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Edited Transcript of CPU.AX earnings conference call or presentation 14-Aug-19 12:00am GMT

Full Year 2019 Computershare Ltd Earnings Presentation

Victoria Sep 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Computershare Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Stuart Irving

Computershare Limited - President and CEO

* Mark Davis

Computershare Limited - CFO

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Conference Call Participants

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* Simon Fitzgerald

Evans And Partners Pty Ltd - Analyst

* Matthew Dunger

BofA Merrill Lynch - Analyst

* Brendan Carrig

Macquarie Research - Analyst

* Gareth James

Morningstar - Analyst

* Ed Pham

Morgan Stanley - Analyst

* Kieren Chidgey

UBS - Analyst

* Siddharth Parameswaran

JPMorgan - Analyst

* Nigel Pittaway

Citigroup - Analyst

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Presentation

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Operator [1]

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Welcome, everybody, to the Computershare 2019 full-year results presentation. I will now hand over to our first speaker, CEO and President, Mr. Stuart Irving.

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Stuart Irving, Computershare Limited - President and CEO [2]

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Good morning, everyone, and welcome to Computershare's 2019 full-year results conference call. Mark Davis, our current Chief Financial Officer, is with me; along with Michael Brown from our investor relations team. On this call, I will take you through the key aspects of our results and provide you with an update on how we are executing on our strategies. It's been a busy and productive year, as you'll see.

As usual, there was a new presentation pack released to the ASX. This deck includes both updated material and new information. We are happy to increase our disclosure to help you better understand Computershare and our outlook. We've also added this presentation to the investor relations section of our website, computershare.com.

And we are not going to bother you with a page turn. I will focus my remarks on pages 2, 3, and 5 of the presentation. Mark will then take you through the slides on our financial results. Then, after some concluding remarks, we will open up the call for your questions. Also, as a reminder, we will be talking throughout in US dollars and in constant currency terms unless we state otherwise.

Okay, so let's start. There's really three points I want to emphasize today. One: we are very pleased to deliver strong results for the year, slightly ahead of guidance. As you will see on slide 2, management EPS increased by 12.8%, EBITDA increased by 10.2%, and return on equity once again exceeded 26%.

All our major businesses lines delivered improved performance. There's operating leverage and further margin expansion in the business. That's the quality industrial Computershare that I talked about at Investor Day.

The second point: this was a year when the optionality inherent in Computershare converted into profitability, enhancing our results. In the first half of FY18, we benefited from three large events which added over $60 million of one-off event-based revenues. They created a high hurdle for this year's comps.

This year, two other parts of our optionality fired: balances from corporate actions in the first half and a rising US rate environment. And this helped us beat our initial guidance.

Margin income increased by 40% to over $250 million. While our operating performance was solid, this significantly enhanced our results and goes towards funding high returns for shareholders. In fact, today, we announced a new AUD200 million on-market share buyback plus a 10% increase in the final dividend.

And the final point: execution. In plain language, we all know exactly what we need to do at Computershare. Our priorities are very clear. And it's encouraging to see that when we lay out long-term growth plans and we execute well, we can deliver good earnings growth and consistently high returns.

In the deck, you'll see two new slides: an execution scorecard for FY19 and also our key Group priorities for FY20. I will let you read them in your own time, but these are what we will all be focusing on to drive sustained growth.

And I share these priorities regularly with all my colleagues across our global organization. Everyone here knows them and it's that shared alignment that underpins our execution strengthen and drives our results.

Moving to page 3, let's talk about what we did this year, starting with share plans. Equatex was the second-largest acquisition in Computershare's history. I'm pleased to say it has outperformed our initial expectations and has already made a decent contribution to these results with stronger-than-expected transactional revenues.

Equatex increases our scale, upgrades our technology and capabilities, balances our industry exposure, and improves our earnings. It also enables us to continue to upgrade the customer experience and to provide data insights to help our client companies attract, retain, and reward their key employees. Integration is on track. We have commenced moving clients to the EquatePlus platform, and we reaffirm the $30 million of synergy cost benefits across the combined business that we detailed last May.

US mortgage services is tracking to plan, too. Now, I will remind you, we do not originate loans; we are just a servicer and we do not take credit risk. Pleasingly, the business had a strong second-half performance as US market conditions improved.

By the end of the financial year, UPB had surpassed the $100 billion placeholder that we laid out in our initial plan. It was good to see PBT margins track higher through the half, and indeed closing at 20%. That's an achievement we are all quietly proud of. Now there is scope to carry on and continue to carefully grow this business for years to come. And finally, we have moved issuer services to the growth column of this page, where previously it was in the profitability column.

Our initial strategy was to drive efficiencies and margin improvement while we developed new initiatives and products for the future. Now we are bringing these new services to market and our largest business is experiencing real growth.

We have a new global management structure focused on continuously driving new product development and improved customer satisfaction. Our net promoter scores in this business are between 50 to 70 across all our regions. We view these as a a lead indicator of future performance. It's the first time we have disclosed these scores and they really are fantastic numbers.

Our largest business within issuer services, US register maintenance, delivered an excellent result. Revenues grew by 5.3%. And notwithstanding the weaker corporate actions market as we anticipated, margins for the combined segment overall continued to climb to 35.8%.

We increased the number of shareholders we serve with some high-profile new client wins such as Microsoft and Amcor. I think these wins recognize our technical expertise and capability in complex global transactions. And we are trusted to do the tough jobs well.

We are now leveraging these core capabilities and customer relationships with company secretaries into new complementary revenue pools. We talked about this in detail at Investor Day and we are making good progress. We are well placed to grow in these large markets, including entity management, registered agent, and private markets.

