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Edited Transcript of CMCX.L earnings conference call or presentation 22-Nov-18 9:30am GMT

Half Year 2019 CMC Markets PLC Earnings Call

London Jan 7, 2019 (Thomson StreetEvents) -- Edited Transcript of CMC Markets PLC earnings conference call or presentation Thursday, November 22, 2018 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Fineberg

CMC Markets Plc - Group Commercial Director & Executive Director

* Grant Jeffrey Foley

CMC Markets Plc - Chief Operating & Financial Officer and Executive Director

* Peter Andrew Cruddas

CMC Markets Plc - Founder, CEO & Executive Director

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Conference Call Participants

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* Adedapo Olusola Oguntade

Morgan Stanley, Research Division - Research Analyst

* Anthony Da-Costa

Peel Hunt LLP, Research Division - Analyst

* Kamran Hossain

RBC Capital Markets, LLC, Research Division - Analyst

* Marco Di Matteo

Goldman Sachs Group Inc., Research Division - Associate

* Marcus William Barnard

Numis Securities Limited, Research Division - Analyst

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

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Presentation

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [1]

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Good morning, everyone. Welcome to the CMC Markets Results Presentation for the 6 Months Ended 30th September 2018. I'm Grant Foley, Chief Operating and Financial Officer for the group.

Looking at the agenda today, I'll be talking through the group's performance for the period and I will also cover regulation and the financial outlook. Peter Cruddas, our CEO, will then give an update on the group's strategic outlook; and then, at the end, David Fineberg, Group Commercial Director, will join Peter and myself for Q&A.

So moving into the financial performance and starting with our key performance indicators, as we announced in September, trading conditions in the first half of the year have been challenging. Whilst Q1 was relatively strong, an improvement on last year's performance, Q2 was particularly difficult. Subdued and range bound market encouraged clients to trade in other asset classes, particularly indices and significantly less in foreign exchange. This was further impacted by the introduction of higher margin requirements under the new ESMA regulation in August. Pleasingly, we have seen trading improve in Q3.

So if we start on the top left, active clients at 44,697 were 4% lower than the same period last year. This was primarily driven by fewer trading opportunities and the group's continuing focus on higher value and appropriate clients. Revenue per client at GBP 1,413 is 22% lower than a year ago, and this has been driven by lower overall revenue performance.

Moving across, the number and the value of client trades has actually increased by 14% and 4%, respectively. This is due to a shift in the asset class mix, and I'll cover this in the next slide. Overall, net operating income at GBP 70.6 million was 21% lower than the same period last year.

As we know the group's cost base is relatively fixed, so the operational gearing has a significant impact on the bottom line when revenues decrease. Profit before tax was GBP 7.2 million in the first half, and we've benefited from a tax credit in relation to Australian deferred tax assets. Profit after tax was slightly higher at GBP 7.8 million.

Earnings per share were 2.7p, and in line with our policy of paying 50% of post-tax profits as dividends, an interim dividend of 1.35p per share has been declared.

So if we look at the group's revenue performance, whilst the number and the value of client trades are up year-on-year, there has been a significant shift in the underlying asset class mix, which has been traded by our clients in response to the lower number of trading opportunities. As we know, our 2 most traded asset classes are indices and foreign exchange.

Looking at indices, these have provided more opportunities than other asset classes in the period, with an 18% increase in the value of the trades, in particular, the US30, where we are seeing clients trade their index more than usual. The US30 has increased in value by 18% from the end of September last year and has the highest underlying price. This product has a fixed spread, so whilst the value of trade is higher, the overall spread revenue is unchanged.

Foreign exchange has been the asset class where we have seen the most significant decrease from last year. Whilst the value of foreign exchange trades is 14% lower, in the second quarter, it was 29% lower than a year ago with the markets trading in tight ranges and providing fewer opportunities in the second quarter. In addition, foreign exchange performance in the first half of last year was particularly strong.

So whilst the value of client trades increasing is usually a good thing for revenues, the change in the asset mix has not generated increased revenues for the group in this period.

Moving on to the net revenue bridge, the second half of last year was a record for the group, with CFD and Spreadbet revenues of GBP 90.8 billion. So we are starting from a high point. However, as discussed revenues from clients trading less or not at all, particularly in Q2, led to revenues falling by GBP 23.7 million and GBP 9.1 million respectively, primarily due to a weak second quarter in foreign exchange.

As you would expect, with fewer opportunities and regulatory change, returning clients and new clients only contributed a combined GBP 5.1 million, which is lower than in prior year's. Overall, Spreadbet and CFD revenues were GBP 63.1 million, GBP 21.5 million lower than the prior year.

