PEXA Group Limited ($PXA)

Good day, and welcome to the PEXA investor briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Russell Cohen, CEO and Group Managing Director, to begin the conference. Russell, over to you.

Thank you. Good afternoon, everyone, and thanks for joining us. We do appreciate you taking the time to join us today at short notice. Last week was a significant week for PEXA. We know that the IPART consultation paper has raised some questions with some of our stakeholders. While we may not be able to answer all your questions today as the process remains in flight, open to submissions and no conclusions have been reached, we felt it was worthwhile to add greater context on how the IPART process works, where it is at now, what happens next, and share any information to the extent that we can. I'll start with the first regulatory update affecting PEXA last week. ARNECC made the determination not to proceed with the interoperability program in all its previously proposed forms. This is a significant moment for us at PEXA. We have invested a lot of time and money into the interoperability program over the last 6 or so years, and as I mentioned on our first half '26 results, we were firmly of the view that the reform pathway had been exhausted. The two independent reports commissioned by ARNECC validated this view, and we were pleased that ARNECC and the responsible council of ministers across Australia came to a similar conclusion. PEXA had a distinct strategy over the past year to be clear and direct about the risks presented by interoperability as contemplated through the reform project, risks to customer on-day settlements, cybersecurity and transaction integrity risks as well as encroachment of PEXA's intellectual property. We had carefully articulated the cost and time already spent over many years, resulting in the impairment of an interoperability asset of old software code, and we have appeared multiple times in various government forums to make our case on behalf of our customers, our shareholders and the e-conveyancing community. We are now firmly focused on enhancing the existing regulatory framework for our exchange, which, in essence, looks to create more certainty for all stakeholders. This involves closing some gaps and working to reestablish a more nationally consistent framework. Our work on this initiative is already underway with ARNECC. Now moving on to IPART. A known part of the IPART process is to seek public consultation to share IPART's early thoughts and ideas and request stakeholder feedback and submissions as it develops draft recommendations and draft reports before reaching a final recommendation to ARNECC. So our important first message today is that the process remains fluid until its anticipated completion in September of this year. For those of you who have just recently started looking at electronic conveyancing and PEXA, it's important to mention that PEXA is price regulated with pricing reviews conducted every 3 to 5 years. ARNECC, our regulator, has engaged IPART to conduct these reviews with the last review taking place in 2019, where PEXA's pricing was deemed fair and reasonable. In fact, since 2014, we have operated with a regulated annual CPI increase each July, and this was reaffirmed as part of the 2019 IPART review. In September this year, IPART will make its final recommendation to ARNECC, who are the ultimate decision-maker and will hand out their determination on our prices. As part of the current pricing review, Liz Warrell, the PEXA team, and a selection of economic regulatory experts have been working with IPART to provide all necessary information to assist them to determine an appropriate outcome. The economic models and approaches IPART may take from here are varied, making it difficult to predict the outcome at this time. IPART's ultimate recommendation in September has a wide range of implications on our revenues and our costs and thus naturally how one may value PEXA. Let me hand over now to Liz, who can talk about the process and the methodologies in more details.

