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Edited Transcript of EQN.L earnings conference call or presentation 2-Aug-19 8:15am GMT

Half Year 2019 Equiniti Group PLC Earnings Call

CRAWLEY Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Equiniti Group PLC earnings conference call or presentation Friday, August 2, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Guy Richard Wakeley

Equiniti Group plc - Group CEO & Director

* John R. Stier

Equiniti Group plc - CFO & Director

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Conference Call Participants

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* Christopher Bamberry

Peel Hunt LLP, Research Division - Analyst

* Paul Daniel Alexander Sullivan

Barclays Bank PLC, Research Division - Director & Analyst

* Rahim Nizar Karim

Liberum Capital Limited, Research Division - Research Analyst

* Robert John Plant

Panmure Gordon (UK) Limited, Research Division - Analyst

* Suhasini Varanasi

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [1]

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Ladies and gentlemen, a very good morning. It's quarter past 9, so let's make a start. Welcome to the Equiniti Group First Half 2019 Interim Results Presentation. My name is Guy Wakeley and I'm joined here by John Stier, Equiniti's Chief Financial Officer.

So the presentation we'll give you this morning will be an overview of the results for the 6 months ending end of June 2019, which we published to the market at 7:00 this morning.

I'll summarize the key highlights, as always, a short, strategic and operational review. John will then talk to the numbers with some more, I think, very helpful disclosure. And then a couple of words on summary and outlook. And then, of course, to questions, both here in the room and on the telephone.

So let's begin with a review of strategic and operational progress in the first half of 2019. I should start by saying that we are pleased with progress. In fact, we're making great progress, and we're very confident to reaffirm our guidance for the full year 2019 based upon the momentum and the achievement that we've had in the first half. And really, there are 3 key things that underpin that confidence, 3 key achievements that I wanted to talk to.

Firstly, and probably most importantly for the group, we've completed our separation of our North American business from Wells Fargo. That now gives us the platform to deliver our investment thesis for the U.S. market. And actually, I'll tell you in a moment about good organic growth. In fact, great organic growth, new product launches, client wins and actually, too, the predicted realization of the operating synergies that we talked to you about.

Similarly, our core U.K. business is in great shape. Our market-leading franchises in share registration and share plans, they continue to grow organically despite the market. And here, it's about quality and service differentiating us from our competitors.

We continue, too, to make great long-term progress against our strategy of nondiscretionary, digital regulated services to the biggest and best corporations in the world. I can talk a little bit this morning about how we're doing that for the U.K. and the U.S. individually, but also together, looking after companies in both markets.

So we're pleased with the first half, despite the challenges in the economy, the strength of the franchise and the nondiscretionary nature of the service means we've got growth, and therefore, we reassert our commitments for the full year.

So let me walk through the highlights in a little bit more detail, if I may. Let's start with the finances. Look, it's been a good set of numbers, we believe, actually against some quite tough comparatives. Top line revenue growth, we've got 8.3% here, driven principally by strong performances in the U.K. and the U.S. And actually, underpinning that, there's organic growth of 3% -- 3.2%, in fact. John will talk in more detail here, but we can tell you now that we've got really very pleasing organic growth in North America of 10.7%, double-digit organic in the U.S.; 5% organic growth in our core Investment Solutions business here in the U.K.; 7.2% organic growth in Intelligent Solutions, against quite a tough comp, actually; and as we trailed previously, we've got some organic contraction in pensions, about 8.5%. So net of all of that, more than 3% organic growth. Underlying EBITDA is up 3.9% to just under GBP 61 million and we quote it here on a post-IFRS 16 basis. John will talk about that. It's not hugely significant to the results, but all of these numbers are post IFRS 16.

Further down the income statement, and again, John will tell you, we've had material improvements in statutory profit and our PBT has actually tripled to -- this year to about GBP 11.6 million. Underlying EPS growth is good, 1.3%, more to come. Dividend growth, very pleased to have 7% dividend growth, increasing our returns to our shareholders.

Now we recognize very clearly, it's in focus, the need to reduce leverage, and we've reduced leverage here to 2.8x. And that's in line with expectations and it's despite the cash costs, of course, of completing the U.S. separation.

And we note here again that leverage is quoted post IFRS 16, which for Equiniti is about 0.2 of a turn of leverage. So what we're doing here is we're improving, i.e., reducing our guidance by taking that 0.2 of a turn and holding our guidance range the same. So holding our guidance to 2.0 to 2.5.

Our ability to reduce leverage, of course, is driven by cash flow. We've got a very solid operating cash flow this year, 83%. That's respectable, a bit softer than the prior period, and that's just driven by timing and also by the unwinding of our working capital in Wells Fargo as we've come out of the TSA agreement.

Against our broader strategic objectives, progress are great. And in North America, we've completed our separation from Wells in late May, actually, 6 or 7 weeks ahead of the latest guidance that we shared. We're delighted now to have what is in effect a fully autonomous and now thriving business in North America, stand-alone and growing. Organic growth there, 10.7%. We've got new client wins, complete client retention since we spoke to you last. And also the benefit of some new product launches coming through.

Here in the U.K., we've also announced today the acquisition of RD:IR, Richard Davies Investor Relations, and this business is a tuck-in for our share registration business in the U.K., a cross-sell opportunity, bringing us a new technology platform to underpin our share registration work, but also to drive acceleration in our proxy solicitation work. Better, deeper insight of what shareholders are doing. We see significant further opportunities to grow organically in the U.K. actually from that kind of product, particularly from reg and share plans.