And there are positive structural growth trends here, such as rising compliance and regulatory reporting requirements. And the number of subsidiaries owned by large companies is growing, too. We see the opportunity to provide a differentiated and superior service to customers and the scope to deliver sustained growth.

Moving now to profitability, these are the strategies that are driving growth in the Group margins. The EBITDA margin for the year increased by 130 basis points to 28.3%. Over the last 10 years, Computershare's EBITDA margin has been in a consistent range of between 24.1% and 29.4%. It has been below 26% in only two of these half-year periods. Again, that's the quality industrial I talk about.

Our cost-out programs are clearly part of this performance. These programs delivered over $30 million of gross savings this year. We are around $5 million ahead of plan versus initial FY19 expectations, so good progress is being made.

Over the last three years, we have now realized over $80 million of gross savings with another $60 million to come out over the next four years. The savings help us manage our costs. As you'll see later in the deck, total operating costs increased by 2.7% compared to revenue growth of 4.8%. Excluding acquisitions and disposals, total operating costs decreased 0.2%.

I will turn now to the disappointing and costly issue of the delay in the final migration of third-party loans onto our UK mortgage services platform. We went through this in detail in April; nothing has changed since then. But our engagement with these clients continues to be positive as we jointly progress through to the new agreed migration dates.

We absolutely expect to onboard these loans by May 2020, albeit a year later than planned. However, I do want to say again how disappointing this isolated one-off issue is for us. And I'm sure for you, too. On behalf of Computershare, I apologize to all of our shareholders.

Finally, on this page, I will call out our strong balance sheet. Having funded the Equatex and LenderLive acquisitions, invested over $100 million in MSRs, and spent $18 million on a fit-out of a new data center in the US, our net debt EBITDA leverage ratio remains conservative, at 1.84 times. This is below the midpoint of the target range, providing headroom for growth.

I am now going to move forward to page 5 for our FY20 outlook. I'd like to be very clear in explaining this outlook. In constant currency, for FY20, we expect management EPS to be down by around 5%.

To provide some context, if we exclude the one-off impact of the delayed migration of UK loans to CPU's platform and the adoption of IFRS 16 accounting for leases this year, management EPS would have increased by around 5%. The IFRS 16 non-cash accounting change issue, which is affective from July 1, is around a couple of percent impact.

We also expect margin income revenue this year to be similar to FY19 levels. Now, that's based on our views as we see the world today on interest rates, cash balances, and the benefits of our recent hedging initiatives that Mark will talk more about later.

We are assuming balances will stay around second-half levels or slightly higher. Our view on rates are guided by the futures curves you see, and our numbers factor in rate cuts. The difference in what you may have been thinking on margin and our guidance is these treasury initiatives and they enhance our yield. Now, I know this all sounds complicated, but I am simply trying to demonstrate that the rest of the business continues to perform well and should deliver ongoing profitable growth this year.

I will finish my comments by putting this outlook into the context of what we are planning and building here. We continue to lay the foundations for growth with sound execution, disciplined investments in our growth engines, tight cost controls, and selective complementary acquisitions.

And I'm now going to hand over to Mark to go through the financials in more detail.

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Mark Davis, Computershare Limited - CFO [3]

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Thank you, Stuart, and good morning, everybody. As usual, I will commence with a summary of our management results on slide 11. And let me begin by reminding you that last year's numbers benefited from over $60 million of event-based revenues that came from three large jobs. They somewhat mask the strength of the FY19 results.

Notwithstanding this high base, revenue increased by 4.8% to $2.4 billion. Management EBITDA increased to $686 million, a rise of 10.2%, aided by the improved revenue mix coming from margin income in particular, as you can see on the slide. Depreciation and amortization rose $5.5 million and $12.12 million, respectively, reflecting the increased CapEx and investments in MSRs that we amortized over the P&L. Pleasingly, for the first time, we have reported over $600 million of EBIT.

Interest expense rose due to the combination of higher debt on the back of the Equatex acquisition as well as higher interest rates during the period compared to last year. Our effective tax rate for the year was 26.5%. This was a little lower than expected in our original guidance assumptions. As we noted at the half, there was a favorable settlement of a legacy tax matter, around $3 million, which was a part of the benefit that we see here. Management EPS was up 12.8%, and stat EPS was higher again at $0.7657, up almost 40% on last year. This number included the gain on sale from the disposal of Karvy.

Turning now to slide 12, where we discussed the management revenue bridge. First of all, we highlight in the text box the $65.9 million of large one-off event revenues in the PCP. As you can see on this slide, the revenue decline in corporate actions and stakeholder relationship management in particular was against these higher benchmarks. We saw growth contributions in particular from US mortgage services, employee share plans with the acquisition of Equatex, and of course margin income.

Revenues for the year were a little over $2.4 billion. The negative FX impact was a result of the USD strengthening against all operating currencies, as you can see in the appendices at the end of the deck.

I'll now turn to slide 13, where we break revenue down by business stream. All major business streams performed well in FY19. A few points to call out on this slide. In business services, overall growth of 5.7% includes mortgage services growth of 11.5% and another strong performance in corporate trust. We have started to expand this strong business into new markets.

We also completed the sale of the Karvy business in India in 1H, meaning that we only recognize less than six months' contribution compared to the full contribution in the prior period.

We had another pleasing performance with ongoing revenue growth in register maintenance. Corporate actions revenues were $6.9 million higher, although were down excluding margin income as we had foreshadowed.

On slide 14, I'll now unpack margin income, given its significance. This slide as always has been presented using actual FX rates. And we were pleased to deliver $121.2 million of margin income in the second half, which was broadly similar to the first half and a little better than what we had anticipated in February.

While 2H balances were lower at $16.1 billion, impacted by weaker corporate actions activity, the achieved yield was stronger. In FY20, we expect balances to be broadly similar.