Thanks, Russell. Let me briefly touch on the process first. IPART started its current review on PEXA last July and have put out a call for initial submissions on the pricing review in August '25, to which PEXA and a number of other stakeholders responded. Since then, PEXA has attended weekly meetings with IPART to assist with their review. This included attendance at a public workshop on 17th of March. The summary from this workshop was released by IPART last week. Recently, IPART engaged cost consultants. Since then, we have participated in a number of workshops with their consultants who are working to estimate and provide advice on the efficient operating and capital expenditure that an ELNO would incur in providing e-conveyancing services in Australia. PEXA will get an opportunity to comment on the cost consultants' draft report as part of the process. In parallel to this, IPART on Tuesday published a consultation paper on the possible methodologies for the initial regulatory asset base, or RAB, and invited feedback from interested parties, including industry stakeholders and members of the public. Feedback on the paper is open until the 29th of April. PEXA plans to make our submission to IPART on the RAB consultation paper. We expect that our submission will be made public along with other submissions received. Once the consultation process closes, we expect IPART to publish a draft report in June as well as the cost consultants' report. IPART is planning to have a public hearing in June before their final report is published and submitted to ARNECC in September. Any proposed changes in price would then impact the FY '28 financial year. Now moving to methodology. While IPART's paper flags several potential methodologies, its proposed approach involves using historical capital expenditure incurred in developing the exchange rolled forward for depreciation and indexation. Importantly, the paper also flags a potential allowance for efficient unrecovered costs incurred in establishing the market, but not captured in capitalized expenditure. For PEXA, we think this is highly relevant given the cost we incurred to create the market. This is a scenario we have reviewed internally, so it wasn't unexpected, noting that the quantum of the relevant inputs has yet to be reviewed by IPART. When we modeled this methodology, we included an adjustment for unrecovered costs PEXA incurred in establishing the market at a return rate that reflected the uncertain nature of PEXA's early years. In November '25 submissions to IPART, we didn't recommend the historical cost approach, because modeling these unrecovered costs, which PEXA has incurred to establish the market, is harder and can be subjective, both improving the cost to include and importantly, the appropriate discount rate to reflect the risks taken at the time of PEXA's establishment. We do want to be clear that the historical cost approach is a proposal only. It does not constitute a decision or recommendation by IPART. IPART are seeking feedback on this approach. As Russell mentioned, this is a normal part of their process and doesn't indicate that a decision has been made. Our view on the relevant methodology is that a line in the sand or a discounted cash flow approach is most appropriate. Such an approach would calculate the implied RAB based on the prices set by IPART in 2019 when IPART found PEXA prices to be reasonable. The approach can reflect the value associated with uncapitalized intangible investment and scale effects, including costs incurred when establishing a market that may not be fully captured in historical CapEx. We believe this approach addresses the inherent uncertainty around the value of historical efficient capital investment and establishes a RAB using evidence being IPART's previous review. The approach also maintains reasonable levels of price and revenue stability, thus avoiding price shocks and/or potentially undermining service levels and platform investment given the critical nature of PEXA's network. And the approach is consistent with approaches applied by economic regulators, including IPART itself, where a sector is transitioning to the building block economic regulation. I'll also draw your attention to PEXA's published submission to IPART in November '25, in which Section 4.5 outlines PEXA's reflections on potential methodologies. While the initial asset base is key in IPART's methodology, there were multiple other inputs into the building block approach, including the discount rate, return on capital, return of capital, future operating costs, future capital spend and forecast market growth and penetration, which is still to be determined by IPART. We will continue to work productively with IPART as the process continues, and we will respond by the 29th of April to IPART's RAB methodology paper. And we welcome you to also share your views with IPART. Finally, and as Russell and I have commented on previously, we have a wide range of outcomes and scenarios modeled and importantly, potential actions we can take in response to each scenario. But for now, we're fully focused on working with IPART and respecting the IPART process. So with that, we can now open to questions.

[Operator Instructions] And your first question comes from the line of Ed Henning from CLSA.

I'm just wondering, you talked about a wide range of outcomes going through all the different scenarios, can you just give us a little bit more on how that varies, whether there's potential upside to the price, potential downside? What was the range? Is it like 20% or something? I know we don't have all the known inputs at the moment. We're just trying to figure out, I guess, kind of the range that you're seeing at the moment, please, from the outcomes.

Yes. Thanks, Ed. Look, I won't discuss the actual numbers. And the reason for that is that each different scenario that you model is really driven by an interlinked set of assumptions and forecast and historical data and return rates and the like that can really drive different outcomes depending on how you actually model them. But look, what I can say, we absolutely modeled historical costs. We've looked at transaction value, unrecovered investment costs, replacement costs and our proposed line in the sand approach as well.

Your next question comes from the line of Tharan Jeyathasan from JPMorgan.

Just interested, I note that you mentioned that you referenced IPART's 2019 review and the fact that they had signed off pricing at that point. And so the implied RAB from pricing then could be used today. But just interested in your thoughts given at that point, I believe IPART assumed that competition and interoperability was still a plausible scenario going forward, except that seems like that's possibly no longer the case. So do you still believe that the review they conducted in 2019 is relevant today?

Yes. Thanks for the question. Look, we still do think that, that review in 2019 is very relevant. Ultimately, they did determine a regulatory asset base at that period of time. And we think that is the right place that we should start. Now that asset base absolutely is then adjusted for the volumes in the market and the market share. And so we think it is still appropriate to use.

Your next question comes from the line of Josh Kannourakis from Barrenjoey.

Russell and Liz, a couple ones quickly. The first one is just on the efficient OpEx assumption. So it looks like in the report, that will obviously be tested at the start. And then as an input from that, there's opportunities for you to drive your own productivity. I just wanted to confirm that assumption. But also then if that gets retested after the next reset in 3 to 5 years is whatever your newly lower efficient OpEx base, does that mean that it will be retested to that lower standard? Is that your understanding? Just a couple of points of clarification, if you can give a bit of color on that.