We remain a disciplined allocator of capital. We've worked really hard to maximize value here. And now that our North American separation has been delivered for about GBP 45 million that we recently guided you to, there are no further nonrecurring charges to come. That's really important. That gives a clear pathway to deleverage for the second half and for next year, and also will materially improve our statutory reported profit.

So let me dig in, if I may, to some of the divisions. Investment Solutions. Look, we've just been delighted with our progress here. The franchise grows stronger and stronger. Straightforwardly, more companies choose Equiniti now than ever before. More companies choose Equiniti than any of our competitors, in fact, almost our competitors put together. New client wins have been very strong, and that's underpinned revenue growth of 6%. And that 6% is against a strong comp as well.

We've been innovating. We've been investing. Our new death notification service for shareholders is now used by almost all of the U.K. financial institutions, and the franchise broadens and strengthens. Most new IPOs, we're delighted to say, have chosen Equiniti as their registrar. Now I know the market hasn't been perhaps the strongest market for new issuance, but nonetheless, the big floats, the ones that matter, they've come to us. We're delighted to have Trainline, to have Watches of Switzerland, to have DWF and others choosing Equiniti to be their registrar and their plans provider. Really proud to have these clients.

We've done really quite nicely building our market share. Over the last 18 months, more than 20 clients have transferred from our competitors to Equiniti. So a net inflow of 20, it's quite extraordinary. And some of those are really, really material employers. National Grid, Morrisons -- William Morrison, the supermarket, are 2 very, very good examples. And those registers are also underpinned by share plans. So getting the registers, growing out our share plans business.

And actually, of the Investment Solutions result, it's the share plans business that's the real standout. We've won or mobilized new share plans for AstraZeneca, for Cobham, for Compass, for National Grid, for Morrisons, Rentokil. These are material employers. And it's the size of that employee base that of course is the numerator in the value equation. More employees makes more assets, makes more income, makes more commission, makes more dealing. So that franchise is strong. And importantly, in these tough markets, it's super sticky because that revenue is locked in for the future. So really, really pleased with how our Investment Solutions has gone.

Intelligent Solutions, too, it's great a print, really worthy print here. Organic growth is 7.2%, and it's been delivered against a really tough comparator. Intelligent Solutions really is all about digital solutions for regulated markets. It's about software and service and selling software and service into our existing client base.

Continuing demand for the products. We sold our credit platforms to Bamboo and MYJAR, who both lend into the motor space, with material BPO contracts underpinning those.

We think of Intelligent Solutions really as being our R&D facility. This is where we write code, where we develop new platforms. One new platform we've developed this year is EQInsider, which solves the problem of tracking PDMR dealing in listed companies, who's allowed to deal, who's not allowed to deal, and how you workflow all of those permissions, directly relevant across our client base. And we're selling it. We're out there selling it now.

When we first talked to you about North America, we said that we think, we haven't proven it, but we thought there was opportunities to take our U.K. software products and sell them into North America. Already now, we have almost 20 sales of our Riskfactor platform for commercial lending into North America. And we're now starting to sell our complaints platform into North America. We're delighted in the first half to have mobilized Charter, our core U.K. complaints platform, into HSBC in North America. So their Buffalo service center is now completely underpinned by our tech for managing customer service, and really pleased with that.

Remediation projects are also an important driver of growth. Now we talk many times in these, in such calls about PPI. And is this all about PPI? Well, it's not. You know PPI is now a relatively small contributor to what we do in this space. And remember, what we have here is not resourcing. We have the ability to manage tracing and workflow and payments and calculations and integrate end-to-end digital workflow for customer service. And it's growing really strongly, double-digit growth in customer remediation.

Now PPI is growing, too. You'll see the advertisements on the television, of course, with that, that famous actor. The deadline for claims is the 29th of August of this year. And I think you'll see from some of the banking results that have come out in the last month, that actually banks are seeing more claims and are making more provisions. So it is -- I'm afraid it's not true that PPI ends this year. PPI ends at the end of next year. And what follows PPI is this trend of increasingly muscular interventionist regulators acting for the rights of consumers across lots of different markets.

So when we look at the broader space, we see the pension space, where there's been lots of pension drawdown. There will be remediation there. We look at the motor finance space, where there's GBP 40 billion of loans have been sold into motor finance with relatively weak affordability tests. That will be remediated. Telcos may be remediated. Tariffs in utilities may be remediated. So we'd urge investors, when they think about remediation, remediation is a broad thematic, and it's a thematic that's going to grow. And to work in this space, you need technology.

One of the big projects we've done in this space this year is actually remediating the 5G spectrum for Ofcom. You might think, "What's that got to do with financial services?" But Ofcom need to clear that spectrum. And to do so, you need workflow, you need payments and you need the ability to work at industrial scale.

In Intelligent Solutions, we can work at industrial scale. Our data capabilities are growing. We now have full credit reference bureaus' permissions, 1 of only 5 companies in the U.K. who can do that. So we can provide products for tracing, verification and geo-demographics across the base. And the prospects for this division, we believe, continue to be very, very strong because of that underlying digital technology.

Now the pensions admin business has been tough for us. We trailed last year that pensions will be tough. And software and admin in pensions, it's demanding, it's challenging for all of the market participants. And it's undoubtedly our poorest-performing business line.

So what we're doing here is making sure that it's stable and making sure that there's a platform for the future as that market recovers. Now our software sales are accelerating. We've completed the integration of Aquila, a software business that we bought last year. And that now gives us a platform for the life and pensions space. We sold that platform 3 times now to Sovereign and to 2 other life insurance companies, big, big projects.