So looking at the income statement, as we've already covered, CFD and Spreadbet revenues were 25% lower than last year. We saw a decrease across all of our regions. The U.K. was less impacted, as you would expect, due to the higher concentration of professional clients in that region. Asia Pacific and Canada was impacted by fewer trading opportunities in FX. Historically, that is the region's most traded asset class.

Our stockbroking business increased revenues by 33%, which was primarily due to the successful migration of 103 intermediaries transferred from the ANZ Bank in July. Interest income has increased as the group can now place some client money on deposit and generate higher interest income. Overall, net operating income of GBP 70.6 million was GBP 19 million or 21% lower than last year.

As you would expect, with the lower revenue performance, we've continued to keep costs well controlled, which will go higher. The main reason for this is the additional costs to support the ANZ stockbroking partnership. However, as I've already mentioned, the relatively fixed nature of the cost base means that any decrease in revenues is felt almost entirely through to the bottom line. So profit before tax is GBP 22.6 million lower than last year at GBP 7.2 million, which is a 10.2% margin. We expect this to reverse in the second half, where higher revenues will come straight through to profits.

Due to the group's Australian deferred tax assets, there is a tax credit of GBP 0.6 million for the first half, and we now expect our full year effective tax rate to be between 10% and 12%.

Looking at our operating expenses, cost continued to be well controlled. Of the overall increase, you can see on the bottom now of GBP 3.4 million, GBP 3 million is due to the increase in size and scale of our stockbroking operation to support the ANZ transaction.

Looking at the line items in more detail, staff costs are 3% lower, primarily due to increased headcount costs being offset by lower discretionary bonus. IT has increased due to higher market data charges relating to stockbroking and premises have also increased as we now have more staff in our Sydney office to support the stockbroking transaction. Regulatory fees were lower from a reduced FSCS levy. Finally, other costs are higher due to bad debt charges returning to a more normalized level after a particularly low charge in the prior period.

Now looking at liquidity and regulatory capital, the group continues to enjoy a strong liquidity and regulatory capital position. Overall, regulatory capital remains strong at 26.8%, with Pillar 1 requirements increasing slightly through higher operational, credit and market risk strategies. The group's available liquidity also remained strong.

Nonsegregated funds have decreased due to those clients reducing their activity and withdrawing their funds. And at the period end, the group had utilized part of its GBP 65 million syndicated facility.

The overall decrease in total available liquidity reflects the payments of final dividends, tax and bonuses from the last financial year as well as the decrease in nonsegregated funds.

Of our available liquidity, we blocked cash for regulatory purposes in our overseas offices, and this has increased from March due to the increased liquidity required in our larger stockbroking business, as we have previously guided. Margins at broker also increased slightly to GBP 111 million.

On the bottom left, you can see a notional exposure. So our approach to risk management remains unchanged, with significant natural aggregation in the book and lower levels of residual risk after hedging.

So if we now move on to regulation. Against the backdrop of the subdued markets in August and September, it is almost impossible to fully understand the impact of regulatory change at this stage. However, more normalized market conditions in October and November are helping us to get a better understanding.

In previous presentations, we have talked about how clients could react and how any impact could be mitigated. The group's focus on higher value, experienced and sophisticated clients means a number of our clients meet the elective professional criteria if they choose to apply. And as guided, over 40% of U.K. and European revenue is now generated by professional clients looking back over the last 12 months.

Looking at the reaction from our retail clients, as expected, with the higher margin requirements, trading volumes have dropped significantly. However, clients still want to trade when they're -- when there are opportunities, and we are seeing this improve with market conditions.

Clients are utilizing more of their cash on account for trading. With the higher margin requirements, it's clear that they are using their deposits more fully to trade. To date, we have not seen clients deposit more to maintain pre-ESMA trading levels. And encouragingly, there has been no increase in account closures and client money remained steady.

So if we look at these in a little bit more detail, as I've said, the proportion of revenue generated by elective professional clients is as guided at 40%. This rises to 50% when we include our institutional clients. As anticipated, as we approached the 1st of August, we did see an increase in applications to become elective professional, although 71% of applications have been unsuccessful, and this reflects the rigorous approach that we have adopted to professional opt up. We do continue to see a steady stream of applications from our clients for elective professional status.

So now looking at client activity levels. On the left, we have shown the average daily turnover for the U.K. and Europe, split between professional and retail clients. You can clearly see that following the implementation, retail client volumes fell by approximately 80%. However, it is worth remembering that this was combined with subdued market conditions. As market opportunities have increased, we are seeing an improvement in retail client volumes, and they are now trading at 40% to 50% of pre-ESMA levels. Active client numbers also fell initially. However, these are now also improving, as we see more opportunities for our clients to trade.