Yes. Thanks for the question, Josh. So look, the costs are definitely one of the key inputs into the model. And certainly, what we have given IPART, we've certainly outlined how we would find efficiencies currently and in the future. And in our future forecast, there are some factored in. Depending on the range of outcomes, we would have to do some things differently that could create different productivity opportunities, which clearly we can't sort of talk to right at this moment. How that impacts that future RAB, you're right, it would reduce that RAB, but you just do need to remember that, that is only one of the impacts on the RAB. So there is your costs, but it is also your CapEx that you're spending as well is also very relevant there as well, of course, the initial RABs and the discount rates and the like.

Okay. That's good. That's helpful. And then just second question, just with regard to, you mentioned that prior report you guys have discussed, and I know you've also the submission to ARNECC around 2025, where you talked about some of the capital costs, I think, being over just over $300 million or mid-3s, but then obviously, cost to date of getting the platform up being more around that $650 million. I mean, how should we be thinking about that, in which how similarly that calculation has been done in line with what IPART is looking for in terms of pricing? And is that something we should consider at all?

Yes. Thanks, Josh. Look, you actually shouldn't consider that. One is really looking at just the historical costs, both CapEx and OpEx view, whereas when IPART is looking at it, they will look at historical costs. They'll then also look at depreciation, indexation in there. And then when they look at some of those unrecovered costs, if you like, in building the market, they have different approaches there as well in how they will risk rate those costs and the like will materially change it.

Got it. And one really final quick one at the end. Potential actions, you mentioned that once IPART sets their decision in September, is that absolutely final? Are there any other sort of actions that can be taken on PEXA's behalf if there is a material adverse outcome to your P&L as a result?

Look, we think it's probably too early to really talk about what other actions we would take. We really need to just wait, let IPART provide a recommendation and note that the final decision does rest with ARNECC.

[Operator Instructions] Your next question comes from the line of Kieren Chidgey from UBS.

Maybe just a follow-up to some of the questions that have just come through. On the initial asset base sort of that IPART has proposed in terms of the two building blocks for that. I mean I presume you can fairly accurately already know what that historical CapEx less depreciation adjusted for inflation roll forward base is sort of the first component. Is that a number you can provide on this call?

Kieren, yes, thanks for the question. Look, that's not a number we will provide on the call. But as we said, it is something that we have modeled.

Okay. And what's sort of the reluctance to provide that number at this point?

Look, we don't want to give out individual numbers and mislead yourselves and other investors around that they should take that as a gospel, because all of the approaches are influenced with other factors, including your cost, your CapEx as well as, of course, whether we can recover some of those costs to actually build the market. We just don't want to put individual numbers out there, which could mislead.

Okay. And on the second part, the unrecovered cost number, you spoke to then, Liz. I mean what is your understanding of the lens that's going to be allowed to look at that? Is that just sort of net losses that have come through the P&L adjusted for an appropriate return? Or is it sort of other IP that might have not sort of had natural costs come through the P&L?

Yes. And look, I think the reality is there's a variety of ways in which that can be assessed. So look, we've certainly got a view on it that goes back to some of those historical losses. Probably, and I sort of indicated this that one of the big factors there, though, is then how you risk adjust those losses as well to really take into account of the risks the business took in those early years. So that also can make quite a determination. So it's not just what you include, it's how you risk adjust it as well.

Okay. Are there any precedents that IPART or their consultants you're aware of that they'll be looking at in regards to that?

I'm not sure of any that we can point you to at the moment.

[Operator Instructions] And your next question comes from the line of Roger Samuel from PEXA (sic) [ Jefferies ].

Precedents of other assets of similar nature, and then can we determine the time it takes to settle?

Sorry, Roger, we didn't hear the start of the question. If you could start the question again?

Yes, sure. Yes. I'm just wondering if it's possible to look at any historical precedent of other assets of similar nature to PEXA and determine, firstly, the time period of which we can expect to see some settlement around this review? And secondly, what's the most likely outcome of the RAB model? I mean, I understand that you mentioned before that IPART is due to release the draft report in June and then the final report in September. But I'm pretty sure there'll be a period of going back and forth between yourself and IPART and perhaps ARNECC as well.

So certainly, we will have an opportunity to give our views on the draft report, Roger, in June. So we will get a look at it then. There will also be a public hearing where they will propose some questions to be discussed at that public hearing in June. The report will then, as we said, be presented to ARNECC in September, and then it will be up to ARNECC how that process flows from there. But look, unfortunately, there aren't any other real precedents or market similar to ours that we can point to at the moment.

Okay. Thank you. I'll just wrap it up. With some recent feedback from investors pointing to an increased interest, obviously, in the IPART process, we wanted to let you know that, that information is available on the IPART website. You can also subscribe on the website to IPART update, so that interested parties -- and also that interested parties can make a submission, and our investors are very welcome to do so. So on behalf of Liz and I and the PEXA team, thank you for your time today and your continued interest and support for PEXA. Thank you.