Multiple opportunities in the public sector. One interesting note here is that the procurement or the reprocurement of our principal Civil Service pensions contract, the MyCSP contract, has been postponed by the Cabinet Office. That means there is a near certainty that we'll serve the Cabinet Office beyond the contract end date of December 2021. That contract will have to run further now.

Those of you who follow the space may have heard about the McCloud judgment. The McCloud judgment upheld that the government pension scheme is actually unlawful, it's discriminatory in terms of age. So the government now have, right across the public sector, the challenge of remediating the new government pension scheme across all of the public sector pension schemes. So we think there's a real opportunity for remediation, for data, for analytics, for industrial-scale processing of pensions.

But despite these favorable long-term trends, the here and now of this business is challenging. So as you would expect, we've done much to take out costs. We've invested in the first half to do that, to take out that cost. We've done restructuring. And what that means overall is that as we come out of this year and into next year, both our revenues and our profits will stabilize. So tough for this year, but the comparators and the underlying cost base improve as we trend into next year.

I should talk for a moment about the United States. Look, here, we've seen a material acceleration in our growth. And now that we're free from the constraints of Wells Fargo, the transitional service agreements all come to an end, we've got freedom, we've got capacity to accelerate this further. This business is growing nicely.

Organic growth of 10.7%. We've got some super-new client wins: Change Healthcare, Cincinnati Financial, Intel and NCC Group. And against the industry trend, really important point, we've grown our number of on-register holders. The number of shareholders is going up, not down. And that's happening from the restructuring and the spin-off that's going on in big U.S. banking companies and in industrials, more holders on the register. That's the numerator in our revenue equation. More holders, more revenue. That's how we get some growth.

Now interest rates have helped us, that's true. But to preempt the question, it's not the increase in interest rates that's driving growth and profitability here. Rather, it's activity. It's the amount of balances that we're carrying and the number of transactions we're processing, multiplied by the interest rate. So the growth here is really when you see the interest number increasing in the P&L, it's activity that's underpinning that. So it's true underlying growth.

We're retaining our clients. We've not lost any since we last spoke to you. And pleasingly, we're now able to serve many more clients on both sides of the Atlantic. So since we spoke last, we're now serving Royal Dutch Shell, Tesco and GSK through their ADR programs on the London market and on the New York market. So the thesis of serving in both markets actually we think is valid.

We've got control of the technology, control of our data centers, core systems, telephony. We've grown organically a new proxy solicitation business. And we've got 20 existing clients transferred into that business.

We've organically launched a share plans business. We've got 3 new names signed up already. Got a team built around that.

And as we trailed and showed you at our Capital Markets Day, we've launched new shareholder and issuer portals to digitize and improve customer experience. That technology is out there, and we're getting good -- good feedback on it. So we're doing the right thing. And our technology build now is focusing on asset reunification: How can we build tracing and calculations capabilities to deal with the U.S. challenge of escheatment and how shares are returned from public ownership into companies?

We've not forgotten our commitment to synergies. I know that's very important. And we're delivering them. The first half of this year, remember, we committed $5 million in the first year of ownership, first full year of ownership. We've already secured 90% of those for the first half. Where do they come from? It's simple, straightforward business transformation. So we no longer pay large technology costs. We've separated all the TSA costs. We've stood up our new customer service center in Milwaukee. We stood up a new operating captive in Bangalore, and we're just operating more efficiently. So we've now got both the capability and the capacity to grow the business, but also real confidence in the synergies for this year and for next year.

So we're pleased with North America. We feel that we're realizing our investment case, we are. And we're citing real confidence here for our growth for the future.

To talk for just a couple of moments on capital allocation. We showed you our capital allocation model last time we spoke. And this slide really is to reiterate that we're managing the balance sheet as we have committed to do. We've designed here for sustainable mid-single-digit organic growth, good cash generation. And that good cash generation creating growth capital. That growth capital gets spent on R&D, organic investments in our software. We've guided to 6% to 7% of revenue as being our mid-term CapEx number. And for the first half of this year, we're at 6.8%, excluding Wells Fargo. So we're maintaining ourselves within that range. Some spent on M&A, we spent about GBP 7 million or thereabouts in the first half. But this creates the ability, both for us to delever, and the commitment is that we'll get to our target leverage range of 2.0 to 2.5, post-IFRS 16, in the second half of this year. Thereafter, next year, as all of the Wells Fargo integration is completed in '19, that deleverage really starts to march on as the business there generates cash. So commitment here to deleverage, but also, and you've seen on the print, dividend has grown. We can maintain 30% of underlying profits paid out to dividends. So this is a balanced capital model by returning capital through dividend but also deleveraging. We recognize that capital is important, and we'll deploy it prudently.

So those are the highlights. I'm now going to hand to my colleague, John Stier, to give us the financial review for the first half. John, over to you. I'll give you the device.

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John R. Stier, Equiniti Group plc - CFO & Director [2]

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Thank you, sir.

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [3]

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Thank you.

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John R. Stier, Equiniti Group plc - CFO & Director [4]

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Good morning, everybody. So as Guy touched on, just to be clear, not only 2019, but 2018 is being restated in our results for IFRS 16, which is lease accounting standard that's come into force.

So when we look at the overall profit and loss account, as we said, we've got very good progression with our revenue, 8.3% reported revenue growth, 3.2% organic. It's GBP 275.1 million in the period. And our EBITDA has grown just under 4% to GBP 60.9 million.

