Link Administration : 2023 Full Year Results Webcast - Transcript

Company:	Link Administration Holdings Limited (LNK)
Title:	Link Administration Holdings Limited - FY23 Results
Date:	28/08/2023
Time:	09:30 AEST
Start of Transcript

Vivek Bhatia: Good morning, everyone. I would like to acknowledge the Gadigal people of the Eora Nation, traditional custodians of the land on which we present today and pay my respects to the Elders past, present and emerging. I extend that respect to all Aboriginal and Torres Strait Islander people on this update today.

My name is Vivek Bhatia and I am joined today by Andrew MacLachlan, our Group Chief Financial Officer. On behalf of the Executive Leadership Team, Andrew and I would like to thank you for your time today as we present our full year results for the financial year 2023. Today I will start by providing you with an overview of our operational and financial results. Andrew will then walk you through the detail of our financial update, including our divisional results and then I'll return to summarise, provide an outlook and open for Q&A.

Over the last 12 months, the Executive Team and I have remained focussed on serving our clients, simplifying and growing our business and supporting our people in line with what we have said and committed to do in FY23. Link Group's digitally enabled platforms connect over 100 million people globally with their assets safely, securely and responsibly. I am pleased to advice that we have once again delivered on our guidance with the results showing the resilient nature of our continuing operations. Our FY23 operating EBIT of [$178.3 million - slide 4] was up 15.7% and 3.5% above the top end of our guidance range we provided over 12 months ago. The underlying performance of our core businesses have remained strong. We have remained focussed on delivering on our strategic goals of simplify, deliver and grow.

Our core businesses of RSS and Corporate Markets have delivered full year revenue growth of 8.2% and a combined EBIT growth of 23.4%. Other operating EBIT margin on a continuing operations basis was up 221 bps to 17.9%. As outlined on this slide, we have continued to build on and grow Corporate Markets in RSS through five bolt-on acquisitions reinforcing our strategy of strengthening our core businesses and positioning them for future growth. Last but not least, I am pleased to advise that the Link Group Board has declared a final dividend of $0.04 per share which will be 60% franked. This makes the total dividend for FY23 at $0.085 per share which, on the current share price, represents a dividend yield of 6.3%.

Turning to our financial performance I wanted to call out a few specific items ahead of Andrew's more fulsome summary that he will provide shortly. Our FY23 revenue was up 4.5% year-on-year, our FY23 Group revenue on a continuing operations basis, that is excluding FS and BCM, was up 8.2% on FY22. Operating NPATA excluding PEXA was up 1.2% and was impacted by higher interest expense. For FY23, we reported a statutory loss of $418 million, this is consistent with the number we pre-released on 3 August 2023. Since the expected sale of the FS business to Waystone and the announcement of the conditional settlement with the FCA, our over two financial years from a statutory and accounting standards perspective, we expect to book approximately $265 million gain in FY24 once the sale is complete and the scheme is implemented. There are several moving parts here, mainly driven by accounting standards and Andrew will provide a more detailed explanation shortly.

Our balance sheet remains strong with leverage ratio at 2.6 times which is in the middle of our range. During the year, we have spent over $120 million on CapEx and bolt-on acquisitions with the aim of strengthening up core businesses and continued re-investment into maintaining our best-in-class solutions and technology platforms. We continue to focus on our sustainability, environmental and social goals as we strive to build a sustainable, diverse, caring and inclusive organisation. We also continue to focus on our ability to minimise our impact on the environment and I'm pleased to

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advise that we remain on track to achieving our planned goals. We will be releasing our inaugural Taskforce on Climate- Related Financial Disclosure, our TCFD report, next month.

In FY23, I am pleased that we raised and contributed over $540,000 in financial and in-kind giving and volunteering back to the communities in which we operate. We are also very proud of the diversity of our people and the richness that brings to the business. We continue to deliver on our 40:40:20 goals. Finally, our steadfast commitment on data security is globally recognised and evident through our ISO27001 certification which now has 94% global coverage and further amplifies our protective measures.

As previously stated, the simplification journey that we committed to undertake is largely complete and delivered. The sale of our BCM business is on track to complete in the next few days with all regulatory approvals now received. The sale of our FS business to Waystone Group also remains on track and we expect completion in October 2023, subject to a couple of regulatory approvals. We have also signed a sale and purchase agreement for the sale of our FS businesses in Luxembourg and Switzerland. We expect to complete the sale by third quarter of FY24 subject to regulatory approval in Luxembourg.