Slide 15 has usually appeared in our appendices. But given our guidance assumption that we expect margin income revenue to be similar in FY20 to last year's levels, I'd like to highlight our recent treasury initiatives which assist to enhance our yield.

This page shows the change in the fixed rate for deposits and swaps in the second half of the year. Firstly, you will see that we have meaningfully increased the amount of our longer-term fixed-rate positions to enhance our protection compared to the position as at December 31 when you last saw this chart.

We have done this by a combination of measures, including reinvesting both fixed and floating deposits that matured into new fixed-rate positions, renegotiating some existing floating rate deposits into fixed rate, and replacing some of our maturing swaps.

We highlight EBITDA and margins across our business on slide 16. Group margins expanded to 28.4%, up 130 basis points. Revenue growth and the benefits of structural cost-out programs helped add $63.3 million of EBITDA to the total.

We recorded solid increases in business services EBITDA, up 6.2%; register maintenance and corporate actions, up 10.2%; and employee share plans, up 31.6%, where Equatex contributed $17.2 million of EBITDA for the eight months of ownership. Karvy contributed $9.3 million of EBITDA prior to its disposal, which was of course down on the prior period, where we owned it for the full 12 months.

Turning to slide 17, where we break down the detail of margin income by business stream. This slide also shows EBITDA ex-margin income. Margin income is of course an inherent part of our business model. And by way of reminder, it is the entire revenue model in some of our businesses.

The margin income contributions were most significant in business services at just shy of $117 million. And register maintenance and corporate actions, also at $117 million. Margin income in the employee share plans was slightly lower, given the exposure to UK rates. And there was no margin income in Equatex. During the period, we also revised our treasury policy framework for managing margin income balances, with minimum hedging levels now extended to four years.

Turning to slide 18, this is a pleasing slide and shows our disciplined cost controls. Total operating costs increased by 2.7% with our cost to income ratio falling by 150 basis points to 71.5%. The most pleasing number on this page is the 0.2% decrease in total operating costs, excluding acquisitions and disposals. Equatex contributed $51.7 million of operating costs and Karvy's costs were naturally not included since the disposal.

We have seen some wage inflation, particularly in the US. And we continue to work on our site rationalization and delivered over $10 million of savings in the year versus the prior period.

Turning to our cash flow on slide 19, there are a few points to highlight. Firstly, we again generated strong cash flows with $585.2 million in net operating receipts and payments. While FX had some impact on the year, the bigger factor was the growth in our receivables. We were also impacted by the timing of payables.

Net interest and dividends increased by $12.4 million due to the higher interest costs on the back of rate rises and increased debt amounts to fund Equatex. The higher cash taxes paid was driven largely by the US, where we have now utilized historical tax losses.

We spent $55.6 million on CapEx for the year, which is a higher-than-normal CapEx run rate, driven largely by the costs associated with the buildout of a new US data center and a technology hub in the UK.

We split out the CapEx for MSRs between maintenance and growth investments. We spent $43.1 million on maintenance to offset amortization. And as you can see towards the bottom of the slide, we spent an additional $57.3 million to grow the book.

We invested a further $27.6 million to fund additional advances, with the balance of the increases in advances funded via our non-recourse debt facility. The last comment on this slide is that investing cash flows include the acquisitions, net of cash, acquired; and the Karvy disposal proceeds.

Finally for me on slide 20. The balance sheet remains in good shape and well placed to fund our growth strategies and increase shareholder distributions. The leverage continues to be below the mid-point of our target range.

This is in the context where, during the period, we funded both the Equatex and smaller LenderLive acquisitions, prior-period acquisition earnout payments, growth investments, higher CapEx. And we have increased both the FY18 final dividend and FY19 interim dividend. Total dividends distributed during the period were up over AUD21 million on the prior year. As we noted at the half, we also extended the duration of our debt with the refinancing of our US private placement. The duration is now four years.

And finally on our return ratios: both ROE and ROIC have been impacted by the higher equity, driven substantially from the gain on sale of Karvy and the higher invested capital following the debt funding of Equatex. We note that adjusting for profit on sale from the Karvy disposal, ROE would have been 28.4%. And both these numbers continue to be at very healthy levels.

Before I wrap up, I would like to add my special thanks to all of our staff throughout the globe, many who are listening in, for their excellent work and efforts in helping the Group deliver these strong results.

I'll now hand back to Stuart for our closing remarks.

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Stuart Irving, Computershare Limited - President and CEO [4]

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Thank you, Mark. Let's finish on slide 22 of the deck. As I said at the start, though I'm pleased Computershare delivered another year of solid results in FY19, delivering on our commitments and doing what we said we would do are important to us.

The highlight for me was that improved performance from all our major business lines. The growth comes from laying down long-term plans, carefully investing capital, managing costs, building our moats, developing new products, raising customer satisfaction levels, leveraging our competitive strengths into new complementary revenue pools, and increasing our optionality. That's how we deliver profitable growth with high returns.

Margin income clearly made a large contribution and our cost-out programs and a reduced tax rate helped as well. The optionality converted into profitability in FY19. Our execution scorecard has positives and also a negative. We are honest and transparent about that.

Equatex is outperforming and upgrades our share plans business. US mortgage services achieved its target margins at the end of the year and has lots of scope for continued growth. It's good news story. Issuer services, our largest business, is re-energized. We have much larger revenue opportunities to build into now. But successfully completing the migration of the UK loans onto our platform remains critical.

Computershare's balance sheet remains strong and we're well placed to fund organic and inorganic growth investments as well as a new share buyback program and increased dividend we announced today.

Now I would also like to end by saying a few thank yous. We appreciate all the interest, feedback, and support that our shareholders give us. Thank you. And we look forward to seeing many of you on the road over the next few days. And finally, thank you to all our staff around the world, whose hard work and dedication to delivering great outcomes to our clients is at the core of these results.