You'll note there that our amortization of software cost has increased in the period ahead of revenue growth. And that's partly caused by our investment in North America, where we've invested a substantial amount to separate the business from Wells Fargo. But also, you'll recall in 2018, we spent a substantial amount of money making our systems MiFID II compliant. Those costs are now being amortized through the P&L with the benefits in the group and supporting us and causes our cost line to grow.

You'll note GBP 5.5 million of nonoperating costs, they all relate to the separation of our EQ U.S. business from Wells Fargo. That activity is now concluded, and so we would expect no more nonoperating costs to be incurred in the second half of this year.

As we run down the profit and loss account, you'll see profit before tax growing substantially as our nonoperating charges have reduced substantially, and our minority interest charge is also halved. About half because at the back end of 2018, we bought out the government stake in the MyCSP business that we're heavily involved with, which obviously benefits that line. And that's allowed us to report a basic earnings per share of 2.3p and an underlying earnings per share of 7.7p in the period.

Now when we look at what's happening with margins, you'll see our margins in the period did decline. They declined by 100 basis points to 22.1%. I want to just spend a little bit of time on why did that happen, but also what gives us conviction about our mid-term expectations of rates increasing as we go forward.

So when we look at the first half of the year, there are 2 things that caused our margin overall to decline, the first of which is that in our Investment Solutions business, we incurred some costs collateralizing some substantial cash flows to a client on a corporate action. There's been a change in the rules in this area over the last 12 months. And fundamentally, with the Bank of England, if you're processing substantial amounts of money across geography, you have to put security around that transaction flow. That's not something we've had to do in the past. Where we have these large flows, these can be literally tens of billions pounds of collateralization. And so what we've done here is we've gone to the banking market and have that security secured for a client. We would get that cost reimbursed from the client, but it's not at our typical margin, which put some margin dilution in the period.

The other thing that's happened, as you've seen, is the margin in our pension business went down in the first half of the year, and I'll talk about that in more detail as we go forward.

What I would say, though, just in terms of margin around that is that we spent a lot of time in the first half of the year looking at how we deliver service in our pension business, where we deliver it from, how we automate and how we drive efficiency. So that in the first half of the year, we incurred an additional GBP 1 million of restructuring costs in that business.

As we think about that unwinding in the second half, and it's not going to be repeated understandably, but also the recurring cost/benefit of that, we get a GBP 3 million benefit in H2. It's not there in H1, which accretes margins substantially.

The second thing, as Guy has touched on is, we've done a lot of work in our EQ U.S. business again to make sure we deliver on our commitments around synergies for the full year. Now that commitment, as you'll recall, is $5 million. The first half of the year, we saw $1 million of that in the P&L, so we get the remaining $4 million in H2. And this second half bias, just fundamentally, for a lot of those costs to be realized, we needed to finish our separation work from Wells Fargo. That's now done. We see that coming through. And obviously, that also positions us well to take that number up to $10 million in 2020. Those 2 things have a material impact on margin, as you would expect, and that gives us confidence that we expect margins to grow in 2019 overall and sets us well for future periods as well, along with mid-term expectations.

Now when we look at the results in a little bit more detail. Investment Solutions, as we've touched on, grew well. It grew 5% organically its top line, and that was driven by a mixture of new clients coming on board. You'll recall over the last sort of 12 months, we've done a lot of new name clients. Some of that competitively, some through IPO, particularly last year. And that's benefited, but also as we've put new products into the client base, things like proxy solicitation, growing well, being cross-sold into the client base and supporting our momentum.

Despite the U.K. economy being a little bit more fragile this year, we've also done pretty well on corporate action income. Corporate action income in the first half of the year was GBP 8.1 million, which is flat on the period -- same period last year. The first half saw activity like Marks & Spencer that went out for rights that we supported. And as we go into the second half of the year, you'll recall there's a number of market announcements recently, which means we have a strong pipeline as we go into the second half of the year for that product line.

In Intelligent Solutions, we saw 7.2% revenue growth, driven by remediation services and credit services with new clients like Bamboo Finance coming on board.

And our pensions business, as we've said for a little while now, it is our most challenged market, and we saw revenue there decline 8.6% on a like-for-like basis. Now with revenue, what's happening there is a couple of things. The first thing is that last year, you'll recall in the first half of the year, we did some work with the NHS that got re-insourced. So it's not in our 2019 numbers, but there is some of that in our 2018 numbers, which on a relative basis, leads to a decline.

The second thing is that when we renewed our MyCSP contract, we took our price down in return for 3-year new tenure, which is, as Guy also touched on, is likely to extend beyond that now with what's happened within the McCloud Judgment. So that again impacts momentum when we look period-on-period.

And then finally, from a margin perspective, as I said, I mean, we've spent an extra GBP 1 million reducing the cost base in the business. Now we've tried to do what we feel are the difficult and important things to stabilize profit in that business. Those actions underpin the second half of the year and we will see margins improve in that business in H2, and gives us confidence that we are in a position to stabilize profit when we report the full year in 2019.

Interest costs grew by 10%, fundamentally because the Bank of England increased base rates 25 basis points in August 2018. And you'll note, 2/3 of our balances here are underpinned with swap instruments that go out for up to 5 years in the future. That's important because what we consciously look to do is to make sure we don't increase volatility in our earnings through rates changing. And they can go up and they can go down, and that's part of life for us, and -- but what we do with this is to smooth out the impacts of that over the mid-term.