It is clear that clients still want to trade. However, the lower levels of leverage suggest that they will be more selective around the opportunity. And although it remains too early to draw full conclusions, there are indications that client tenure and lifetime values may be increasing.

Looking at the -- how our clients are managing their account headroom. With pre-ESMA margin levels, clients understood that in many instances, they needed to maintain surplus funds on account to avoid liquidation at those margin levels. Post-ESMA, clients appear to be more fully utilizing the funds that they have on account. Pre-ESMA coverage was 4x and it is now around 2.5x. Client money for the U.K. and European region remains broadly unchanged, indicating that clients are not deploying additional funds, but importantly, are not closing their accounts and withdrawing their funds.

On other regulatory matters, the group continues to make preparations to ensure that it can service its European clients in the event of a hard Brexit. A new subsidiary in Germany has been established and an application has been submitted to the BaFin to make our Frankfurt office the group's European headquarters to maintain the passporting rights for our European offices. But to be clear, our group headquarters will remain in London.

With regards to other regulators, the widely expected increase in FX margins for Singaporean clients from 2% to 5% will come into effect next October. And lastly, we continue to monitor the developments following the publication of the IOSCO Report in September, outline policy measures that regulators can consider to the industry. Following ESMA, we are already well-placed to manage any regulatory change and we continue to benefit from our focus on higher-value clients.

Finally on the financial outlook for the rest of the year. As I've said, we have seen an improvement in trading in Q3. We continue to expect net operating income to be circa 20% lower year-on-year as a result of the ESMA impact as well as the weaker-than-expected second quarter. Partially offsetting this is the uplift in stockbroking revenue in the second half from the ANZ deal, which went live at the end of September. On a fully annualized basis, we continue to expect this deal to deliver GBP 7 million of profit before tax.

And finally, on revenue, we continue to trade in line with our previous stated expectation that 40% of U.K. and European revenue comes from elective professional clients, rising to 50% with our institutional business.

On costs, as I said earlier, we have a predominantly fixed cost base. Therefore, costs in H2 are expected to be moderately higher than in the first half. Overall, 2019 costs will be slightly higher than 2018 as a result of the ANZ investment as well as ongoing investment across the group as we work to further diversify our revenues across products and geographies. As I've already mentioned, as we see revenue improve in the second half, we expect to see that improvement come through to the bottom line.

Lastly, due to the recognition of higher deferred tax assets in Australia, we expect an effective tax rate in the region of 10% to 12% for 2019. And for 2020 and 2021, we expect this to be in the region of 12% to 14%.

I will now hand over to Peter to update you on our strategic outlook. Thank you.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [2]

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Thank you, Grant. Now the good news, you've had the -- we put Grant out first to deliver the average performance in the first half, but now I'm going to boost your morale and tell you about all the wonderful things that we've got coming through the company.

First of all, it's important to remember that CMC is not just a retail Spreadbet/CFD business. Some of you like to find a little home for companies focusing sectors. I understand that, but I want today to try and help you understand where we sit in the space and why we are different from most of our competitors.

Over recent years, we have focused on growing our high-valued client base through project tuna. These clients have a higher lifetime value and have also put us in a better position to deal with regulatory change. Our high value, or what we define as premium clients, have grown by 32% since 2015. And at the same time, we've also delivered revenue growth in the adjacent areas of institutional and stockbroking using our technology to help diversify our revenue base and reduce our reliance on retail trading.

Our institutional business has more than doubled, and we have now completed the ANZ transaction on time and within budget, which will mean that this revenue stream becomes more significant for the group as we go forward and as Grant has highlighted to you. In the future, we believe our retail business may benefit from consolidation in the CFD sector, and we're also focused on further diversifying our revenues through growth in stockbroking and institutional business as we add new products to meet institutional demand. For example, we're seeing good demand for our MT4 platform, especially in the APAC region, where we just launched it. We also launched our first stockbroking at the St. George Bank in Australia. So that's the first time they've had a stockbroking app. And we've also been -- we have also been a geographically diverse business, but we continue to see opportunities with the Dubai application, which is almost complete, and also, possibly South Africa expansion, which we're considering.

