PEXA Group Limited (PXA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PEXA Investor Briefing following IPART Draft Report. [Operator Instructions] I would now like to hand the conference over to Mr. Russell Cohen, CEO and Group Managing Director. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us today. This morning's IPART announcement is significant for PEXA. So today, Liz and I wanted to share our early thoughts on the report, the key points in which we will be engaging with IPART ahead of their final report and the next steps. Before I do so, I'd like to thank the investors and all interested parties who made submissions to IPART in response to its proposed methodology released at the end of March. We appreciate you taking an interest in the process and using your voice to guide their review. Given the uniqueness of PEXA, it is invaluable for IPART to receive your insights and recommendations to inform their decision making. We have conducted an initial review of IPART's draft report as released this morning, and we note that IPART's draft recommendation is to reduce PEXA's exchange regulated revenue requirement by approximately 20% through a one-off reduction of most transfer transaction fees. This reduction will likely only apply to charges to legal practitioners, meaning financial institutions will not see their fees change. This equates to an estimated $70 million in revenue in the financial year 2028, while the fee reduction is centered on one customer group and transaction types. The impact will obviously be borne by all users of PEXA's platform. We do not believe this is an acceptable result for PEXA, our customers, our stakeholders and the e-conveyancing industry in Australia at large. We will push hard against the cut of this magnitude and for a final determination to be phased over 4 years. While we are disappointed with IPART's draft recommendation, we do note that IPART accepted many of our key arguments. It has largely accepted as reasonable PEXA's historical OpEx, CapEx and volumes as well as future OpEx and CapEx in line with our original submission. In calculating its draft recommendation, we welcome the decision of IPART's tribunal not to rely on the independent cost consultants' calculations around the costs and concepts of building a hypothetical ELNO. We also see ample opportunities to engage with IPART to revisit their calculations. In particular, IPART's chosen methodology and assumptions to calculate the initial asset base and the appropriate rate of return to investors in PEXA's first 8 years. The assumptions related to the initial asset base have led to almost all of the 20% cut in revenue recommended by IPART. This highly contestable assumption in the draft report means that from a regulatory perspective, PEXA's assets in 2019 were only worth $600 million, whereas state governments and other investors sold in that same year for $1.6 billion. If IPART's draft recommendation is to be implemented, then in effect, regulators will have transferred approximately $1 billion in value from today's investors to PEXA's initial investors, including state governments. Given the significant consequences of this contestable assumption for PEXA and the broader industry, we will advocate strongly for a more cautious approach, which does not adversely affect our ability for continued innovation and investment. We also do not subscribe to the theory in the report that a cut in the return on the historic asset base has no effect on how a company is run today. In the real world, a government-mandated price cut of 20% for a company like PEXA will lead to pressure for significant cost cuts. This introduces significant operational risks and may lead to implications for customer service levels, system stability, investments in new functionality to improve our customers' productivity in PEXA's staffing. IPART's theory is that this assumption provides a reasonable return for investors in new technology platforms. In the real world, it is likely to send a clear message to technology investors that regulated businesses who create value for customers and their investors face a heightened risk in Australia of unpredictable regulatory intervention. We feel it is reasonable for IPART to be far more cautious in making contestable assumptions about an appropriate return on historic investments in start-up online platforms given the significant impact of these assumptions. We understand that you, our shareholders, will share our concerns around the implications of this draft report. Looking back to the beginning of this pricing review, we note our competitor in their submission sought a 5% price reduction to PEXA's prices. In that context, this draft outcome is particularly extreme. There has been no precedent for a regulator in Australia to cut the price of a relatively young online platform. We intend to raise our concerns with IPART and the relevant government representatives over the coming consultation period and to engage and advocate on behalf of our employees, our shareholders and the general public who expect consistency in regulatory behavior. We are encouraging our investors and other interested parties to make submissions to the process, too. I'll now hand over to Liz to summarize the key points from the IPART report.