In EQ U.S., we grew our revenue 10.7% on a like-for-like basis. Now please do note, we report this on a constant FX basis, which we think is the right thing to do and I know as most people would in the marketplace. So it's a genuine like-for-like comparator.

We saw, firstly, the stabilization that we saw in the second half of the year with the client base in North America continue, which is really pleasing, and no significant clients went to any of our competitors. But also, we've seen traction with new clients coming on board, like Cincinnati Financial, and starting to sell our new products that we've launched into the marketplace, like proxy solicitation.

When you look at corporate action income in the first half of the year in North America, that increased from GBP 3.6 million to GBP 5.5 million, where we've seen a strong U.S. economy and a lot of stock market activity, such as GE, one of our clients, that spun off a business into Wabtec.

We've also seen interest receivable grow 79% to GBP 5.9 million as our clients had a period of increased activity. And last thing is I'd like to give you some flavor, and Wells Fargo, one of our large clients, returned to dividend in the U.S., and that means we're processing a lot more payments, which contributes to that line.

We've also invested substantial amounts in North America to make sure that we keep innovating and putting new products into the marketplace, and that's allowed us to take to market, early indeed in the last few weeks, an employee share plan offering, which we're excited about.

And then finally, here with our central costs, you'll note the increase. They increased for 2 reasons. The first thing is that we've continued to invest in sales to make sure we keep driving our sales force. And secondly, there's been an increase in M&A costs in the period.

So when we look at our cash flow, the first thing to say is we're pleased with cash overall. It's remained robust and strong in the period, but it is impacted in the first half of the year by some of the seasonal biasness in the business that I'd like to talk about in a little bit more detail.

So as we run through that and look at some of the different lines, you'll see our operating cash conversion ratio is 83% in the first half of the year. Where we see seasonal bias there is, firstly, in the first half of the year, we tend to spend more on VAT. Q4 is our strongest sales quarter of the 4 periods that we work within. And through that, we then pay an increase in VAT in the first quarter of the year, and that impacts the assumes that are accrued at the year-end.

The second thing is in the first half of the year, we would always pay our annual bonus. And the difference between what we accrue and pay is about GBP 5 million, which obviously, that's quite an impact in that reporting period.

Now when you look at 2018, you don't see that seasonality because we were able in 2018 to improve substantially the working capital practices in our North American business that we bought. But it is a seasonal factor that you should expect in the business as we report going forward.

You'll see GBP 11 million being spent on nonoperating charges. This is all through Wells Fargo. Now our capital expenditure number, there's a further GBP 7 million associated with setting up our EQ U.S. business on a stand-alone basis. There's GBP 18 million there associated with that acquisition. It's all done, it's in the past, it's one-off in nature, but it's in these reporting numbers.

You'll note our interest payable costs also increased quite substantially to GBP 7 million. Two things drove that. Firstly, we drew down debt in 2018 for our EQ U.S. acquisition. And secondly, when we went through our rights issue at the end of 2017, that reduced our leverage test. Leverage test impacts on the rate that we pay on the debt that we borrow. So that helps us in H1 last year. Since then, we've gone through and drawn down money for the acquisition, that's changed our rates again, which is, it is what it is, really. But that's resulted in the charge increasing when we look at 2019 to 2018.

You'll also see in there, we paid GBP 7.5 million for sundry acquisitions. That's around Nostrum and Marketing Source, principally. And we also paid our annual dividend and payment to our MyCSP minority interest, which totaled GBP 14.8 million.

So when you look across there, you've probably got seasonality in the business, some of which is cash flow that I've talked about, but you'll note, we tend to generate about 55% of our profit in H2 as well, which puts some seasonal impacts on the cash we generate. And then we spent GBP 18 million on one-off items, as stated, the EQ U.S. separation and setting up, and also we pay more dividends in H1. So there's quite a lot of H1, H2 seasonal bias for you to be mindful of that. And it's because of those things that we have a lot of confidence in cash improving substantially in the second half of the year, and we expect the business to continue its journey now to delever.

What we're setting out in this next slide for you then is what's happened with our debt over the last 6 months. The GBP 41.9 million noted on the left in the red dots is the impact of IFRS 16. So that's leases that we've taken on. And then you'll see we generated GBP 50.7 million through operating cash, spent GBP 18.7 million on recurring capital expenditure and GBP 14.8 million on dividends and our MyCSP minority payments. You'll note over on the right of this slide as well those nonrecurring items. Just to help you get a sense of from a cash perspective what's enduring and what isn't.

And then when we look at our working capital in a little bit more detail, you'll see we saw an increase in our contract assets. That's through our debtor book fundamentally supported by growth in the business. And we also saw our operating payables decline by GBP 5.5 million despite the business growing.

That decline was firstly through the seasonal items that we've just spoken about. And secondly, we started to see our TSA costs unwind in North America as we've concluded that work. And again, that's taken our payables balances down in the period.

Now when we look at our debtor book, you'll see when we look at our accrued revenue, which is the light gray box in our debtor book, which is the dark blue box, overall debtors were GBP 88 million at the end of June 2019. That compares to GBP 87 million in our year-end December '18. So a little bit of movement, but not a lot.

You'll see that our DSO continues to be in the range of 55 to 60 days, which is what we would expect for the mid-term. And you'll see it's been easing down over the last couple of reporting periods from 60 days to 58 days.

Overall, we continue not to take any revenue into the group without it being underpinned by a contract, which our prudent policy combined with our blue-chip client base means we get very, very little bad debts in the business. And again, you'll see GBP 0.1 million being recorded in the period.