Now onto questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Simon Fitzgerald, Evans & Partners.

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Simon Fitzgerald, Evans And Partners Pty Ltd - Analyst [2]

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Good morning. My first question relates to margin income, which I'd like to unpack a little bit more, but particularly as it relates to bank deposits in the US and CD rates, particularly in that jurisdiction.

When we look at the rights that are achieved on CD rates in bank deposits, particularly in those maturities at 12 and 24 months, they are still higher than what the rates that you would have achieved I think in, say, 2018 and certainly 2017. So that would certainly suggest that your reinvestment rates would be accretive, or at least those recent ones.

Can you just talk a little bit more about the mechanics in terms of your investment buckets versus what's happening at the effective Fed's fund rate level, but specifically with the US? And maybe you can talk to a few more of those drivers for the FY20 margin income versus FY19, whether it's mainly average rate related versus balances?

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Mark Davis, Computershare Limited - CFO [3]

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Sure, it's Mark. I'll take that question. There are a range of assumptions that go into this, and rather than give you a whole myriad of assumptions we've given you, the number which is the outcome of the bottoms-up analysis. But let me just give you some of the key factors that are impacting on what we see at the moment.

As you correctly pointed out, we have had some deposits that were taken out two, three, four years ago that have matured in FY19. And they have been able to be reinvested at higher rates than what we had previously, so that obviously helps. There is more duration in the book, and as we put some tenor into the book, it has the impact of enhancing the margin or the spreads that gets applied to the deposit.

There is assumptions relating to average nonexposed balances versus exposed balances. We are anticipating that the percentage of exposed will actually be a bit higher in fiscal 2020, and they attract better yields than the nonexposed balances.

We have some regions like Canada, where the rates at the moment are higher than where we started the year and so we have that benefit. And so it's the sum total of all of the assumptions that we work through in our analysis that has us see the world at the moment where we anticipate the numbers on margin income that were pulled out.

And as we progress through the year and things become clearer, we'll keep you informed. But as Stuart did mention that our assumptions do factor in rate cuts as part of the analysis. We have not taken a contrarian view to what the curves are suggesting.

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Simon Fitzgerald, Evans And Partners Pty Ltd - Analyst [4]

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Okay, that's very helpful. Second question, just on the mortgage servicing business, particularly in the US. We have started to see an increase in those index of refinancings. And I know that those don't always end up as -- in approvals, but can you just talk about what you are seeing in terms of refinancing? And how your recapture rates, whether they've improved on last year, et cetera.

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Stuart Irving, Computershare Limited - President and CEO [5]

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Yes, there's no doubt about it, in recent months, refi levels have increased. At the same time, the volume that we're carving up through CMC and into that business has also increased as a result. I mean, obviously, the thing that we track is on the -- from an MSR refi perspective.

So we have seen an increase, there's no doubt about it. But then there's been an overall market increase in terms of origination and elsewhere, which is, from a business perspective, pretty much offsetting at the moment, but we're keeping an eye on it. The market is fairly robust at the moment, Simon, over there. This is in general the mortgage market.

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Simon Fitzgerald, Evans And Partners Pty Ltd - Analyst [6]

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Good. And then final question is just on the cost to income ratio market. As you mentioned, 71.6%. I'd point out that in 2010 and 2011, the business actually did a cost to income ratio of 68% to 70%. And just wondering if that's a level you think that more medium term you could target?

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Mark Davis, Computershare Limited - CFO [7]

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Look, there's -- yes, it's an outcome, naturally, rather than a target or a range, and it depends on a variety of factors. Like we have some aspects of our business where naturally we're seeing some margins should improve that will help these numbers. As the synergies from the Equatex acquisition roll through, that will assist us; as we continue to progress on our cost-out initiatives, that will assist us.

There has also been, as we've been talking about, some OpEx investments, not just in wage inflation, but also investments in supporting our new management structure where we're running the business across global business lines. I think that will reduce over time, but there has been some investment in getting there, which we'll see for a little while. But what I would say is there are a range of initiatives that are going to continue to support this number and potentially it strengthening.

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Simon Fitzgerald, Evans And Partners Pty Ltd - Analyst [8]

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Okay. Thank you for taking my questions.

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Operator [9]

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Matthew Dunger, Bank of America Merrill Lynch.

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Matthew Dunger, BofA Merrill Lynch - Analyst [10]

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Just wondering if we could look at US mortgage servicing a little bit further. Should we expect the second-half margin trends to continue, and what's driving the improvement in margins?

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Stuart Irving, Computershare Limited - President and CEO [11]

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Yes, so -- if you'll remember at the -- when we delivered the first-half results, there was a number of challenges as far as timing of onboarding of some loans in the first half and we carried some extra costs. So what we saw at the second half was improvement.

And it's really coming from two areas. We have been able to take out a range of costs, and then also we are seeing a more robust mortgage market. If we go back to last year, there was a number of quick rate rises in the US, which stalled the market.

So as we've taken out these costs and as the mortgage origination market for our performing loans basis continues, we also had strong growth in the capital-light servicing market. We were actually able to achieve -- we saw our PBT margins improve over the -- in the second half. And as we have targeted into May and June, we had that exit rate, which was sort of 20% PBT.

And we also saw some pretty good -- just on servicing margin -- on the margins on the servicing business was pretty good as well. Our challenge is obviously to maintain that. The mortgage market is not consistent; every single month, there's ups and downs, as you would expect in all markets. But I think it's a good indicator in that business in terms of it can be achieved. And we'll continue to work that and sustain it as much as we can throughout the full year.

