Computershare Limited (CPU) Earnings Call Transcript

Thank you, and good morning, and welcome to the Computershare FY '26 Results Conference Call. Nick Oldfield, our CFO, is with me, along with Michael Brown from our IR team. Our presentation pack was released last night, and I'm going to take you through the highlights, and Nick will take you through the financials in more detail, then we'll get to Q&A. So Computershare had a good year. Our long-term simplification strategy is really paying dividends. Continuing investments in technologies are helping drive margins and structural growth trends are intact. Above all, our earnings growth remains remarkably consistent and predictable and is set to continue. But let me start with the results highlights on Slide 2. Management EPS is up 7% at $1.45 per share. And our earnings trajectory accelerated as the year progressed and results came in slightly ahead of the guidance we upgraded in February. Headline revenue is up 3%. But if you exclude the impact of disposals, it was actually up over 5%. Our key businesses are also performing well. Issuer Services revenue was up 4%, Corporate Trust was up 6% and employee share plans was up 10%. Margin income was down 1.6% at $749 million, but that did exceed our expectations and the upgrade in MI guidance we announced in May. And as we've called out before, increased activity drove higher balances, which really muted the impact of several rate cuts in our major markets. EBIT ex MI was up over 8% and EBIT ex MI margins continued to expand, up 70 basis points to 18.2%. And ROIC came in at 36.5%, reflecting our capital-light business model. Now our balance sheet continues to be a highlight. Leverage came down to 0.1x, and this continues to provide optionality for acquisitions. And we've got a pretty good pipeline, but I will remind you that we will remain very patient and selective. But with our earnings momentum and strong balance sheet, we can step up the dividend again. The final dividend is AUD 0.65 per share, a rise of 35% on last year's final dividend, and that makes $1.20 per share for the full year. I think reflecting on the past 12 months, I've been particularly impressed by the team's ability to stay focused and execute despite everything going on around the globe. We delivered acquisition synergies ahead of schedule, continue to embrace and work on new technologies and supported many of our clients through a number of complex global transactions. And I think that discipline has been a real strength of the business this year. Now let's jump to Slide 4, and we'll talk about each of these business lines. Now every business delivered revenue growth. So let's start with Issuer Services. Registered maintenance revenues were up 3% year-on-year. Corporate action volumes were broadly in line with FY '25. But a notable exception to this was really the key U.S. market where FY '26 deal volume was up 3% versus PCP, but activity increased as the year went on. And in fact, in 2H '26, it was up 8% versus PCP. And then pending deal count, that's announced but not closed at 30th of June was actually up 8% on the prior year. And I think that's a good indicator for more activity to come. The Hong Kong IPO market was also a standout. In FY '26, there were 96% more IPOs, and it was really strong retail participation, which helped drive fees up. So it was not just the number of IPOs. It was really that strong retail appetite for them that drove the increase. Entity Solutions, which we previously referred to as Governance Services, continues its robust growth profile, driven by CoSec services and growth in the number of entities under management. That said, EBIT and margin were down in Issuer Services in FY '26. Now this largely reflects lower margin income as well as continued investment in new technologies and fledgling businesses that we're incubating for future growth. Moving to our Corporate Trust business. Client activity increased across all major product lines. Structured products, which make up the majority of our book, grew strongly. With more volume, Trust fee revenues were up 9%. Client balances are also increasing with the growing issuance. And it's also pleasing to confirm that the GBP 80 million synergy target set out for the Wells Fargo acquisition has been delivered a year ahead of schedule, helping our EBIT margins in this division expand to over 17%. Corporate Trust remains an attractive market and a priority for capital deployment, and we do see many years of growth runway ahead. Now employee share plans reported another impressive result. Revenues grew by 10% and EBIT increased by 24%. The volume and value of assets under administration continued to climb, helping drive higher transaction fees, which were up over 18%. Now the business sailed through the volatility observed in equity markets around the world this year, and we saw the benefit of the diversification strength of our client book. Energy & Resources clients, for example, outperformed during the second half. But whilst there has been record trading, we ended the year with AUA up 8% and the number of units up 5%. Now this business has really come a long way after our initial investment in Equatex and the significant and complex project to deploy the technology globally. Looking forward, given the growth in the book and as long as equity markets remain broadly consistent, we do expect trading revenues to be higher again in FY '27. So overall, our key business lines are growing and performing well. Now on to FY '27 outlook over on Page 5. Looking forward, we expect FY '27 to be another year of earnings growth. The momentum in our business line underpins our positive outlook and our initial guidance for FY '27 management EPS is to grow by around 6% to $1.54 per share. Based on the interest rate curves this week, MI has passed the low point and should be higher in FY '27. Our initial guidance is $770 million for the year. Now as we have always done, we take the exit rate on balances as the basis for guidance in the new year. And I do think that exposed yields should be a little higher in FY '27. As for the guidance, we also have the usual detailed assumptions and disclaimers in the back of the deck just in case we ever need them. So with that, Nick, over to you to go through the detail.