Finally, on this slide, you'll note our receivables financing facility stood at GBP 10.2 million at the end of June '19. That's a decline from GBP 14 million at the same time last year, and we would expect the use of that facility to keep declining as we go forward.

Now the GBP 5.5 million, as we've touched on, on nonoperating charges all relates to the U.S. separation, making it a stand-alone entity, and that's now behind us, so we expect no nonoperating charges in the second half of this year. Anything that we have that's non-transformational, such as the small acquisition cost that Guy referred to earlier, we take that above the line through our EBITDA as we go forward, as we do restructuring costs, as we've seen in pensions.

When you look at capital expenditure, of that GBP 25.7 million, GBP 7 million was EQ U.S. integration work, with things like setting up our data centers in North America. And our underlying rate of CapEx against revenue is 6.8%. So very much in line with our mid-term guidance of 6% to 7% of revenue.

Now when we look at leverage, you'll see all again on a post-IFRS 16 basis, that as we've touched on, that's 0.2 to the calculation. That's declined from 3x debt-to-EBITDA to 2.8x at the end of June '19. We're maintaining our leverage target at 2 to 2.5x debt-to-EBITDA, and we expect to be within that range by the year-end, with a strong cash flow expected in the second half of this financial year.

You'll also note that we have announced today as part of our announcement that we've renewed our 5-year financing facilities. These facilities were put in place when the business listed. We're getting towards the end of our fourth year, and we felt it was right and prudent to secure that for a new 5-year period. So that's been done. It's all signed with our banking syndicate. There is an associated cost of GBP 3.6 million of fees, which will be spent in June, it's actually being done in July 2019, so the second half of the year. But that gives the group substantial liquidity, and we're prepared to support our growth ambitions as we go forward.

Now with IFRS 16, as I say, it impacts our leverage test 0.2. We're not changing any of our guidance. So effectively, we're taking that down by 0.2 compared to historic trends, and we expect within that range in the -- by the end of this financial year.

When you look at the impact of this standard, it puts GBP 36 million onto our fixed assets, which is the benefit of future leases, and it records a gross liability of just under GBP 42 million. That all relates to property leases. The only leases we have in the group are associated with the property that we occupy.

When you look on an annual basis, and you'll see that reflected in the half year. And broadly, this increases our EBITDA by GBP 7 million a year. And then that GBP 7 million boost to EBITDA is offset by a similar charge into depreciation and interest payable costs, meaning at a profit before tax level, it's earnings neutral. No change to cash flow, as well as you'd expect, as the standard comes on board.

So when we look at our mid-term guidance, that remains as before. We expect the business to trade within a 3% to 7% organic revenue growth range, supplemented by capability-enhancing acquisitions, and you've seen that reported again this period. And indeed, if you look at the average of our organic revenue growth since we listed the business now, nearly 4 years ago, that's at 4.5%. So again, very much within that range.

You'll see we expect to see our margins continue to accrete by 25 basis points. And the cost action we've taken in pensions and the synergy benefit we get in the second half of the year in EQ U.S. underpins that for this financial year.

We continue to expect to pay 30% of our profits out as dividends. And you'll see again our dividend has increased by 7.1% in the first half of the year to 1.95p. And our cash tax guidance range didn't change for this year, 13% for '19, growing to 17% thereafter, as partly, we see a higher proportion of profits coming from North America, which is a higher tax-paying geography for us, but also, we'll lose the tax benefit of the nonrecurring charges that we've incurred in the period.

Cash conversion guidance remains at 95%, and capital expenditure being 6% to 7% is a run rate going forward, which is what you've seen reported in the first half of this year. And then finally, our leverage target remains unchanged, and we expect to be certainly within that target by year-end.

So what you've seen in overall with Equiniti is another period of very solid results being delivered. You've seen Investment Solutions, Intelligent Solutions and EQ U.S. all growing in the period. And you've seen us really trying to tackle some difficult situations in our pensions business to stabilize profit, which we're firmly on track to do for this full year -- full financial year.

Cash flow in the group remains strong, and we expect the business to continue its journey of deleveraging for future periods.

I'm now going to hand back to Guy. He's going to take you through our summary and outlook. Thank you.

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [5]

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Thanks, John. So just a couple of words in conclusion about summary and about outlook. These results are a reaffirmation of our guidance. We are, despite the uncertainties in the environment outside, despite the capital markets, despite interest rates, despite the economy at large, we have confidence in our ability to grow the business organically, to accrete margins and to pay down debt. Why do we say that? We say that, firstly, because the core U.K. business is very, very strong. We're winning clients, we're booking new business and we're growing our share plans franchise.

Having separated from our vendor in the United States, we've now been able to give our U.S. businesses its legs. We can now go and grow that business very, very successfully throughout the U.S. market. So we now have a strong U.S. franchise and a strong U.K. franchise that are working together. That building momentum is a real part of these results.

We see that the strategy of being a specialist, not a generalist, is really working. Our clients want to deal with specialists, specialists who bring digital solutions, who bring regulatory insight, who can solve tough problems. Not an outsourcer, but a specialist. And that's the business that we're building, a business of specialism -- a business of specialists. That specialism brings resilient characteristics, nondiscretionary revenue and also very high recurring revenue. And it's from that specialism that we're confident that we can grow our margins here in the U.K. and also in the U.S. That operating leverage will underpin our performance.