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Matthew Dunger, BofA Merrill Lynch - Analyst [12]

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Great, thank you. And on the return on invested capital for that business, that seems to be below the Group's return on invested capital. Can it improve to -- in line with the Group level, given these increase in less capital-intensive businesses?

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Mark Davis, Computershare Limited - CFO [13]

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Yes. Look, we called out target returns, which we're still building towards. And that will take the next 12 or so months, and we'll continue to make progress on that during FY20. The free cash flow returns post-tax that we're aspiring to achieve here at 12% to 40%, and that's modestly below the historical -- our return on invested capital that we achieve for the Group.

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Matthew Dunger, BofA Merrill Lynch - Analyst [14]

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Great. Thank you very much.

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Operator [15]

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Brendan Carrig, Macquarie.

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Brendan Carrig, Macquarie Research - Analyst [16]

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Just a quick follow-up, just on the timing of the hedging. Mark, you mentioned that you meaningfully increased yield from the longer duration hedging or extending the duration helped out in the yield. But given the shape of the curve, I thought that that might have been a bit more difficult to do during this period. So can you provide any more color just around the timing of when you extended that hedging during the period?

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Mark Davis, Computershare Limited - CFO [17]

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Well, it's been I think [depressive] since the start of the year.

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Brendan Carrig, Macquarie Research - Analyst [18]

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Okay. And then just on the US mortgage servicing, just following up on Simon's question. UPBs at the Investor Day were just under $102 billion, and that's basically flat over the subsequent two months. Would you suggest that that's the refi issue coming through and offsetting the growth -- or at least the amortization is offsetting the growth in new UPBs over that two-month period?

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Mark Davis, Computershare Limited - CFO [19]

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So our Investor Day was towards the end of May this year, so we're only really talking about not much of a time period that happened between the end of the year and when we reported the results.

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Brendan Carrig, Macquarie Research - Analyst [20]

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Well, the slide in the Investor Day was as of April 30, and today we have reported as of June 30. So it was two months in terms of the data that we were provided on those two slide decks [that's on the page].

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Mark Davis, Computershare Limited - CFO [21]

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Look, some of it will have to do with market conditions. Some of it will have to do with when we deployed capital and bought MSRs, et cetera. As Stuart said, there has been some increase in refi naturally with the movement in rates that we're seeing.

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Brendan Carrig, Macquarie Research - Analyst [22]

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Sure. And then just on CapEx, I think you did touch on it, but is it fair to assume that, excluding MSR, but just on the CapEx, given the one-off initiatives this year, would revert to more normal levels next year?

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Mark Davis, Computershare Limited - CFO [23]

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Yes, that's pretty likely. We won't see the same sort of high-level one-off investments that we had in things like the data center and the buildout of some of our new offices in FY20.

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Brendan Carrig, Macquarie Research - Analyst [24]

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Okay. And then just the last one, just on the ROIC at the Group level. I think you mentioned that the ROE was impacted from the Karvy sale, but just on the ROIC piece, it's down 340 basis points. Is that partly mix with US mortgage service?

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Mark Davis, Computershare Limited - CFO [25]

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Yes, that's the combination of the higher equity that we've got that we reported at the end of the period as well as the higher debt on the back of Equatex, where we haven't had the full earnings benefit from that acquisition. But we'll see in coming years that it is impacting that calculation.

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Brendan Carrig, Macquarie Research - Analyst [26]

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Okay, sure. Thanks very much.

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Operator [27]

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Gareth James, Morningstar.

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Gareth James, Morningstar - Analyst [28]

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Yes, I just wanted to clarify something on page 16 of the preliminary final report. It's just the $9 million or so in the corporate losses. Could you clarify what that is, please? What was the driver of that?

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Mark Davis, Computershare Limited - CFO [29]

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Page 16 did you say, Gareth?

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Gareth James, Morningstar - Analyst [30]

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Yes, that's right. Yes. So you've got the line there, management adjusted EBITDA - corporates. And it's $9.2 million, I think, up from about $680,000 the previous year.

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Mark Davis, Computershare Limited - CFO [31]

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Yes. That will be a range of things that are in that number in the corporate. I think most of that would have been there at the half year, and so it's the roll-through. And it's also where we take the -- it's where we run through some of the provisions that aren't allocated to businesses. And so we take through some of the variable compensation at a Group level that are not allocated to businesses, like our LTIs and our corporate bonus pool come through that number.

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Gareth James, Morningstar - Analyst [32]

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Yes. So is that likely to continue next year at a similar level?

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Mark Davis, Computershare Limited - CFO [33]

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We don't forecast each individual line item in terms of breakdown. But I don't think there was anything particularly unusual about that number that we saw this year compared to prior periods.

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Gareth James, Morningstar - Analyst [34]

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Okay. And the other thing I was just curious about was the progress in the UK with growing the UPB from the challenger banks. Is there any update on that?

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Stuart Irving, Computershare Limited - President and CEO [35]

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Look, it's a little bit of a mixed bag. You have some of the challenger banks that are -- despite the Brexit mood over in the UK, are meeting their target and doing reasonably well. Then there's another part -- another one of the challenger bank that seems to be not at target.

So it's a little bit of a mixed bag there. But we have got some of them that are seeing strong and continued growth. And that projection over the next couple of years still stays strong because they've been able to have a pretty good track record over the last 12 to 15 months. But then we also have one of the other ones who's a little bit behind, so it's a bit of a mixed bag.

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Gareth James, Morningstar - Analyst [36]

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Okay. But it sounds as though it's broadly in line with the rough guidance that you've given previously on the UPB outlook there?

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Stuart Irving, Computershare Limited - President and CEO [37]

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Yes, yes. In terms of the crossover and the runoff, the UKAR book, et cetera, et cetera, yes, that's correct.