I've always seen CMC, first and foremost, as a technology company. Over the last 5, 6, 7 years, we have spent over GBP 65 million, around $100 million, in CapEx developing our NexGen platform, and it's won us multiple awards as well as a stockbroking business on the other side of the planet. We believe it's more complex -- our platform we believe is more complex than what our competitors are offering, and it provides clients across professional, retail and institutional with more features and customizable options than our peers' platforms do.

Each segment has different requirements, but we can service all of those different segments. I mean, for example, we added international shares to our stockbroking platform, the ANZ platform, but also on exchange options, which are all part of the requirement and we're rolling out mobile trading on stockbroking as well.

And more recently, we've proven how scalable our investment in technology has been through our white label stockbroking partnership with ANZ. I mean, this is our core platform that we adjusted and developed into a first-class stockbroking platform, which ANZ now use for 0.5 million clients. And we see significant opportunity for more deals of this nature in the future.

Just to sort of talk a little bit more about stockbroking, because actually, we're really proud of ourselves. I know first half numbers will take a lot of the concentration and thinking from you guys, but actually we've been flat out here and delivering a massive project. When we pitched for it, we saw none of our competitors at the top table. We were the only firm that could really deliver what was required. There were 1 or 2 other American firms, some venture capital companies that wanted to take on the project, but actually, we won it on merit. And I'm delighted we completed the ANZ transaction at the end of September on time and within budget, and this was a culmination of 18 months of hard work and really just demonstrates the diversity of this business. I take you back to my opening statement. We do not see ourselves as a retail punting CFD/Spreadbet business. We are not. We win business all around the world based on technology. And it's not just CFD business, you can see it's stockbroking.

And so on the technology side, we've added a new platform functionality and built new data centers. And on the people side, we increased the headcount across the front, middle and back offices in our Sydney offices. We recruited 140 people in 1 year, some of those people came from ANZ Bank, but we recruited. We've now got about 264 people in our offices in Sydney. It's a big operation.

And I was out there, got back 2 weeks ago. So if I'm looking tired, you know why. It's a hell of a journey, I tell you. I came straight from Sydney via Dubai. I still don't know whether to have steak and chips or cornflakes for breakfast, but we'll get there in the end.

And what we did in that short space of time was incredible. And all of this culminated in completing the biggest migration in the history of the Australian Stock Exchange. Over 0.5 million accounts were migrated across in one weekend. In addition, we leveraged off our leverage. We took on some of ANZ's institutional business, their intermediary business, for example St. George Bank. I don't know what happened there. I don't think that was me. There you go. See, I am tech savvy after all.

Even though when I went to school we didn't have the internet, didn't have computers, didn't have mobile phones, people say, "Can you envisage CMC being where it is today with all this technology?" Well no because mobile phones and the internet weren't invented when I went to school. Actually we barely had electricity, but that's another story.

So as part of this fantastic piece of technology that is the driving force of this business, it wins us business. If you imagine or if you think about some of our competitors, they spend a lot of money on marketing to bring on retail clients. We take our technology and we get 0.5 million clients overnight and we get paid for doing it because we split the commissions with our partners. And we did 103 intermediaries as part of the ANZ deal. These are direct relationships with the intermediaries. They're not actually ANZ -- with us and ANZ because ANZ doesn't own these companies, banks, brokers all around Australia. And that puts us as the #2 stockbroker in Australia -- I may have skipped something over. Anyway, #2 with 17% of the market share probably coming up on my next slide.

So very proud of being able to operate a stockbroking business on the other side of the world and being paid for it as well, didn't have to pay for any of those clients.

I'm just moving on now, still on stockbroking. So we're now the second largest execution-only broker in Australia, with a 17% combined market share of a AUD 21 billion market. As I've already said, we have a big pipeline of partners and a proven track record of executing deals as we net -- as we market our technology to new partners. And just really on that point, we don't always see our partners' business as bringing on new partners, bringing on new partners. We've got this pipeline. But we're developing business and the classic example was the ANZ deal, where they asked us to add products, international shares, options. St. George asked us to add mobile trading and all sorts of other functionality. So once you've established the relationship, you keep building it, keep building it. And it's wonderfully sticky and very, very scalable for us because we're building technology anyway, and so we can just utilize the resources that we already have.

We're also the only broker in Australia to offer international shares on mobile devices, and retail clients can trade international shares on 11 markets, which we plan to roll out to other partners over the coming months.

So to summarize, although it might feel to outsiders that we've had a pretty difficult quarter. And we did, we had a great first quarter, we had a very difficult second quarter, which really coincided with regulatory changes. They came in on the 1st of August, but we saw clients reacting in July. Plus, they were also distracted with the World Cup and the hottest summer on record, as we all were, to be honest.

