting Exchange margins above the around 55% that you did in '24? Or are there other cost items that we need to be thinking about there?

Yes. Look, a great question. I think there's a couple of things I just want to flag. Firstly, we do want to emphasize more on the group margin because we feel that the group margin is an important part of the business, showing where we're investing our focus on the broader group revenue. So, in terms of the exchange margin, we didn't give guidance on the exchange margin. But I think the best thing I can say is we do expect to still have strong exchange margin, first point. The second element and Scott flagged these, we will continually focus on our operational efficiency across the group, which is all the group. That includes automation and other different dimensions. And we also do expect to see improvement in the Exchange revenue. So that's the other side. Probably the last bit I would add is whilst interoperability has paused, I think the key word is paused. New South Wales and Queensland are still exploring their options. And we will actively work with all the jurisdictions and all the regulators to help them in their exploration.

Annabel, it's Scott here. Just to add to Glenn's question, thanks for your question as well. We continue to expect very solid performance from our exchange business, and we certainly don't expect it to go backwards from this year. I think in terms of the level of upside, it's always a little difficult to tell because the business responds well to operating leverage. But because of some of the uncertainties in the environment, we don't quite know how much operating leverage there will be.

Okay. Great. That's helpful. And then just on the U.K., I wanted to just ask about how conversations with conveyances are going just for the sale and purchase piece because I was just wondering like what's the key incentives that they have? Is it that they work on more transactions because the majority of them are being paid on sale and purchase completion? Or what would kind of drive them to take on that product?

Maybe I'll kick off first Annabel and then Scott can certainly add. One of the critical things in the U.K. market, while we're certainly confident on that market is that the size of the market but also the core customer experience in terms of sale and purchase. So, you got about 30% sort of fall over and poor customer experience. That also leads to poor practitioner business experiences as well and rework difficulties in terms of doing the transactions amongst other things and not seeing the data. The engagement -- and this has continually improved the right way. Engagement with the conveyancing fraternity and also our acquisition of Smoove does 2 things for us. The fraternity firstly is starting to see actually PEXA and Smoove will be value adding to their business. Secondly, Smoove gives us access to around about 2,000 practitioners and we already have engagement with that practitioner network. And our intent is to get the PEXA tech into this new platform and services. So, our practitioners who use Smoove can use the PEXA tech and become more efficient and effective in providing their services. And also, like we see in Australia being able to provide the conveyancing services on a greater time frame, but also more conducive to their business needs as well. So, the indications are positive, but we have to work that through it.

Maybe just to add to that, Glenn. At the general level, we see 3 sets of benefits for practitioners from using the PEXA platform. One is because a lot of the coordination in the U.K. between different parties, the transaction is very fragmented. There is actually a lot of coordination costs that practitioners incur. And our workspace design actually removes a lot of that friction. Secondly, post-completion processes are typically expensive, particularly in relation to trust accounting. And our settlement processes and lodgment processes do away with a lot of those traditional post-transaction activities. And that also removes a reasonable amount of cost for practitioners. Thirdly, the PEXA environment is very, very secure from a cyber-security perspective. And actually, one of the largest forms of professional indemnity payout in the U.K. is to do with cyber risk for practitioners. And we're doing some work at the moment to size that, but we think - so size the benefit of using the PEXA platform to reduce cyber risk, but it looks to be reasonably significant. And we would hope to see that professional indemnity insurance premiums would come down for those who are using the PEXA platform, albeit that's still to be proven. In relation to the specifics, the effect of the PEXA -- the Smoove platform is that people who are on that panel, those panels, which are arranged by Smoove, get selected by mortgage brokers and customers and the like. My guess is that if you're going to be on the Smoove panels in the future, we will be making sure it's clear whether or not you are a user of the PEXA platform as a way of signaling to people that the experience will be much better.

Our next question is from Ed Henning from CLSA.

The first question I've got, just can you just clarify the 2 large banks you're talking about are T1 banks, which are greater than 10% market share. And in discussions with those banks, are they willing to start to integrate earlier with yourself and do the BOE testing slot a little bit later when it becomes available, hopefully, first quarter next year? And just to confirm on that, the integration period can take roughly 6 to 12 months with a large bank? That's the first question, please.