Thank you, Stuart, and good morning, everyone. So as you've heard, we've had a good FY '26. So let me try and unpack that earnings growth of 7% versus the PCP. I'll start on Slide 7. Firstly, revenue. Excluding MI, revenue was up 4.4%. Adjusting for the in-year disposals of U.K. mortgage servicing and our German Print & Mail business, revenue ex MI was up 7.5%. Total revenue was up 5.2%. This was driven by growth across client fees, which were up 3.8%, largely driven by growth in issuance in Corporate Trust, where fee and money market fund revenues were up 9.4% and in Transactional & Event revenues, which were up 15.4%, reflecting growth in trading activity and plans, both price and volume increases across shareholder paid fees in registry and greater corporate actions activity, especially in the U.S. and in Hong Kong IPOs. On the cost side, we saw increases over and above expectations. BAU OpEx was up 4.5% for the year and over 6% in the second half due to some one-offs. We also invested an additional $39.7 million in new products, technologies and capabilities. This included around $6 million of annualization of OpEx costs in respect of FY '25 acquisitions. Notwithstanding these higher costs, we were still able to improve operating leverage with the EBIT ex MI margin increasing 70 basis points. So what drove the BAU OpEx increase? Well, first of all, we had general salary increases. We awarded merit rises of 2% in October '25, around $18 million, whilst on costs rose disproportionately by $25 million, largely due to step-ups in U.S. health care and U.K. payroll taxes. These costs will level out in FY '27. There will not be any further step-ups of this nature. We also saw an 8.7% increase in other direct expenses and a 4.6% increase in computer costs. These increases reflected a combination of BAU third-party vendor inflation and investments in some of our key projects. For example, the integration of our investment -- investor engagement businesses, $5 million, product enhancements in both plans and Corporate Trust, including foundational work for our EMEA business, social contributions for the Deposit Protectio -- service and work to develop our AI investment program. I expect OpEx inflation to slow to be below 3% in FY '27. EBIT increased 2%, whilst the EBIT margin dropped 40 basis points to 37.2%. This was driven by a 1.6% reduction in MI. I will come to this shortly. Interest expense fell $34 million, driven by lower rates and lower drawn debt levels. The ETR also fell 30 basis points to 24.6%. Whilst pleasing, it was also a little higher than anticipated as we repatriated more funds from Canada, incurring higher levels of withholding tax. NPAT was 6% better than the PCP, while management EPS was $0.10 per share and over 7% ahead of the PCP. Looking through the EPS lens, buyback accretion contributed $0.02 per share of the increase. Organic business growth and cost out was worth $0.059 per share. Lower interest expense was worth a further $0.059 per share. Margin income declines offset these increases by $0.022 per share. And tax expense was higher due to greater profitability. This impacted by $0.017 per share. All up, this took us to $1.452 per share in management EPS for FY '26. Below-the-line costs were also lower by 34%, slightly better than what I said in February. This is really related to the timing of redundancy expense. We continue to target the elimination of our below-the-line cash expenses by FY '28. In the meantime, we expect below-the-line cash costs will be 50% lower in FY '27 at around $47 million before tax. This is all shown on Slide 10. Now you might ask, what makes me confident we'll deliver this target? Well, simply, this is about programs of work coming to an end. We have line of sight to the work that needs to be done, what that work involves and what it will cost us. This isn't cost that simply rolls on. It's project management costs, consulting costs, redundancy costs. Once we finish the project, the cost is eliminated. Let me now touch on margin income, which was 1.6% lower in FY '26. In the context of 3 U.S. rate reductions in the first half, this was a good result. Balances rose 6%, whilst we also increased our recapture rate, our hedge book and hedge yield, all of which helped us limit the yield impact to 19 basis points. You can see this on Slide 8. In FY '27, we expect to generate around $770 million in MI, an increase of $14 million compared with FY '26. You can see this on Slide 9. This is based on average balances of $32.8 billion, an increase of $800 million or 2.5% on FY '26 and in line with exit balances at the end of June. Now the sharp eyed amongst you may note that this is actually lower than average 2H FY '26 balances. But this is simply due to us managing some particularly large low-yielding balances in 2H FY '26 that will not repeat. We expect a yield of 2.35% based on the assumption of rate rise in the U.S. in January, 1 rate rise in Canada in March and 2 rate rises in the U.K. in November and March. This is based on curves as at the 10th of August. FY '27 outlook also assumes an increase in the percentage of exposed balances that are hedged from around 50% to 60%. This is at the top of our target range, but reflects a conscious decision to increase hedging based on attractive longer-term rates. The weighted life of the hedge book is broadly unchanged at around 5 years. Finally, let me turn to the balance sheet and capital management on Slide 11. Cash conversion is broadly flat at 65%, impacted by prepayments of certain long-term technology contracts. I expect this to trend to 70% over the coming years. CapEx fell a little, over $7 million down on the PCP. This is more timing related. I expect it to increase to around $65 million in FY '27 due to planned investments in some of our facilities, our IT infrastructure and AI. Leverage, as you've heard, is now 0.11x. This puts us in a great position, extremely well protected in the event of any potential shocks, extremely well positioned for when our preferred M&A opportunities arise. I now expect us to be close to net cash by the end of the calendar year. We're delighted to increase our final dividend to $0.65 per share, 35% up on last year's final, with the overall FY '26 dividend 29% higher than FY '25. The average payout ratio is now 55%, giving us further room to grow within our target range. And finally, for those of you who would like to see us use our balance sheet strength to buy back more of our stock, I would remind you that this remains inefficient for us under the currently prohibitive Australian tax legislation. I'll now hand back to Stuart.