But -- so to really summarize now, so regulatory change may present short-term challenges. But in the medium term, we believe it presents opportunities. And to take advantage of these, we're focused on continuing to grow our professional client base or our tuna clients. It's the highly leveraged, retail, nonprofessional clients are being targeted by the regulator. This is not our business model. If you want to segment us and compare us to companies that target retail, nonprofessional, highly leveraged clients, then we'll always come second to those companies because that business is highly profitable, but it's exactly the area that regulators are targeting to protect clients. We're all about fair client outcome. So it's not our business model and we want to continue growing in new geographies, using technology, partnering, offices, Dubai, we've talked about, and maximizing the value of our technology by continually enhancing our institutional services. And we will keep responding to what partners want.

And we're always looking for other opportunities like white label and stockbroking. And we're thinking beyond the ANZ to what the business and what the world would look like in the future. There's no doubt there's changes coming, we've already seen them on the 1st of August. So we believe our business model is for the long term.

And our view is that if you've built a powerful offering, it's defendable against regulatory change and other market challenges that may present themselves along the way. And this business has been around, like me, since 1989. I've been around a little bit longer than that. I've been working 50 years next year. Let's call it 15, big mistake, should have left at 14. I wasted a year, but anyway.

So we've been around since 1989 -- my directors are down there. They've heard it all before. I'll write you some new material for next year. Don't worry, guys. And I've every confidence in our technology and the people to succeed and for CMC to remain as the leading player in our space. And actually, we've got a bloody good balance sheet as well, a lot of cash on the balance sheet.

So that's me done. I'm sure you've got lots of questions. So I think -- David, Head of Trading, been with me 20 years, and Grant and myself, happy to answer your questions. Thank you.

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Questions and Answers

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [1]

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Sorry, let me get my pen.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [2]

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Paul?

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [3]

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Yes. It's Paul McGinnis from Shore Capital. A couple of quick questions. On the dividend, you noted the policy of a 50% payout. Obviously, in the previous years, you've been prepared to go higher than that in terms of payout in order to hold it. But this time around, you've cut at the interim stage. Could you just outline what decisions or what would influence any decision as to whether to hold or not hold the full year payment? First question. And then the second one, is it still too early in the post-ESMA era to be able to judge what's happened to some of the, I guess, you probably refer to them as more of the churn-and-burn operators? Seems like many of them are sort of suffering since the regulation change.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [4]

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Want to take this one?

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [5]

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Yes. So we thought we'd get the question about the dividend. It's not actually up to me or Grant or David. It's up to the board. Our Chairman's here today and Sarah, Nonexec Director. We have surplus cash on the balance sheet. You can see that we have GBP 192 million. But really, it would be a board decision. But we think it's too early, really, to think about holding the dividend because we only had a bad quarter. I mean, we've delivered tremendous stuff. Market volatility is picking up. Let's see where we are over the next 3 months. But also, I think there's going to be opportunities in this space, and we just want to see how it pans out. We're very confident that our business plan and our strategy, which has been built over the last 6 years when I became CEO back in 2013. If you look at the areas we're trying to develop, they're not areas that are under scrutiny from the regulator, non-leveraged business, stockbroking with scale. Stockbroking isn't profitable unless you've got the scale. I'm sure most of you know that. But we got the scale in Australia overnight with a partner's deal. So that area of the business, partners, white labeling, stockbroking, institutional business, white labeling, mini prime brokerage, premium professional clients in the nonchurn and burn space. We get some churn and burn business. But this industry is in transition. And when we were at the table with ANZ Bank, we never saw any of our competitors there. I don't think as a company we get a credit for what we've been -- we're doing here. Obviously, people reverse engineer. They look at the numbers. They look at the profits, and then they go from there backwards. But actually, if you look at where we've positioned ourselves, I think we understand this industry as well as anybody, better than anybody. But to get back to your point about dividend, it's a possibility we didn't. We're not going to talk about it today. The board have to decide what they want to do. I love a dividend, being a 62% shareholder, but let's see what happens in the next 3 months. We may not have to. And the other question was...

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [6]

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Churn and burn.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [7]

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Churn and burn.

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David Fineberg, CMC Markets Plc - Group Commercial Director & Executive Director [8]

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Yes. So we did foresee there to be consolidation within the sector, not as of the 1st of August, but we'll see how it plays out. You have seen some consolidation already, which makes it natural, given the synergies on the MT4 space. But that's also why we launched MT4, was because we saw that, ultimately, if there is this opportunity that arises to transition an MT4 base onto NexGen is not impossible. So you have to have the MT4 in place should those opportunities arise. But it's something they're closely monitoring.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [9]

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Yes. I think it's a bit early to see, and many people sort of wave the white flag as yet. But I think we will see it in the coming months. Kam?