Thanks, Russell. IPART have made the following draft recommendations: IPART's proposed initial asset base is $368 million versus PEXA's proposal of $1.4 billion. IPART cross-checked its recommendation using a highly sensitive and contestable assumption regarding the appropriate rate of return to investors in PEXA's first 8 years. IPART applied an average WACC of about 20% between 2011 and 2019, whereas PEXA proposed an average of 36% over the same period. The actual return to investors in PEXA in that period when PEXA was sold averaged a 36% IRR. As Russell detailed, this results in a real cut to exchange revenues of about 20% or $70 million implemented through cuts to key transfer products between 36.6% to 14.6% in FY '28. Consistent with historical pricing, CPI would then be applied on top of this and to all other products. Fees in FY '29 through to FY '31 are then recommended to return to CPI annual increase, with IPART's next review to be conducted in FY '31 and for implementation in FY '32. PEXA requested the recovery of interoperability costs and IPART allowed recovery of this through its capital base. IPART has also recommended a demand volatility adjustment mechanism, which would adjust turns in the future review period if market volumes moved by plus or minus 5%. IPART has also recommended that our optional subscriber products built for customer productivity and subscriber API integrations not be price regulated. While not a complete list, there are several points we will look to engage with IPART on, including and not surprisingly, the initial asset base. We will continue to challenge how the asset base could have changed so materially since the previous review in 2019 when IPART concluded our pricing was reasonable. We will also be clear in our view that the recovered capital cross-check is not a valid cross-check unless the early-stage WACC used as a cross-check is truly reasonable. In light of recent tax changes in relation to the treatment of property in Australia, we will request and recommend changes in IPART's approach to calculating future market volumes. Additionally, as a result of these tax changes and expected increased volatility in PEXA's volumes, we anticipate that the return may be more volatile in the future, and we believe this should be adjusted for in the WACC applied to PEXA. We will request that any change to service fees be implemented gradually over 4 years to allow PEXA to more easily manage the operational impact from the changes. We will look in detail at the proposed mechanism to adjust for demand volatility. We don't believe it is reasonable that financial impacts from FY '28 to FY '31 are only compensated from FY '32 potentially 4 years later. IPART has also proposed that PEXA should absorb into our cost base any new government charges levied by the national data standard and various jurisdictional fees, which we believe is unreasonable.

Thanks, Liz. It's important to note that PEXA has been priced and service regulated for over a decade. Our prices haven't risen in real terms since our first transaction in 2014. Our ability to continue to innovate, to expand to all 8 states and territories and improve the customer experience of our technology relies upon our ability to grow our revenue base. PEXA has consistently delivered a secure, reliable and innovative platform while continuing to invest in new capabilities that make property transactions simpler, safer and more efficient, and we are very proud of what we've achieved. We have only a limited amount of time to review the lengthy draft report from IPART. However, our initial view is that the report raises important policy questions. PEXA supports appropriate price and service regulation. We have embraced this concept since our founding and supported this in our submissions to IPART, but we question whether this is the right regulatory approach for a digital platform and one that is designated as national critical infrastructure, and if this approach properly reflects the investment required in building, maintaining and continually enhancing the platform. Digital infrastructure operates very differently from traditional physical infrastructure. Digital platforms such as PEXA are growth drivers in our economy as they are around the world. Accordingly, price reviews of these entities must be fit for purpose. As you would expect, we have prepared for a range of outcomes from this IPART review. If growth is curtailed particularly in a high inflation environment, then aspects of our business will have to change. At this time, we feel it is too soon to discuss the actions that the group may or may not take in response to the IPART report. The report is still in draft form. We have not discussed its impact with our regulator, its customers or with policymakers, and we want to go through the appropriate process to deliver the right outcomes for our customers and our shareholders. In terms of next steps, IPART has now opened a consultation period in which interested parties, including PEXA shareholders and customers can make a submission in response to the draft report. A public hearing will be held on Tuesday, the 21st of July from 10 to 12 noon, and we expect all interested parties will be able to join in the hearing. IPART has asked a series of questions in its draft report, which attendees will have a chance to respond to in the hearing. All interested parties will have the opportunity to make a submission on the draft report and these submissions are due by the 14th of August. PEXA will continue to participate in all aspects of the process through which we will address in detail our concerns and our questions. IPART's final report is expected to be provided to ARNECC by the end of September 2026. After the report is issued to ARNECC, ARNECC will then go through the process of working out how it chooses to respond to the report and how each jurisdiction responds to the report, which we expect will take several months. We are now happy to take any questions you may have. Thank you.