The LFSL creditor scheme is progressing to plan. As we announced on 3 August, LFSL expects to issue a practice statement letter in September 2023. The practice statement letter is a very important step forward and it will notify the investors of the LF Woodford Equity Income Fund of the formal launch of the scheme. This will provide further details about the key terms of the scheme and the first court hearing in relation to the scheme. Both BCM and Fund Solution businesses possess sound fundamentals and we are proud of their excellent people and leadership. Ultimately we know that these businesses will be better placed to achieve their full potential for its people and its clients under different ownership. As we dedicate our focus and resources on our two-market leading core business of Corporate Markets and RSS.

As we look forward towards the future of our core businesses, our high levels of recurrent revenue, solid performance from these core businesses, as well as the geographic and sector diversification of our overall client base continues to provide us with a high degree of resilience and a strong foundation from which we can deliver consistent and sustainable growth. Revenue growth on a continuing operations basis was 8.2% and excluding acquisitions completed during the year, it was 6.3%. On a continuing basis, the operating margin excluding the margin income was 13.6%. Going forward, undoubtedly Link Group will be a higher growth and higher margin business as you can see from the numbers on this slide. I will now hand over to Andrew to take us through the financial summary.

Andrew MacLachlan: Thank you, Vivek and good morning, everyone. I'm going to provide more detail on the financials first at a Group level and then at a business unit level before handing back to Vivek to provide an update on our outlook. I'd also direct people to the appendices at the back of this presentation which provide more detailed reconciliations of our operating to statutory results. As Vivek mentioned earlier, we've once again delivered on our guidance. Our operating EBIT performance for the financial year '23 of $178.1 million was 3.5% higher than the top end of our guidance range of $169 million to $172 million.

Overall Group revenue was $1.23 billion which was 4.5% up in constant currency terms on the prior year. Group revenues excluding acquisitions was up 3.1% for the year. Group revenue saw benefits from higher member numbers in RSS, higher number of shareholders in Corporate Markets in India and higher margin income from Corporate Markets in the UK and Australia. This was offset by lower revenue and Fund Solutions, BCM and lower capital markets-related revenue for Corporate Markets in the UK and Australia.

Operating costs were up 3.5% for the year but were up only 2.1% once adjusted for the acquisition. Benefits from our now completed global transformation program and the ongoing contribution from our India hub offset some of the inflationary pressures experienced in staff and vendor costs. We've also continued to see our federated operating model start to deliver benefits as our businesses take greater control of their costs. At the operating NPATA level, we've reported earnings of $99.1 million which includes a PEXA contribution of $9.9 million. As you're aware, the PEXA in-

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specie distribution was implemented in January '23. For the financial year '23, operating NPATA excluding PEXA contribution was $89.3 million, up 1.2% from a year ago and was mainly impacted by the higher interest cost on our corporate debt.

As Vivek mentioned, our statutory NPAT loss of $417.7 million was impacted by a number of factors which I'll talk to in the next slide. There are several components to walk through when bridging from operating NPATA to our statutory NPAT and we have disclosed these in our update to the market on 3 August '23. Our operating NPATA, excluding PEXA, of $89.3 million was impacted by the following. Gain on sale of $406.8 million on the PEXA selldown and the in- specie distribution. You'll remember we recognised $47.9 million in the first half of '23 related to the PEXA on market sale in November '22. The remaining $358.9 million fair value gain recognised in the second half is a result of the PEXA in-specie distribution implemented in early January '23. We've taken the $31.1 million fair value write down on the carrying value of our investment and SMART Pension as a result of the valuation work done following their latest equity raise in May '23. Our UK strategy remains independent of our investment in SMART Pension as evidenced by the HS Pension acquisition and recent partnership deals.

Like everyone else in the market, we continue to look and assess our property requirements. With the expected sale of our FS and BCM businesses, the properties aligned with those businesses forms part of the sale perimeter. We've now had time to look at the work preferences of our people in the UK and Australia. Weekly office visits still remain well below pre-COVID levels so we have therefore taken a non-cash impairment of approximately $34.5 million on our surplus real estate footprint both here in Australia and the UK. This reflects actual office occupancy in a flexible work environment.

A non-cash impairment charge of $25.3 million relates to the BCM good will of which $15.4 million was recognised in the first half of '23. In the second half of '23, we've taken an additional impairment for our BCM business, reflecting the agreed sale price to LCFH announced on 17 March '23. A non-cash impairment charge of $368.6 million relates to the Fund Solutions assets. $448.9 million of this was recognised in the first half of '23 but in the second half of '23, we've written back $80.3 million, mainly driven by the accounting standards given the recognition of the provision in respect to the conditional settlement with the FCA also in the second half of '23.