Thanks, Nick. So in summary, we had a pretty decent year. Computershare has once again proven to be consistent and predictable. We gave initial guidance last August for management EPS of $1.40 per share, upgraded to $1.44 in February and today delivered $1.45. All our businesses have momentum with growth in clients and fees. And there's definitely a buzz around the group as we work with new tech and also on market structure projects. And we put a lot of time into understanding potential changes to digital market structures, and I'm sure we'll discuss that in the coming days. I do think we're well placed to benefit from these and see new revenue pools opening up for us where we've been restricted or indeed not played in before. MI is now a tailwind rather than a headwind. And with our technology and AI investments, we're becoming increasingly efficient. As Nick said, our balance sheet provides us with optionality to invest in our businesses, make acquisitions and reward shareholders, and it is satisfying to be able to announce a final dividend up 35%. But as Nick said, there's room to grow. And going forward, we expect our growth track record to continue. We raised our ambitions earlier this year for our EBIT ex MI target to continue to grow beyond 20% as well as long-term ROIC target of 35%. The operating businesses are performing consistently and predictably, which gives me the confidence for the full year and beyond. So with that, now let's move to questions.

[Operator Instructions] Your first question comes from Nigel Pittaway from Citi.

Just first of all, just within the sort of guidance for next year, the 3.5% projected growth in EBIT ex MI, what would that be if you actually ignored the disposal of U.K. mortgage servicing?

It would be -- so the step-up in margin, Nigel, would be a little bit lower than the 70-odd basis points that we've talked about or the 80 basis points that we've talked about. So if you take out the U.K. mortgage servicing and the German Print & Mail business, EBIT ex MI margins in '26 would be around 18.8%. So the step-up in margin isn't quite as pronounced as it looks on headlines, but there is a particular piece of business that we -- that won't repeat from FY '26 that is impacting those margins. If I take it -- if I just look at EBIT ex MI growth at a headline level or on a pro forma level, it's going up 7%, so it's twice as much if I take out, but there's just a bit of noise between the margins and the absolute number.