The focus then for '19 is those core defensive businesses where through growing market share, through cross-sell, and also through the very significant embedded value in our share plans business, we can grow revenue sustainably despite the economy. We'll be laser-focused on capital allocation. We'll use that to drive further growth, but also to pay down debt and deliver, therefore, on consensus. We believe the group has strong prospects for value creation, and we look forward to the future with confidence.

So thank you for your attention during this presentation. We're delighted as always to take questions in the room and also from those on the telephone.

Robert first, please.

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Questions and Answers

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Robert John Plant, Panmure Gordon (UK) Limited, Research Division - Analyst [1]

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Thanks, Guy. Rob Plant from Panmure Gordon. How will your credit bureau position itself versus the larger credit bureaus in the U.K.?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [2]

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So what we're really interested in credit, in credit referencing rather, is not to be a D2C provider of service, but rather to be a provider of capability that people buy on a B2B basis. So helping organizations onboard staff, ID&V customers potentially and also to understand the demographics and therefore, the buying propensity of the communities they work with. So this is B2B provision of data insight and referencing.

Paul, you're next.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [3]

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Yes. It's Paul Sullivan from Barclays. Just firstly from me, I mean, given the revenue opportunities you're seeing in the U.S. and that you potentially will see going forward with the new services you're rolling out, is there a temptation to reinvest some of those cost savings to further drive revenue growth? That's the first question. And then secondly, John, could you just perhaps give us the -- or remind us of the sensitivity to declining U.S. interest rates on the interest income in the U.S.? And then finally, with pensions, could you -- I mean, is there a -- is there potentially -- is there a potential corporate solution or M&A solution to the pensions problem? And do you have any line of sight on that?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [4]

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Let me take those 3. So the first question, given growth opportunities, would we reinvest in the U.S.? That's sort of what we're doing. So we've done it organically. We've hired great new teams of people from our competitors to organically build a proxy business, build a share plans business. And we want to get the right balance between earnings progression, of course, but also capability to move the top line. So as you look at the results, we've super top line growth, much of that is underpinned already by investments in new capability. So therefore, margins will come and follow it. So there is opportunity, and we're doing that.

Your second question was to John about interest rates. But if you don't mind, I'm going to have a crack at that, because there's 2 things here that matter, right? We would encourage people to look not so much at the core interest rate, and whether it's 2.5 or 2.25, but really to think about activity and flow, because that's the proxy for revenue here. So it's true that interest rates have come down from 2.5 to 2.25 in the U.S. But because we're doing so much more work, the activity is supporting, and therefore, growing our income from interest. And we've worked on some very, very large transactions in the U.S., and everything is bigger in America. So some of the corporate transactions we've been processing have been more than 50 billion in value. And it's that flow plus things like Wells Fargo returning to dividend, that's growing our average net balances. And it's the growth in balances that's the core number here.

John, do you want to talk to the precise arithmetic there?

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John R. Stier, Equiniti Group plc - CFO & Director [5]

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Yes. No, of course, Guy. As you know, Paul, everywhere, we tend to sort of swap 2/3 of balances and to reduce volatility. So if you look at where we are today, a 25 basis point reduction costs us about $1 million in revenue and profit. And as we've talked about in private, it's one I would say to various ups and downs we get. We see a lot of opportunity there. So none of it changes where we think we'll end up overall this year. But clearly, it's a negative, and we will offset it with positives across the portfolio.

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [6]

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To the question on pensions, you're right, pensions has been tough. Could there be a corporate solution to that was the question. We do believe, Paul, that, that's a market that's going to shake down. There's obvious consolidation in that space.

Nothing to say about that at the moment, but we're very alive to opportunities, and maybe there will be consolidation in the future.

Further questions? Rahim?

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Rahim Nizar Karim, Liberum Capital Limited, Research Division - Research Analyst [7]

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It's Rahim from Liberum. The reiteration of the synergy targets is obviously very helpful and the separation in the U.S. is great news. I was hoping that you might be able to remind us on the plans for migration of Sirius and what that might mean in terms of the synergies beyond 2020. So that's the first question.

The second question is around cash and free cash. I understand the first half has been impacted by a number of factors. It's useful that you've reiterated guidance for the full year. At the time that the U.S. deal was done, my memory suggests or at least my recollection is that you talked about the potential of the business as having GBP 70 million, GBP 80 million of free cash once all of this is all done. Is that something that you're able to comment on, and something that you're able to give visibility on in terms of the enlarged group's free cash flow potential?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [8]

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Yes, with pleasure. So let's talk about synergies first. We're reaffirming the synergies. And I think just a comment about scaling those numbers, if I may.

Other businesses in our space that have consolidated and invested in the U.S. have typically generated synergies of 15% to 22% of operating revenue, all right? We've been much more modest about that. As you know, we committed to about 9% of revenue synergies, because we knew we had a lot of technology build to do and we also wanted to invest to grow, to get growth there. So we've been muted in our assessment of those synergies. We're not upgrading our capabilities here. But what we are saying is that our confidence in delivering them is materially building as we get comfortable with the market, comfortable with how you operate in that market and also get the technology in.

Now you're right as well to ask me about Sirius. So Sirius is our modular, core workflow platform that does basically everything in our U.K. business. Now we have Sirius installed and working in the U.S. that exists. So we have an American version of it that exists in our data centers, but currently, we're not transacting on it. We're using some parts of the process around scanning and document management, but the core element of Sirius has not yet been used.

The way we're thinking about this, Rahim, is that our migration into Sirius will be a progressive organic journey that we'll carry out over these next years, the next 2 or 3 years, actually, but is irrelevant to the synergy case. It underpins it, but that technology migration does not -- is not essential for the synergy case. In terms of synergies generally, there's just lots to go at, loads to go at.