Yes. Thanks, Ed. Maybe I'll kick off. So just to make sure I got this right. You're talking about the 2 additional T1s that we flagged for the PEXA Pay, if that's the question. They are in the T1. They're in the top category. So that's the first point. The second point, in terms of the access to a Bank of England PEXA Pay slot, we're already oversubscribed in terms of the number of institutions want the upcoming PEXA Pay Bank of England slots. Now that's in negotiation and discussion with the Bank of England, so we can't determine when those slots become available. We are looking, though, depending on the Bank of England around the first quarter, calendar year next year, that could move could move in all different ways. And as soon as we've got confirmation, we'll obviously confirm that. In saying that, the allocation of those slots depend on a couple of factors, including that the Bank of England agree that we want to give it to XYZ organization as well as us. And also, that financial institution saying that they're ready to take the slot and ready to actually move forward to be enabled to do transactions. So, there's a numerous aspect of that as well. So, I can't give you any more clarity than that at this particular point in time. I think the third point in terms of it takes 6 to 9 months. Unfortunately, the answer I'm going to want to say there is it depends. And it depends on the tech that those organizations have got. It depends on what other priorities they've got. And it also depends on whether they want to use an API version, where it's integrating into their systems or whether they want to use a user interface version as well. So, it does depend on all those factors. In all those situations, what is a positive is the work that we've done with Hinckley, Shawbrook, NatWest, and the other one that we're onboarding at the moment. They are all gone through or going through those permutations and combinations which gives us more confidence and experience. And the last area to add to it, if you're a customer of Optima Legal, also, that's a positive because we've already enabled Optima Legal, be that as way you don't have to be a customer of Optima Legal.

And sorry, just to clarify, are the 2 big banks you're talking to, are they willing to start to integrate before the testing slot? Or are the banks wanting to wait for the testing slot to start the integration process with yourself?

That's a good question, and apologies, I didn't answer that one. That also depends. Some of them are actually saying, actually, can we start the work earlier? You don't have to wait for the Bank of England allocation because we can do some of the front-end work as well. It really comes down to the case by case, Ed.

I think it's fair to say that -- sorry, it's fair to say that the bulk of the conversation with them to date has been getting them to the point of testing. You can imagine we've got to follow up with a whole bunch of other conversations subsequently.

In saying that, Ed, and just to that point, one of the things that we have been working on and which we have been working with different institutions, let's not do the Bank of England last or first. Let's see how we can get you on first, so we can accelerate the process. And that was where I was indicating in the presentation where we're looking at different ways with the Bank of England and ourselves about doing things in a slightly different order. And I understand where you're coming from. Can we move it faster? And the short answer, there's some of the work. That is some of the work we're looking at.

Okay. No, that's helpful. And then just a couple of clarity questions. Obviously, you're progressing with NatWest and you've talked about it's more on their timetable on integration and stuff and getting going. Is that now getting to the really pointy end? Do you think you're really close on that one to start to see some transactions or still a little while away?

Again, I'll say what you're saying. It does move, Ed, to be quite frank, it does move, you understand that. So, we do everything we can within our control, and this is where Scott was talking about earlier, to see how we can move people forward and earlier. And we do continually explore that throughout. So, I always look for how can we make it happen earlier, rest assured. And if we can, we will.

Okay. No. And then just a last clarity question. Just on Slide 33, you talk about your road map and the sale and purchase Version 1 and Version 2. What percentage of the sale and purchase market can Version 0.5, 1 and then 2 do, is it like 50%, 60%, 70% of sale and purchase transactions?

I'll just describe what the different versions are, and then that will help sort of give a sense of the coverage. So, Version 0.5 is a very, very limited feature product, and basically, it's a test product. And we've got a range of test transactions with one of our existing customers, which we'll try and put through to make sure that some of the basic plumbing works the way we want it to work. Version 1 is what we call a one-sided product where you don't need both the purchaser and the vendor to be on platform. And that's a bit different in design than we have in Australia where the product is designed to have both sides of the transaction in the workspace. But recognizing that we're in a different position in the U.K., we have decided to be able to release a one-sided product. That gives us exposure to flows such as that from the new homebuilders, which are typically a one-sided transaction. That's roughly about 10% of the flow in the market and gives us also a little bit of extra others of similar ilk. Version 2 is a 2-sided product. It's not fully featured but it does allow for both purchase and vendor to be in the workspace together. And we think that's roughly a 40% to 50% coverage capability.

So by the end of the financial year, we believe we will have a sizable capability in terms of sale and purchase. The other thing just to add to Scott's point, and Scott touched on it a bit with the homebuilders. We are exploring multi- paths to actually get sale and purchase on to the platform.

The other important piece, just to add to that, Ed, is 30% of the flow in the U.K. for sale and purchase is for cash, so no bank involved. That's a bit bigger than is the case in Australia. And that 2-sided product, we think, will be a good candidate for those -- that transaction type. And the good thing about that is we can get flow without actually having to bring banks into our ecosystem.

Which is also one of the important elements of Smoove as well coming back to the distribution, Ed.

Okay. No, that's helpful. I'll leave it there because I know other people have got questions.

There are no further questions at this time. I'll hand the conference back to Mr. King for closing remarks.

Well, firstly, a couple of things I want to add. I just want to say thank you to everyone who asked questions. We do appreciate the time and people listening to the call. Secondly, I want to again reiterate that we've had a good, solid financial year '24. We know we've still got more work to do, but we are progressing on the execution. We have clear priorities for FY '25, and we do see and expect continued performance improvement in FY '25 across our businesses. Lastly, I just want to say thank you to all our shareholders, customers, our people, and to my colleagues in particular. Thank you.

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