Okay. That makes sense. That seems consistent. Okay. Just next, I mean, you did sort of touch a little bit on this as you went through. But obviously, there has been quite a lot of investment in Corporate Trust such that EBIT ex MI margin in the second half is back down to where it was on 1H '25 despite sort of you enunciating early delivery of the Wells Fargo synergies. So can you just expand a little bit more on precisely what's happening in terms of the investment in that cost line within Corporate Trust?

Yes. So there's 2 pieces, Nigel. I'll let Stuart talk about the investments. But just to deal with the margin in the second half, that was in particularly diluted by some of the one-off costs that we talked about, in particular, staff on-cost U.S. health care. And so the margin in the first half '26 is a better guide of where that sort of the underlying margin really is now in that business. So I'd probably ignore the lower margin in the second half.

Yes. And look, we do have some investments there. I mean, as you know, when we acquired that business and we acquired some of the technology that came from Wells Fargo, our goal was to improve on some of that technology set and also get us into markets where perhaps the business haven't been as competitive as before. We've been investing in a lot of work with our collateralized loan obligation portal. That was fairly reasonably sized IT project, for example. And we're already beginning to see the benefits of that in terms of attracting new customers with the real-time data that we're able to provide our issuers, which really helps them with the pricing. So it's always a balance about how much you invest and cutting. And we've always said that we would always invest into these businesses to help them grow. And that's a great example of where we did invest, and we are seeing growth in new customers coming in.

Okay. And maybe just finally -- just on the FY '27 outlook slide, I mean, obviously, the organic business improvement of $0.03 per share. I mean, what do you see as the main positive delta potential for that line? And how much of that do you see as being driven by cost reduction in '27?

Look, this is around $22 million of cost reduction in there, Nigel. Overall, I think, as I said, we think cost inflation will be sub-3% going into FY '27. Where the major growth -- where you're going to see the major growth is going to be in Corporate Trust and in employee share plans, where we see both of those businesses continuing the momentum that we saw in FY '26. Issuer Services, there's a little bit of a business mix change. As we sort of said, there's a particular high-margin piece of business that won't repeat into FY '27. That will be replaced by some lower-margin businesses. So the margin story in issuer is a little bit more nuanced. So the absolute growth is coming largely out of Corporate Trust and Employee share plans.

And would debt issuance be the big swing factor there that could drive it further higher? Would that be because I mean, with corporate actions, the delta is relatively sort of $30 million.

I think so. That's a fair assumption, absolutely.

Your next question comes from Siddharth Parameswaran from JPMorgan.

A few questions, if I can. Just firstly, just on the margin income. I just want to understand if there is any conservatism or not in some of the components of the guidance you've given for FY '27. In particular, it seems like the proportion of nonexposed balances that you're assuming in FY '27 seems to be materially higher than second half '26 as a portion of the overall balances. I just wanted to understand why that is. And obviously, that has a lower yield on it. But also just the conversion efficiency that increased in the second half to 99%. And I think you're guiding to around 96% for FY '27. Maybe you could just comment on how you see that conversion efficiency likely to play out?

Yes. Thanks, Siddharth. So in terms of the foundational assumption for our guidance, we assume balances for FY '27 to be consistent with our exit balances. And so we've seen in the past that, that has proven a little bit conservative. But also there's always a little bit of nuance between rates and balances and how it all plays out. I think -- but we just try to be absolutely consistent with how we've done in previous years. And that plays into the point on nonexposed balances. So our exit nonexposed balances are higher than what they have been. What we've actually seen there is one particular corporate trust client where we've been growing the relationship and growing the balances with them. But those particular balances are all nonexposed and they are low yielding for us. And so that is impacting our, one, the quantum of nonexposed balances, but two, the yield on the nonexposed book. Now as we've said on many occasions, we don't look at the individual client relationships through the lens of balances or fees. We look at it in the round. And we're very comfortable having low-yielding nonexposed balances from clients if that means that as long as the broader commercial relationship meets all of our target thresholds, which in this case, it does. So that is really why the nonexposed balances have gone up and why the yield looks like it's coming down.