Final question was about free cash flow. And look, I mean, the core point here is that now we've come out of the first half, all of that exceptional cash disappears. So the cash we spent on transaction costs, on integration costs and on all of the heavy lifting of CapEx, all of that is now finished. So therefore, the cash that the business generates, which as we've said on any sort of mid-term time series is 95% of EBITDA. That cash then flows down through the income statement. John?

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John R. Stier, Equiniti Group plc - CFO & Director [9]

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And so, if you look, Rahim, as you model out to call it, through 2021, when you get the full synergy benefit in North America and our growth expectations, you get to the numbers that you've talked about, absolutely. So we do generate a lot of cash. We think a lot about how we best allocate that for value for shareholders as well. But there's no change to those expectations.

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [10]

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Chris, hello.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [11]

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Chris Bamberry, Peel Hunt. With regard to the cost synergies in the U.S., the remaining $5 million for next year, just the areas you're looking at for that, if you can remind me. And secondly, by the year-end of this year-end, how much of that we have visibility on, do you think?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [12]

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Okay. Okay. So if we did nothing now or nothing further now, which of course, we shall not do, if anyone's in doubt. But if we were to do nothing further, we would have half of the next 5 secured now, through the full run rating of everything we've done this year. And the things we're doing are sensible things, just straightforward, sensible things. So we're looking at how we deliver print and mail, and we're reducing the amount of print and mail that we deliver, of course. We're looking at how we pay for -- have looked at how we pay for software licensing, how we pay for hosting, how we pay for support, and we've made that more efficient. We've moved some of our IT support to Bangalore. We've got a great captive there that does IT support and tax for us. That's in and running. We've displaced all of the Wells Fargo BCP business continuity infrastructure, all of that is now gone, and we've got our own business continuity through a brand-new facility in Milwaukee. So those things are built.

So really, what's happening now is run rating those out of this year and into next year. There's no kind of new pixie dust. It's just keeping doing what we're doing.

Any further questions in the room? And also, any further questions on the telephone? Okay, question on the phone?

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Operator [13]

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We have a question from the line of Suhasini Varanasi, calling from Goldman Sachs.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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Sorry, I couldn't be there in person. Just one on the margins in Investment Solutions. Would it be fair to say that the margins excluding your collateralization costs was basically stable year-over-year? And that's the reason why we should expect a pickup in second half of the year?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [15]

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Yes. I think -- thank you for the question. You're absolutely right. There are 2 things here. The margins, absent that one element, are stable. But also, this is a fixed cost business, inherently. We deliver our services through our own staff. So we always get a big uptick in margin in the second half as we get more revenue in the second half against the same cost base. So that nonrecurring bit of cost will go away, and the margins will trend up in the second half because of the seasonality of the business. So yes, your observation's absolutely correct.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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And just one on the revenues, please. In Investment and Intelligent Solutions, you have done pretty good growth. And in Intelligent Solutions especially, you've had tougher comps. As those comps ease off in the second half of the year, should we expect an acceleration in growth there in Intelligent Solutions? And on Investment Solutions, you've noticed that there have been quite a lot of contract wins, share deal wins in first half of the year. Do you expect that to contribute to growth from second half and therefore, an acceleration in growth in the second half?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [17]

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I'm being tempted into an upgrade there. Look, I think straightforwardly, we must say this. Intelligent Solutions, remember, last year, grew organically, I think at 31% or 32%. So to get 7% growth in the first half against that comp, I mean, that's going it.

Now there's a lot of uncertainty out there. And what we never would seek to do here is to guide anybody up. That's the wrong thing to do. But what we are saying is that because of the opportunities that we see and the performance that we've got, what we can give you is real confidence in the revenues that we're guiding to. So Intelligent Solutions being kind of high single-digit, that's good. We're very, very confident in that, come what may.

To Investment Solutions, we've won a lot of clients. Now what tends to happen with big client wins, and there are 20 transfers here from -- mainly from 1 competitor. What tends to happen here is the value from those come, not this year, but they start in the first full year of operation and really flow in the second and the third year of operation. Because the way we make this work is by getting our employees investing in share plans. And it takes 2 or 3 years for those plans to be populated and then for people to start dealing.

So when we talk about new clients, the way we'd like to guide you is that this doesn't promise you a big uptick in growth for this year, but what it does is it really underpins us for the future. So those new clients do give us confidence for the future. Does that get the question?

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Yes. Yes. And maybe just one last one on the U.S. Now you have made some investments, and that's probably dragged down the margins in the first half. Do you plan on further investments in the second half?

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [19]

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Well, again, I don't want to guide here, but what we are saying is that this is a market full of opportunity. Where we have succeeded in the U.K. is looking at technology and digital capabilities that are relevant to the corporate secretary and how can we make boards and secretariats be more efficient and more digital. And there's lots to go at in the U.S. We're actively screening the market, as you would expect us to do. And when opportunities fit our investment criteria, you know what, we might make one. But we're not guiding towards any acquisitions in the U.S. of any material size at this time.

Any further questions in the room?

Okay. Well then, as always, thank you for your support and your interest, and we look forward to seeing you at the next set of results. Thanks, everybody. Have a great day.

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John R. Stier, Equiniti Group plc - CFO & Director [20]

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Thank you. Enjoy your crunchies everybody, as well.

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Guy Richard Wakeley, Equiniti Group plc - Group CEO & Director [21]

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That's right.