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Gareth James, Morningstar - Analyst [38]

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Yes, okay. Thanks, guys.

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Operator [39]

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Ed Pham, Morgan Stanley.

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Ed Pham, Morgan Stanley - Analyst [40]

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Thanks for taking my question. I've got two. Firstly on UKAR, you've given a bit of data over the years: seven-year contracts, $600 million of revenues, $100 million of pre-tax earnings over seven years. But can you just give an idea of how much did it make this year and how much will it make next year? And what's the year-on-year delta in the earnings contribution from UKAR?

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Mark Davis, Computershare Limited - CFO [41]

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No, we don't disclose profitability of individual contracts on a year-by-year basis. But when you look at the big factor impacting FY20 to FY19, it's consistent with what we discussed at Investor Day, where you do see the step-down in the fixed fee in the order of $40 million.

And as we'd talked about previously, we had anticipated that we would have meaningful offsets in terms of the benefits from the integration program, which as we have called out have been delayed. And so the biggest year-on-year change is the $40 million of fixed fee revenue that we won't see next year that we did see this year.

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Ed Pham, Morgan Stanley - Analyst [42]

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Is that a broad proxy for the year-on-year delta, that $40 million? Just from an EBIT contribution?

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Mark Davis, Computershare Limited - CFO [43]

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I guess there are some other factors in the business. For instance, as you'll recall, the UK -- the UKAR book was a closed mortgage book, and so it naturally has run off. And so that will be a negative as well. And to some extent, that will be offset by volumes coming through from the new originations. The $40 million is the major year-on-year change.

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Ed Pham, Morgan Stanley - Analyst [44]

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Okay. And then second question on the --

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Stuart Irving, Computershare Limited - President and CEO [45]

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And in terms of the [BT] of that contract, I think we're north of 80% of what we said at the beginning of what we'd actually achieve. So it's not all a bit of a horror story, and it's really just about the delay on the benefits of these costs.

And as we brought the two businesses together and also the runoff of that book, there was an anticipated restructure of that business. And that restructure is continuing and the business will return to profitability in FY21.

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Ed Pham, Morgan Stanley - Analyst [46]

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Yes. I guess, yes, we're just trying to bridge 2019 to 2020 and obviously UKAR is a big factor. So I was trying to get something on that.

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Stuart Irving, Computershare Limited - President and CEO [47]

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It is. There's a fair few moving parts in there. There's the 35 that we called out in -- which is just the platform sort of delayed synergies, so to speak. There's also the step-down in the fixed fee revenues, which, again, we called out in our Investor Day and gave you the amount and what you have on there.

And then there's a few other moving parts in that business. Like one of the things that we had was we did a bunch of work for UKAR on the TPP claims over some of these mortgages, and that time for that drops out this financial year, and a few other bits and pieces. So yes, there's a few moving parts in there.

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Ed Pham, Morgan Stanley - Analyst [48]

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Second question is on the guidance and the margin income. Can you just confirm you are actually embedding the futures curve for the Fed funds into that guidance? Because there's quite a severe curve.

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Stuart Irving, Computershare Limited - President and CEO [49]

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I know that we had a few questions on that and I thought I had made it pretty clear that we were, and Mark backed that up. We are factoring in cuts into this guidance, but there's a number of reasons and assumptions where we believe that our margin income number in FY20 will be roughly the same as what we saw in FY19. And that's the first time we've ever guided that number because there's lots of moving parts and we're trying to help you guys out with your models, et cetera.

And why do we believe that? Well, on the plus side, we have deposits that were maturing in FY19 that we were able to reinvest at higher rates. As Mark said, we've been able to put some more duration into the book and that enhanced the margin or spread applied to these deposits. We think the deposits will be roughly maybe just a tad higher than what we saw in the second half of the year.

If you look at the back of the deck, the average of our nonexposed balances in FY19 and what we think we're going to do in 2020, that will come down a bit. Because they are lower yielding, and as a result of that, gets a little bit broad.

When you look at USD cash rates across 2019, what they averaged, and even though the July rate cut, it didn't pull that down by the full 25 basis points. And then you go to out of the US and you go to Canada, in FY19, probably about a third of the year, the CAD rate was at 1.5% and two-thirds at 1.75%. Now there's a potential this year for 1.75% for the whole year, so that provides a little bit of upside. Of course then we have that headwind of expected USD cuts and then also the AUD cut, although that's not as big of an impact for us.

So when we think about it from a Computershare perspective, there's lots and lots of moving parts in margin income and there's a bunch of assumptions. But let me make it very, very clear. Especially with regards to how we see the US, we have factored in rate cuts into the guidance.

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Ed Pham, Morgan Stanley - Analyst [50]

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Yes. Okay. And final question, just on the UK deposit protection service. I think it makes about $30 million a year. There was a new rule that caps the deposits in that business. Is that a -- does that impact your revenues and your earnings from that business?

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Stuart Irving, Computershare Limited - President and CEO [51]

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No, not hugely. We've been working with the British government on that. You're right, the new rules came in when they introduced competition into that marketplace. They've actually been relaxing that rule a little bit for us. And not just us, but generally for the marketplace.

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Ed Pham, Morgan Stanley - Analyst [52]

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Right. Just talking about the cap --

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Stuart Irving, Computershare Limited - President and CEO [53]

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Of course, interest rates in the UK are not helpful in that business, either.

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Ed Pham, Morgan Stanley - Analyst [54]

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Yes, okay. Thanks.

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Operator [55]

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Kieren Chidgey, UBS.

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Kieren Chidgey, UBS - Analyst [56]

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I've got a few questions. Maybe just starting on US mortgage services. You've hit that original hundred -- the [line[ UPB target obviously, but the capital that you've invested to get there is $500 million compared to the $400 million you'd guided a couple of years ago.