And the conversion efficiency?

Sorry, Siddharth, the conversion efficiency. So yes, look, there's no doubt we had a very good second half from a conversion efficiency perspective. We were able to get some really good rates from certain banks who are hungry for U.S. dollars on sort of on some 3-month and 6-month arrangements. We are not certain that they will repeat through FY '27, which is why we're guiding at 96%. I still think relative to history, 96% is a great result, but we will obviously be striving to get that higher.

Okay. No problems. I might just ask another question just around tokenization then. Just if you could just help us understand your partnership with Securitize, what that means for your costs, what the demand is from clients, what your expectation is of the take-up of this either for yourselves or for some of your competitors over the next 12 months, 24 months, some of these a different form of ledger to what's being used currently. And just related to that, there's a lot of change that seems to be happening in the industry at the moment, reviews into transfer agents. Obviously, tokenization, just do we have clarity that a, you won't go the way that Equiniti went in seeking to seek corporate solution to any changes that are occurring and also your commitment that I suppose management are actually keen to stay and see this through for the next couple of years. Can you just answer that, please?

Yes. There's a lot in that to unpack. Look, I think from a Computershare perspective is we expect sort of capital market structures to continue to evolve both with sort of planned infrastructure updates and also tokenization initiatives. And as we've seen through sort of many years of market change, Computershare remains deeply engaged with our issuers, stakeholders and regulators really to create opportunities for the group. And our strategy really is to continue to act as that trusted bridge across traditional and digital markets for issuers and their shareholders. We will leverage our experience of connecting issuers, investors and infrastructures across multiple jurisdictions as we sort of navigate that sort of market change. Now what's been very, very clear is post-trade registration of an asset is a critical role even in a tokenized world and very much recognized by, in this case, the U.S. regulator, the SEC. And we'll continue to sort of work and lead with the industry to provide additional sort of complementary services to our clients and markets stakeholders because we can provide clients with the ability to issue digital tokens as well as maintain their traditional issued capital. So look, it all sounds great and it all sounds exciting, a little bit like when everyone said Bitcoin was going to replace all the banks, right? But from my perspective, we really see issuers, which are our customers in an education phase at the moment. They're really trying to understand how these developments will drive value. Will it change liquidity pools? What benefits will we get from it? And that education phase will probably take a while, while others, including Computershare sort of contemplate or build new infrastructure. And I guess it's that sort of the contemplation and the building of the new infrastructure where we are most engaged. And we expect traditional markets and digital markets to run alongside one another for a considerable period, likely many, many years to come. You asked a couple of questions in terms of what's our view. At the moment, we have the capability to issue, which is mint and burn digital tokens and work alongside the existing one. We have a relationship with Securitize, which is sort of built on APIs using their platform. It's not exclusive. We could do something else if we wanted to. As I said, there's not a lot of demand sort of happening there. The interesting place is really about what's happening with the clearing and settlement and then also the exchanges and what they're doing, and we're in dialogue with all of them. Look, I think Computershare's approach has been pretty conservative as far as rushing out to spend and build and they might come. We've got a relationship. We're testing the water. We're dealing with regulators. We've got options. There's not a lot of demand at this stage, but that will continue to evolve like we saw financial markets for many, many years. And remember, it was Computershare that sort of put forward the issuer sponsored token design, and we're very, very active in it. So anyway, that's kind of a quick summary on tokenization. And I think from my perspective, it's actually going to create some new revenue opportunities potentially as there will be areas where we couldn't play in before or we're out of as there's more sort of direct registration as a result of using tokens. So -- but that's a long way off. I'm not waving that flag now.

Your next question comes from Julian Braganza from Goldman Sachs.

Just first one on Issuer -- ex MI, the revenue growth there for the second half a little bit softer 4.3%. And one thing more, how we should be thinking about that number and any drivers that are impacting that in the half? And also just a second question just around -- I guess we can see a similar thematic there with Corporate Trust, a little bit softer in terms of second half revenue growth. Just any commentary around that.