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Kamran Hossain, RBC Capital Markets, LLC, Research Division - Analyst [10]

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So Kamran Hossain from RBC. Three questions. The first one, coming back to, I guess, the 71% turning down of clients to be elective professionals. Can you talk a little bit -- or give us a little bit of commentary around how you think peers have done there? Or what -- whether their standards are as high as yours? Second question, to some diversification. I know it's easy to get caught up in the short term, but I guess, thinking out a little bit blue sky, I guess ANZ helps diversify you a little bit. If you think out 5 years, how diversified do you think you will be? And the third question, I know you talked about the tax rate for this year. I guess you get greater earnings into Australia next year. Can you talk about the tax rate for next year?

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [11]

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So I'll take the first one on the 71% rejection rate. So we have adopted a very rigorous approach is what I've said. So for the 3 criteria where clients need to pass to that, of the 3, we make sure that we're comfortable with the evidence that we have to support that. I don't want to comment on other competitors. But from what I've seen, some of the rates that some competitors claimed to have from a professional upside look a bit on the high side given this area, and I really do hope that at some point in the near future, the FCA does review some of these firms, including us, and make sure that these rules are being followed to the way they are envisioned by the regulator because I think I have seen some rates and some processes that frankly look like they're not quite where they should be. But I'm sure that will all come out in the wash in due course. Do you want to talk about diversification?

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [12]

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Yes. I'll talk about -- yes, there you go. Very diplomatic finance director I've got there. Very diplomatic, yes. It's not what you said the other day.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [13]

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No. No. Just between us.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [14]

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Yes. Yes. A bit more colorful language as well. But -- look, 5 years for me, I believe -- if you look at the growth of this business, the growth is coming from a nonleveraged product, stockbroking and institutional white labeling, mini prime. I would hope, within the next 3 to 5 years, that, that will be much bigger than our retail, highly leveraged, low-valued clients. That is the journey that we are on, and we're not getting there by accident. I mean, fair client outcome has to be the mantra for all firms in this sector, if they want to survive. So we are building -- the reason -- the last 5 years, if I look at, at least 2 of our competitors, if not all of them, they have invested a lot of money in onboarding clients. We haven't done that. We've invested a lot of money in technology. Huge amounts. We're now winning business through technology. And I would like to see us in the next 3 years generating more income from institutional and nonleveraged product and professional clients and moving away from that area. We'll always get low-valued clients, but at least we'll give them a good experience and they can get the transparency that they need. And the regulators are supporting our business plan because what they're saying is that if you don't have experience in this sector, we don't want you to be churned and burned. So we're going to push up the retail margins. That's not our target market, but frequently, we get measured against churn and burn companies. As I said earlier, nobody in the churn-and-burn industry we saw at the top table with ANZ. We are a different business. We think differently. We act differently. We've invested our money. We've kept huge amounts of money on our balance sheet. We've got huge investments in our technology. When someone does a white label deal -- well, Ocado, I've said it in the past. They do a white label deal in America, the share price goes up 40%. We do the same and no reaction. And I think that's an overhang from the sector. But this can be a great industry. People want to trade, clients want to trade, they're not going to stop trading. And with a company like us, they get transparency, they get information -- I forgot to mention our Alpha offering, which I think was on the slides. I don't know what happened to it. But our Alpha offering is really sales trading, but we offer one-on-one account managers to our higher valued clients. We invite them to exclusive events, where we get independent speakers to talk about the markets and all this education we give around our platform. So I would think diversity in the next 3 to 5 years, we'll be doing more business outside of the low-valued, highly leveraged, retail space. That is where we're heading.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [15]

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And Just on a final point on tax. So yes, it's -- we've provided the guidance down to the tax credit in the first half to 10% to 12%, and we expect it to be in the region of 12% to 14% for the 2 years thereafter.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [16]

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That's, really, I think, down to the stockbroking business...

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [17]

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Yes. They're both growing profits in our Australian business, New Zealand...

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [18]

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Yes. We've got some big -- correct me if I'm wrong, but we've got some massive tax breaks in Australia. When we bought the stockbroker 10 years ago, we carried over those tax breaks, and that's where we got them from. And I think they're still in there, aren't they?

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [19]

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Yes. Yes. Yes. Any other questions? Anthony?