So just wondering, as we look forward, this journey up to maybe $150 billion over the next couple of years, whether or not you believe you can do that without having to increase that $500 million materially from here. And also in light of the fact you've had to go harder on the amount you've invested, whether or not the 12% to 14% ROIC number is still a valid target over the medium term?

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Mark Davis, Computershare Limited - CFO [57]

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Yes, so I think over the medium term we continue to think it is a valid target. The $500 million was also impacted by the timing of excess strict transactions that were undertaken or not undertaken, as the case may be. We would've -- we didn't quite do as much as what we had foreshadowed during the period, and some of that will fall into fiscal 2020, so that inflates the number a little bit.

We probably expect that amortization -- those investments in MSRs will run a bit higher than amortization again in fiscal 2020, but that would probably be the last year. And then from there onwards, it would match it, and so we're not expecting much growth in that capital employed beyond FY20.

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Kieren Chidgey, UBS - Analyst [58]

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Okay. It doesn't sound like the $500 million reduces materially from here. That's sort of the new best --

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Mark Davis, Computershare Limited - CFO [59]

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Not in the next 12 months, no.

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Kieren Chidgey, UBS - Analyst [60]

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Okay.

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Stuart Irving, Computershare Limited - President and CEO [61]

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We always thought it would be in the range of $400 million, $450 million or so. And the timing of an excess strip sale -- when you do these numbers, it's a point in time, what was on there at June 30. And we do have a pending excess strip sale that will take it down a bit.

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Kieren Chidgey, UBS - Analyst [62]

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Okay. To get the book up to $150 billion, does that $500 million have to go up to $600 million or --?

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Stuart Irving, Computershare Limited - President and CEO [63]

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No, we don't think so. You can see a lot of our growth this year was actually in the capital-light subservicing area, which is where we're not deploying that capital. And we continue to work these clients and add new clients into that space, which is important on the mix.

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Kieren Chidgey, UBS - Analyst [64]

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Okay. Second question. Given everyone else has asked a question on margin income, I thought I would as well. Just on the -- look, I'll try and make it a little bit different, but just on the -- your comment, Stuart, around some of the exposed -- the mix of balances being -- shifting more to exposed balances, which obviously give you a higher rate than the fixed into FY20. I was just keen on understanding the reasons behind that.

And also in second half, I noticed there was more of a skew towards US exposed balances, and so -- which obviously helps, given the higher yields there. So can you just talk about the composition of that book and the outlook as to why you see that mix changing into FY20 again?

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Mark Davis, Computershare Limited - CFO [65]

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Yes. Look, I think in -- if you look at the average of the mix in FY19, a lot of that came out of the first half, bumping corporate actions and the number that we produced in 1H, which had a substantial amount of nonexposed balances in it. And as we build up our bottoms-up analysis throughout the Group and what we're seeing amongst the Group this year, we're not expecting at this stage as much nonexposed as what we can see on the exposed side.

And so that mix does go to margin because we're doing a fair bit more margin, as you've seen historically, on the exposed versus the nonexposed book. So it's really just a function of mix and what we're seeing happen in the business and comparing that to the prior period.

There was a second part of your question, Kieren?

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Kieren Chidgey, UBS - Analyst [66]

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Well, it was just the -- I think that's broadly answered it. Just looking at the growth guidance for next year more broadly, if we put aside the UK and this IFRS 16 impact, you're saying it would have been around 5% growth. But I presume with a full year of Equatex coming in and your cost program incremental benefits flowing through, that would largely get you to 5%. So more broadly it seems to suggest that the rest of the business is pretty flat next year.

So just wondering -- you've called out Karvy as obviously a disposal, that that has an impact, but some of the other factors that are going against you next year. And in particular, whether or not that transactional activity in employed plans, it looks a bit elevated this period. I'm not sure how much of that you'd regard as sustainable through Equatex as opposed to one-off?

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Mark Davis, Computershare Limited - CFO [67]

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No, we think that's probably -- we think that's one of the factors. As we look at the ups and downs and as we built out these numbers, we're not expecting some of the transactional numbers in plans to be quite as strong in fiscal 2020 as what we saw in fiscal 2019.

Tax is also -- it looks to be a modest headwind going into fiscal 2020. There is obviously the delta on the UK mortgage services book, which we have discussed. It's not just the change in the fixed fee, but there's also runoff in that book that we have to contend with. And you talked about Karvy, so they are probably some of the bigger items that are worth calling out.

But we also are making some investments that are going into -- that are taken above the line in terms of -- that are included in the management earnings on the Equatex integration, which will be higher in fiscal 2020 than what they were in fiscal 2019 as we work our way through that program for a full 12-month period rather than an eight-month period.

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Kieren Chidgey, UBS - Analyst [68]

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All right, I'll leave it there. Thank you.

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Operator [69]

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Siddharth Parameswaran, JPMorgan.

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Siddharth Parameswaran, JPMorgan - Analyst [70]

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Just a couple questions, if I can. Firstly, just on the cost-out that you announced just on the UK mortgage servicing business, $50 million. Can you just confirm if that $50 million includes the platform migration savings as well?

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Mark Davis, Computershare Limited - CFO [71]

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No, no, it doesn't.

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Siddharth Parameswaran, JPMorgan - Analyst [72]

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It doesn't? Okay, okay, that's fine. And could you just give us some detail as to what -- where the $50 million will come from? I mean, you've given some guidance on timing. Maybe if you could just give us some detail as to what exactly this involves? Because it's quite a large number as a percentage of your cost base.

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Stuart Irving, Computershare Limited - President and CEO [73]

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Yes. Look, it's a range of elements throughout the Group. So I mentioned earlier on, we have about 300 or so staff working on PPI claims on behalf of UKAR. So these costs will come out in the deadline for these claims to actually come in.