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

Just a couple of hopefully basic questions. One, in the volume assumption that's in the draft report, this is also your volume assumption and you're assuming obviously, there's going to be changes from the budgetary, I guess the change from the budget which you can see the banks talking about now. But in each year, you're anticipating in the future years that volumes are going to fall. Is that correct? That's the first question. And then the second question is, can you touch on anything you're not charging on for the moment that you might be able to charge on? I note in the report, they talked about PEXA Key, but they're saying that you can't charge for that because part of the asset base, is there anything else that you're doing at the moment that you might be able to include a fee for going forward?

Yes. Thanks, Ed. So the volume assumptions in the report are IPART's forecast but they are not dissimilar to our forecast that we have produced. The unknown, I think, for all of us is just what will lease tax impacts and the tax changes have on the volume. That's something that we've been working through and something that we will certainly be raising with IPART through the process. Russell?

Ed, I'll take the second part of your question in terms of what we may or may not be charging for. So PEXA Key is currently a free product that we offer to customers to enable them to share bank accounts and other transaction details safely and securely with the practitioners. We had no intention of charging for that product so there's really no impact to us. We do charge modestly for our API connectivity that's to maintain a secure data connection for many customers who choose to connect to the exchange via APIs. So we'll continue to have revenue associated with that. We also have modest revenues associated with various productivity tools we built over the years: PEXA Projects, PEXA Planner, PEXA Tracker; and we'll continue to look to pricing those appropriately to the value they create for our customers. Those are innovative tools we built around the exchange to help customers drive productivity through their workflow, and we will continue to monetize those.

Your next question comes from Elizabeth Miliatis with Macquarie.

Sorry, I was on mute. Just on the OpEx base that's been assumed in the calculation. You've noted that you'll make some cost actions around that. Does that then have implications to the next review in 4 or 5 years' time? And then just secondly, as we progress from the draft report to the final report how might some of these changes outside of obviously things that you'll push back on, but I presume that the WACC should get better and also volume -- the volume assumptions may actually get better just given whether the market is at the moment. What's your thought on those 2 points?

Yes. Thanks, Liz. Look, we do hope that IPART will take into our account, our views on the volumes and the WACC but we will need to wait and see how that plays out. On the OpEx, yes, they will indeed take that into account for the future review and it could potentially give us a lower return in the future if we did make significant cuts.

[Operator Instructions] Your next question comes from Kieren Chidgey with UBS.

Just on the comments around sort of a phased implementation. I sort of note reading through the draft report they're obviously seeking views on that sort of whether or not it should be phased relative to a first year step change. But the numbers they give in their phased commentary sounds more like it's sort of a potential 2-year phasing they're considering. Has there been any discussion around that with them? And just interested in how you've read that comment in the report in terms of what you're thinking they would potentially reconsider from a timing perspective?

Yes. Thanks, Kieren. Look, we haven't tried to calculate their actual numbers as such, yes, but we will certainly be advocating that any change should be implemented over 4 years. It is a very significant change. It would be quite unreasonable for that to be implemented over 1 year.

Okay. All right. And secondly, just sort of a follow-up question on cost sort of responses from yourselves. Yes, can you just be a little bit clear if we do sort of land with what's been currently proposed sort of quite a hefty $70 million 20% revenue reduction. Can you be clear of what your sort of intentions are in terms of reducing the cost base, albeit, take your point, that benefit of lower cost would probably be lost in a subsequent review 4 years down the track, but still obviously help you in near term. So just wondering if you could sort of frame up what your options are in terms of pulling back on costs over the medium term?

Yes. Kieren, look, we're not going to outline that in detail right at the moment because the draft is still -- the report is still in draft, and ARNECC have not looked at -- and we haven't discussed with them how they will implement any recommendations. It is too early to talk to specifics at this stage as to what we will do.

Your next question comes from Christian Waked with Jarden Group.