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Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [20]

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It's Anthony at Peel Hunt. Sort of 2 questions, if I may. The first is just on the rebates and levies. It's up year-on-year, even though revenue is down. Can you just -- can you talk us through why it's up? The second question is on borrowings. Can you talk us through the surge of the debt? And then the third point is on the ANZ deal, what are the -- so going forward, what are the other sort of opportunities within this ANZ deal, specifically? Like are these clients able to use or potentially able to use the CFD platform going forward, et cetera? So I mean, I just wanted to get a little more color about the ANZ deal into the future.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [21]

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Yes. So the rebates are up slightly year-on-year, and that's really a reflection of the change in shifts slightly in the business. Our institutional business didn't see the increases we saw in the retail business. So we continue to pay the rebates, as we always had, to our institutional business. And we saw our ANZ intermediary business go live in July, and that also attracts a rebate. So we've got a slight shift in the mix there, which has increased the rebate overall. But working with folks, they're not showing that post rebate, net operating income line. The usage of our facility, our revolving credit facility, is really dependent upon the flux in our prime broker requirements. So as we went into the first half, as is usual, that's the point in the cycle where you have quite a lot of cash going out of the bill. You have to file your dividend payments, any bonuses, any tax payments. We also put more capital into our stockbroking business. So as you would expect, seeing this was a leaner Q2 in particular. You draw on that a little bit more, and it is really driven as well by any increase in our prime broker requirements. That's why it's there. But you can particularly see the slight increase in usage in the first half of the year, and then you build out cash balances as you go throughout the end of the year. But that's why it's important for us to have that to ensure that we can continue to service our business and hedge it accordingly with our prime brokers.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [22]

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Just the other point about the ANZ deal and leverage off of that. So I mentioned earlier, there is 103 intermediaries that used to use the ANZ platform, which we now provide them. At least one, but more, have asked us to add CFDs to the stockbroking platform. So they've got a single sign on, and so they can use their shares as assets for trading as well. And that's what I meant earlier, when you talk about -- I call it leveraging off of leverage. Quite a few of the intermediaries are really pleased that they've got a provider that can actually offer other products for them. So -- and also we're seeing good incremental value, and I don't want to get people excited, around the foreign exchange settlement on international shares where Australian clients buy overseas shares in Aussie dollars, Facebook, Apple, FAANGs. They have to settle in U.S. dollars. And so we're providing foreign exchange facilities to them as well. And that business is just beginning. And the whole ANZ Australian experience is just beginning. I tell you, you go to Australia, they put us on a pedestal down there. ASIC and the ASX were really excited about ANZ doing the deal with us because they saw us delivering really sexy, fantastic, technology. We are held in high esteem in Australia. We come here and it's all doom and gloom, regulators and retail margins and churn and burn. I mean, it's different. It's different. If we could move the U.K. into the APAC region, that would be great. Then, that would solve Brexit as well, really, wouldn't it?

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [23]

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Question? Marcus?

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Marcus William Barnard, Numis Securities Limited, Research Division - Analyst [24]

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Marcus Barnard from Numis. Two questions. Firstly, on consolidation, I think you talked about consolidation opportunities. Is that something you expect to take part in, either as predator or prey? Or do you expect to watch it from the sidelines? And secondly, you talked about the opportunities to expand the stockbroking venture. Is that -- can we expect to see that in sort of Australasia or Asia Pacific or Europe or closer to home in the U.K.? Just your sort of thoughts there.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [25]

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So we're going to expand the stockbroking business into New Zealand and possibly, Singapore. We're very early days looking at Singapore. But definitely, in New Zealand, and then, we'll build it out from there. I think consolidation will happen, but I think the regulators need to act even further because some of the churn and burn type operations are beginning to be aggressive about onboarding clients into overseas jurisdiction, which we haven't done. One or two of them also offered highly leveraged options-type product. What this does is it circumvents what the regulator is trying to achieve. We're not party to any of that, but until the regulator really clamps down in -- on bad behavior, and they've started that processes, this is not a criticism of the regulator because what they've done is the right thing. They need to make sure -- then the -- it's not aggressive, overseas onboarding into jurisdictions that don't have financial compensation schemes. When that come through, and it will come through, then you'll see the industry squeezed even more and more. So I think they will be consolidated. Are we interested? Yes. Are we interested in buying a churn and burn outfit? Definitely not. We've had those opportunities. We're not interested. Strategic opportunities that could help us expand our partners' business, technology business, stockbroking business. We like nonleveraged products quite a lot. When we look at the opportunities of buying companies, what do we get? We get a client base, and we get technology, but we've got our own technology. It's easier for us to build stuff. But we do think there will be consolidation in the sector. But it might take a little bit longer.