Also for the financial year, we've incurred approximately $34.6 million net of tax related to transaction, acquisitions and operating model changes. As you'll recall, we had incurred $14.4 million in the first half. Breaking this down further, approximately $23 million relates to transaction costs associated with the DND scheme, the PEXA distribution, the BCM sale, the FS sale and settlement. As you would have seen from our disclosures on 3 August, we've taken a $390.9 million provision related to the announcement of the conditional settlement with the FCA and redress. This amount is post-tax and after discounting for the time value of money as required by the accounting standards.

Considering that the expected sale of the FS business to Waystone and the announcement of the conditional settlement with the FCA are over two financial years, from a statutory and accounting standards perspective we expect to book approximately $265 million gain in FY24 once the sale is complete and the scheme is implemented. This accounting treatment does bring an element of noise in our statutory results; however, we've strived to provide as much disclosure on this element as possible to assist investors. I would also highly recommend you read note 16 in our financial statements that we lodged this morning.

Improved operating EBITDA performance and timing benefits have seen us deliver net operating cashflow of $276.9 million and a conversion ratio of 101% at the top end of our 90% to 100% guidance range. CapEx for FY23 was $80.7 million or 6.6% of Group revenue. Since FY20, Link Group has spent over $310 million in CapEx as we continue to invest in our digital capabilities, innovative technology and market leading platforms. Free cashflow of $40.7 million was an improvement from the same time last year due to lower transaction related costs and no PEXA related CGT payment in the current period, partially offset by higher interest costs on our corporate debt.

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Looking at finance expenses, we've seen a significant increase in costs mainly driven by the impact of higher rates given our debt is 100% floating. It will also be beneficial to look at note 19 of our financial statements to see a breakdown of finance costs that impact our P&L. We ended the period with net debt of $681.5 million, in line with prior year. Our leverage ratio of 2.6 times is in the middle of preferred guidance range of two to three times. Our interest cover remains at a comfortable 5.8 times.

As we've disclosed back in April '23 and again on 3 August '23, we expect our pro forma leverage ratio at the end of June '24 to be at the upper end of our two to three times range. Our leverage forecast assumes a normal level of working capital movement, 90% to 100% cash conversion ratio, CapEx spend at the top end of the 4% to 6% of revenue range, tax paid at a 28% to 30% effective rate, interest expense on corporate debt which I previously noted is 100% floating and is contingent on the FS sale and LFSL scheme implementation occurring during FY24. We remain focussed on our core businesses and their ability to reinforce their market leading position. We will continue to assess bolt-on acquisitions on a case-by-case basis and we'll prioritise strategic deals over a slight delay for our leverage ratio to return to the mid-point of our preferred range.

Looking now at each of our businesses in turn, starting with Retirement and Super Solutions or RSS. RSS revenue for FY23 increased by 8.3% to $554.1 million. With underlying revenue excluding acquisitions for FY23 up 5.7%. RSS underlying revenue growth was underpinned by higher member numbers, indexation and contribution from the UK, partially offset by the impact of unclaimed super money and previously announced client exits on account of industry consolidation. Project activity which is reflected in non-recurring revenue was in line with expectations.

Strong member growth in RSS continued with ANZ member numbers up 7.5% year-on-year. This member growth largely reflects continuing growth in members at our largest clients. Off shore, RSS has made great progress over the last 12 to 18 months. The UK now administers around 1.6 million pension accounts with the HS Pensions acquisition completed in the first half of '23. In July '23, Link Group also signed a multi-year partnership with Cushon, now part of the NatWest Group in the UK. The UK margin profile will be lower than that achieved in Australia as the business model is different. RSS now also has a strong foothold in Hong Kong after our acquisition and agreement with HSBC for the provision of digital pension and value-added services to HSBC's ORSO clients for a period of 10 years.

The Hong Kong market is currently undergoing significant regulatory change and this is where we see an opportunity to step in and provide these services on behalf of current administrators to consolidate the industry and provide scale benefits. The corporate ORSO market is akin to the corporate super market in Australia. We believe the HSBC transaction will be a significant consolidation opportunity, not only in the ORSO market but also in the adjacent MPF market. I note in Hong Kong, it's a FUM based revenue model and we expect the Hong Kong region to be a material contributor to the RSS division over the next three to five years.