And there's a range of efficiencies -- costs coming out on the technology, which is separate from the $35 million number. So the technology costs in the business is going to be coming down over the next couple of years. There's going to be operational efficiencies, the introduction of some of our shared service model, as well as further development of robotic process automation within that particular business. And a lot of the shared service headcounts, et cetera, will be coming down.

So out of all that number, we think that probably around about 90%-plus of that number will be delivered in the first 24 months. So it's a range of places. It's a plan that's been tested. And as per our other cost-out programs, we don't come to market until we have a strong level of confidence on achievement. So that's really the breakdown of the places within that $50 million.

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Siddharth Parameswaran, JPMorgan - Analyst [74]

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Okay, fair enough. Okay, second question, just on IFRS 16. So you did flag an impact in this -- sorry, in terms of FY20. On my calculation, I think it's around 3% or so. Is there an ongoing impact or does it unwind in the future? How should we think about what that means for outer years?

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Mark Davis, Computershare Limited - CFO [75]

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Look, it's hard to speculate on outer years because to some extent it will depend on the timing of new lease renewals and if there are major leases coming into the portfolio or dropping off. I certainly don't expect it to get -- to be a further challenge beyond fiscal 2019 based on the way we see things generally.

But this is a -- just to be very clear, this is a change in accounting standards. It has no impact on cash. And it's really the change that lessees are required to recognize a right-of-use asset and changing the way that you'll account for the associated lease liability. But it's nothing to do with cash.

And whilst there is a slight headwind compared to FY19 next year, we're not expecting it will be worse in future years. And if anything, there might be a modest unwind as it flows through.

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Siddharth Parameswaran, JPMorgan - Analyst [76]

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Okay, great. And just a final question, just want to clarify. If we are seeing a pickup in refis which might be affecting some of your MSR values, just to be clear, there is no normalization of that happening in terms of your management accounts? That will flow straight through? And I take it that that is included in your guidance?

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Mark Davis, Computershare Limited - CFO [77]

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Right, that's correct.

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Siddharth Parameswaran, JPMorgan - Analyst [78]

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Okay, great. Okay, thank you.

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Operator [79]

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(Operator Instructions) Nigel Pittaway, Citigroup.

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Nigel Pittaway, Citigroup - Analyst [80]

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Just wanted to return to the 20% PBT margin that you achieved in the fourth quarter in US mortgage servicing. What's interesting about that is it come when all the growth -- well, a good portion of the growth, the majority of the growth since December 31 in UPB -- has come in sort of performing subservicing.

Which if I go back to the charts you put in the 2017 Investor Day, it was very firmly in the bottom quartile of low margin, low capital intensity. So my question I guess is was there anything particular about the subservicing that you brought on this period that would have meant it's higher margin than average? Or have you in any way revisited how profitable performing subservicing is now and changed your opinion of that?

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Stuart Irving, Computershare Limited - President and CEO [81]

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I think one of the things that we did -- if you remember at the half, we talked about carrying a decent amount of cost in the business. So we've sort of -- in this half, we spent a lot of time removing cost out of that business and across a range of areas.

I mean, the mix is the mix, Nigel, as you say, and you're right that some of the nonperforming ones are lower margin; however, of higher volume. And we're getting more and more efficient in that business as we roll out new platforms and the [should'ves] and the technology.

So a lot of it was to do with fundamentally reducing the expenses in that business as well as increasing some of these pools of the capital-light subservicing, as well as quite a buoyant nonperforming -- just because of where the US mortgage market was. They're really the factors in it.

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Nigel Pittaway, Citigroup - Analyst [82]

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Okay. So given it's mostly cost-driven, what are the doubts about the sustainability of that margin moving forward? Where do they emanate from?

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Stuart Irving, Computershare Limited - President and CEO [83]

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Well, I think the challenge that you have is the volume of originations coming through CMC vary from month to month. So there will be certain months, like really post-Thanksgiving and up to Christmas tends to be a quieter period, that type of stuff. So it fluctuates throughout the year.

And the challenge that we have, which we are taking on head-on, is that how do we keep these margins despite these fluctuations and become even more efficient. So there's still a way to go in that business, but I think we set ourselves out these targets almost four years ago. And we've got the right mix and we'll get more efficient in that business. And it's good to actually see these margins -- the exit rate certainly at that 20% rate.

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Nigel Pittaway, Citigroup - Analyst [84]

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Okay. And then maybe just changing tack slightly. The revenue from bankruptcy seems to have doubled in the second half versus first half. So just wondering whether or not that's sort of one or two bulky transactions or whether that's a trend that you're starting to --?

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Mark Davis, Computershare Limited - CFO [85]

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Yes, no. It's a bit of a lumpy business, that one. And it was also coming off a relatively low base in terms of that corresponding period, so nothing that we'd call. It can bump around based on activity and win rate that we see in that business, and they had a better result in that area than what they've had previously.

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Nigel Pittaway, Citigroup - Analyst [86]

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Okay, great. Thank you.

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Operator [87]

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That concludes our Q&A session. I'll now hand back to Stuart Irving for any closing remarks.

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Stuart Irving, Computershare Limited - President and CEO [88]

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Thank you very much. Thanks very much for listening, everybody. I do understand that there may have been an issue with the slides being shown on screen, which I apologize. Hopefully everyone was able to follow along using the deck that we released earlier this morning.

And we'll see many of you on the road, and where we can talk about our major business lines in more details and our plans for next year. Thanks very much for joining. We very much appreciate it. Thank you.

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Operator [89]

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That concludes the Computershare 2019 full-year results presentation. Thank you once again for joining us today and for your interest in Computershare. You may all disconnect.