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Marco Di Matteo, Goldman Sachs Group Inc., Research Division - Associate [26]

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It's Marco Di Matteo from Goldman Sachs. I just wanted to ask about the DTAs. So could you quantify how much of balance sheet are recognized DTAs you still have? And would you expect further write-backs if the profitability in Australia improves further?

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [27]

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Yes. So on our balance sheet, we've got about GBP 6.7 million of deferred tax asset that we currently recognize, and we've got about another GBP 11 million in our balance sheet. So we still have a sizeable chunk that we can start to recognize over the coming years. Ade, did you have a question?

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Adedapo Olusola Oguntade, Morgan Stanley, Research Division - Research Analyst [28]

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Ade Oguntade from Morgan Stanley. Just a few questions for me. One, in terms of cost, you mentioned that you do have, like, a high fixed cost base. But I was just wondering, given what we've seen this quarter and the possibility of a weak market environment going forward, if you could just comment on any levers you have in terms of cost, flexibility to reduce cost. Also, maybe if you could also comment on -- maybe a more specific comment on your institutional business, what you're seeing in terms of trends in the first half in that segment, maybe year-on-year, and then, what you're also seeing going forward. Thirdly, I think, in the press, there were some reports on maybe issues with respect to the overall total retail platform, on the...

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [29]

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With our platform?

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Adedapo Olusola Oguntade, Morgan Stanley, Research Division - Research Analyst [30]

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No. In -- with the ANZ partnership.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [31]

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Because they haven't got one. It's ours now. They were just log-on issues. I think our platform has always worked perfectly well. I don't like to say too much against one of our partners, but clearly some of the clients that came across lost some of their data. I mean, personal data, like log-on details, and they had to rely on ANZ Bank to give them that data.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [32]

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It was a password reset.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [33]

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It was a password reset. So I mean you can imagine, 0.5 million clients over one weekend migrating. There were a lot of phone calls, and a lot -- it wasn't our platform issue. That, as far as I know, when I was down there, had been resolved. Clients, we were trading on the first day on the platform. It was really a related issue with ANZ, nothing to do with us. But they've resolved it, and they put lots of resource in it at the time.

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Adedapo Olusola Oguntade, Morgan Stanley, Research Division - Research Analyst [34]

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Yes. And just one last question, with respect to -- in your APAC and Canada business, you can see weakness there as well. Maybe you have more specific comments in terms of what you are seeing there.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [35]

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Sure. So I'll take one on the cost, and around the flexibility. Yes. Obviously, with the weaker first half, we've been very focused on cost control, as we always are, but we remain confident about the future of the business. So within our cost base, of course, there's discretion around marketing spend or discretionary bonus season. We've pulled back on that, as I said earlier. But marketing is an investment for the future. We continue to invest in the future growth of the business and we feel confident about the future growth of the business. So we're just -- we're in the pace of sensible cost control at the moment, bearing in mind the first half, but we're not considering anything more than that. Do you want to talk about the institutional?

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David Fineberg, CMC Markets Plc - Group Commercial Director & Executive Director [36]

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Yes. In terms of the institutional, so we have seen a good growth year-on-year, a healthy pipeline of business, but it's important to understand that within institutional, there are many different channels. So in one aspect, we are a liquidity provider to some, so we win business based on price. Others, we were a hedging counterparty to them. So they will hedge their flow with us. Others, we are white label. So we provide the technology to them. So there's many different streams, and so we're seeing good growth across them. And also, within that, well we've got one that's been with us for 5 years. Originally, started using us for hedging, now taking the FX Prime service, and they're also looking to access DMA. So you can cross-sell within those channels anyway. But in terms of going forward, I'll probably see white label as a good area of growth for that, given not a lot of funds now are actually invested in technology. They're obviously reassessing their costs. So if they were to compete in the technology front, they'll essentially come to us for that.

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Grant Jeffrey Foley, CMC Markets Plc - Chief Operating & Financial Officer and Executive Director [37]

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Yes. And coming back to the Asia Pacific and Canada performance, that is a region, as I said earlier, that as an asset class, trades more FX than other areas in the group. And so with the weaker performance in FX, in particular, in Q2, you've really seen that come through in the revenue per client, and they did have a small increase in active clients as well, so there's been that dilute-ary effect because the active clients come onto more in the late part of the second half.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [38]

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Just a quiet quarter, summer, World Cup. Regulators -- as I said, 30-odd-years I've been running this company, I've seen it all before. I'm still -- I can -- my lock-in on my shares is nearly over, I am not selling. And you can put that down in writing.