Turning now to Corporate Markets. Corporate Markets delivered a good performance with revenues of $416.4 million which was up 7.6% compared to the PCP. On a constant currency basis, revenue was up by 8%. Australia and New Zealand revenues of $184.7 million was up 2.9% and contributed 44.3% of Corporate Markets revenues. The business delivered strong client wins through the year, including Ampol and hipages Group. Its revenue growth was also assisted by higher margin income. This was partially offset by weaker capital market activity impacting corporate actions, IPOs, investor relations and therefore print and mail volumes.

Fund Solutions in Australia is now operationally integrated within Corporate Markets and is now called Fund Services. Corporate Markets is the only scale provider of listed and unlisted registry services in Australia. In the UK, revenues of $167.3 million was up 3.5% and contributed 40.2% of Corporate Markets revenues. Revenue was supported by new business wins as well as a strong renewal pipeline. Margin income also contributed to the strong UK result. Similarly, as in Australia, Capital Markets activity was soft with low IPO activity and low market confidence slowing corporate actions and share dealing.

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I'm pleased to report India had another very strong year with revenue growth of 22.2% contributing 8.3% of corporate market revenues. The growth was mostly seen through the first half driven by buoyant IPO activity. Float balances across Corporate Markets were approximately $1.6 billion during the year and benefited from one-off activity in the second half and the growing equity share plan business in the UK. Average base interest rates were approximately 3.1% with a 95% earn through and the float balance split 67% to the UK with the remaining exposed to Australian rates. We expect float balances for FY24 to be in the $1.3 billion to $1.4 billion range.

I'll finish with Fund Solutions and Banking and Credit Management. Both these businesses have been classified as discontinued businesses and are held for sale in our balance sheet as of 30 June '23. Revenues for both these businesses was $272.6 million for the year, down 6.6% with operating EBIT of $7.1 million down 54%. I'll now hand back to Vivek to provide an update on our outlook.

Vivek Bhatia: Thank you, Andrew. Looking forward to FY24, Link Group is a simpler, focussed and more importantly, a growth-oriented business. Our modern, secure and scalable technology platforms are known for their industrial grade robustness and reliability. Our innovative solutions leverage artificial intelligence and robotic process automation to enable our clients to enhance their overall member or shareholder experience and outcomes whilst fulfilling the changing landscape of regulatory requirements.

RSS is Australia's number one superannuation solutions provider with a 41% market share. It is also Link Group's largest division, generating 57% of Group revenue on a continuing basis and about 58% of operating EBITDA.

Corporate Markets, which is our fast growing and geographically diverse business generates 43% of Group revenue on a continuing basis and contributes 42% of the operating EBITDA. It continues to make strong strides in securing market share across its broad range of products, with India performing exceptionally well again in FY23.

As you can see from the table on the bottom right, going forward Link Group will be a higher margin business and we remain optimistic about the opportunities that present themselves in the future. Both of our businesses have solid fundamentals, blue-chip clients, experienced and dedicated people and robust technology platforms. These attributes make them market leading businesses with a strong runway for growth.

Link Group on a continuing basis i.e. with RSS and Corporate Markets, generates over $950 million worth of revenue and has delivered circa $248 million of operating EBITDA in FY23. On a proforma basis, Link Group on a continuing basis delivered an operating EBITDA margin of 26% and an operating EBIT margin of 17.9%.

The next two slides provide the focus areas and some key highlights of our core businesses. As you are aware, RSS has a purpose built, flexible technology and services ecosystem that is actively growing into a global retirement solutions business. RSS currently administers more than 11.6 million super and pension members on its platforms across four jurisdictions, including 10 million in Australia.

Our focus for FY24 builds upon the expansion of RSS into Hong Kong, continued growth in the UK on a solid platform and consolidating and building upon its market leadership position in Australia. RSS continues to expand on its service offering to deliver on data, digital and retirement capabilities to serve its clients and their members. The focus on IT security as well as adoption of innovative solutions turbocharged the robust, comprehensive & scalable platforms to deliver on the changing regulatory landscape and the evolving expectations of members in the sector.

Corporate Market provides an unmatched ecosystem of technology led solutions which are unparalleled in the market and provide a wide range of services for clients to operate in the listed and unlisted space. As the slide shows, Corporate Markets is focused on the key verticals and we are already seeing benefits of this renewed focus of offering an ecosystem of platforms and services to its clients in a bundled and integrated way.

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