Yes. So look, I mean, from a -- I'll deal with Corporate Trust first. Look, I think from an overall market perspective, debt issuance generally was pretty strong. We saw fee revenue growth of up 9.5%. If you look at the market, asset-backed security growth was around about 20%. CLOs were up around about sort of mid-30%, et cetera. And a lot of it's timing and whether it's your customers and products, et cetera. We did see CLOs sort of taper off just from a general market perspective in the second half. But I think, I mean, overall, we continue to see debt issuance increase, especially through structured products. I think on the conventional side, it was a little bit quieter, no doubt about it. When I sort break into our business, I look at new deal revenues, I can see that new deal revenues increased sort of 23% over what we saw in '26, et cetera. So, look, the business has always been very, very stable in terms of what it does it. You get some stronger halves than others. But I think that it's a business that is -- that maintains very stable market share across the structured product categories. I think that you'll see debt issuance continue to be pretty consistent in terms of issuances because there is a little bit of recovery when rates were sort of popping around a couple of years back, but that's really the story in Corporate Trust. You had another question around Issuer. I just missed that at the start. Can you repeat that?

Yes, sure. So some thematic in terms of Issuer Services where second half is a bit softer, about 4.3% and that's despite the typical tailwinds around corporate actions. Just want to understand just the drivers of that growth in the second half.

Yes. Look, I don't think there was any specific one item that I would call out first half to second half or quieter. I mean, I think that looking through sort of registry, I certainly sort of if you look at overall public markets and the timing of some of these transactions, I really saw '26 as a little bit of a turning point, especially in U.S. listings like client numbers within the registry business generally have remained fairly stable. We saw market share sort of modestly increase in a number of our marketplaces. And then outside of the listed company addressable market, we also saw a number of things, especially in the first half around ETFs and some REITs, some of the services that we actually provide there that perhaps from a timing perspective, weren't really in the second half. And then you look at the transactional volumes outside of just client numbers and Issuer transactional revenue is probably a little bit more diverse than the plans revenue. It's not just sort of trading. There's a whole bunch of stuff, everything from sort of loss certificates to DRS fees, to IPO fees to DRIP, et cetera. Again, that was fairly consistent. But sometimes you can get a first half, second half bias. So -- but nothing I would really call out in terms of weaknesses in the second half.

Got it. And maybe just a follow-up on employee share plans, transaction revenues doing obviously very well in that second half '26 period. I just want to understand what gives you comfort around your guidance comment that they should continue to do better. So help us understand what gives you comfort around the growth here. And I look at the revenue and transaction revenues is a very meaningful proportion of total revenue. I just want to get comfortable with that trajectory.

Well, I think that we've always said in employee share plans that there's this structural growth trend of what we call the equitization of remuneration, which is a little bit of a mouthful, which is really about corporates using more and more equity to attract, retain and reward employees, right? And we have -- you have to remember that quite often, there is an award and then there's generally a lag period, like a vesting period, could be 12 months, 24 months, 36 months, it varies, but there's always a little bit of a lag. And what we're seeing in the data is that despite very high trading volumes, the book continues to be replenished. So the number of units being issued by organizations continue to increase. Now one of the things that is interesting for me is a little bit of a behavior's thing. I have seen more employees choosing to do sell-all transactions and sell partial transactions. And I think you see that in a little bit of an uncertain world. And so I think as far as confidence in the guidance, one, we have the replenishment of the book. More and more -- you look at some stats, like 15 of our top 20 clients, it's like 8% more employees are getting equity, right, on average, right? And I think with some of that uncertainty, you'll still see a little bit more of the sell-all transactions. So that really kind of gives us the confidence that we -- this is not just a cyclical business that there is an underlying structural growth trend. Now of course, if equity markets correct themselves, of course, there may well be a correction, but it's probably a lot more stable than people realize.

Got it. And last question for me just on Issuer Services margins and the cost story investments being made there. I mean just look at the benefits from Corporate Actions and the margin profile, it looks like there's very, very meaningful investments being made in Issuer Services over FY '26 and adjusting for margin income. I just want to get comfort here. If you're looking at FY '27, you talked about cost out opportunity $22 million. You talked about 3% underlying OpEx growth. But if I think about Issuer Services stand-alone, the margin trajectory for '27 and the view on these investments, how should we be thinking about that?