Link Administration : 2023 Half Year Results Webcast - Transcript

Company: Link Administration Holdings Limited

Title: 1H FY23 Results

Date: 24 February 2023

Time: 9:30am AEDT

Start of Transcript

Operator: Thank you for standing by. Welcome to Link Administration Holdings Limited first half FY23 Results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr Vivek Bhatia, CEO and Managing Director. Please go ahead.

Vivek Bhatia: Thank you. Good morning, everyone. Firstly, 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 half year results of the financial year 2023.

The executive team and I have focused on serving our clients, growing our businesses and supporting out people over the last six months. 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 result, and I will return to summarise, provide an outlook for the remainder of '23 and open for Q&A.

Link Group's digitally enabled platforms connect over 110 million people globally with their assets safely, securely and responsibly. Over the last six months the underlying performance of our core businesses has been strong. Our people and businesses have remained focused on delivering for our clients and on our strategic goals.

Our first half of 2023 operating EBIT was $80.2 million, up 14% year on year and above the guidance range of $75 million to $80 million that we provided at our AGM in November last year. Our operating EBIT margin was up 170 basis points half on half. We have, once again, delivered on our guidance and I am pleased with the consistency of doing as we say.

Pointing out a few key achievements, our decentralised operating model is now in place empowering our businesses with full end to end accountability for their operations. With increased flexibility and the ability to take greater control of their core space, the businesses will now continue to optimise their models over the next 12 to 18 months.

PEXA in-specie distribution was implemented on 10 January 2023, delivering an implied $0.27 per share in value creation for shareholders. Market value of the in-specie distribution to Link Group shareholders as of close of market yesterday is just shy of $850 million.

We are proud to have been part of the success of PEXA and Link Group shareholders have been provided with a direct investment in PEXA, the operator of Australia's leading digital property settlements platform, with great growth potential locally and overseas.

Our Retirement and Superannuation Solutions business now services over 11 million super and pension members across three countries. They have renewed and extended several major contracts in the last few months, including Australian Super and HESTA.

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Earlier this week we also announced an in-principle agreement with Rest to extend our longstanding relationship with them by a further five years, subject to finalisation of agreed terms and conditions. We are thrilled to be selected through a rigorous 18 month selection process to partner with Rest on their exciting journey forward.

In addition, as we announced earlier in the month, RSS have also signed a 10 year agreement with HSBC in Hong Kong for the provision of digital pension administration and value added services to HSBC's ORSO clients, providing an [immediate] footprint in the Asian market for RSS.

Our Corporate Markets business has delivered revenue growth of 2.5% on constant currency basis. India has again shown significant growth delivering 35% improvement in revenues for the first half. Despite a challenging revenue environment which is based on the subdued capital markets activity in the first half of this financial year, our corporate markets business has delivered an operating EBIT, excluding margin income, of $28.1 million, which was up 14.5% year on year. Corporate Markets margin income has also benefitted from high interest rates over the course of the first half of the financial year.

As announced on Monday we are in exclusive negotiation with the Waystone Group in respect of the sale of the whole of our FS business, excluding Woodford related liabilities. This follows a period of confidential, exclusive negotiations with and due diligence by Waystone Group. In addition, Link Group and LFSL are also in advanced confidential discussions with the Financial Conduct Authority, the FCA, to settle their enforcement proceedings against LFSL.

As we have said previously, no legally binding agreement has been reached with either Waystone or the FCA and at present there can be no certainty that any of such agreements will ultimately be concluded.

RSS and BCM businesses have faced tough market conditions in Europe during the first half of the financial year. However, both those businesses have continued to deliver for their clients and have been focused on managing costs.

Last but not least, I am pleased to advise that the Link Group board has declared an interim dividend of $0.045 per share, which will be 80% franked. This is 50% higher than the $0.03 that we declared for the first half last year.

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 first half FY23 revenue was flat year on year but was up circa 2% on constant currency terms. More importantly, our first half '23 Group revenue, excluding FS and BCM, was up almost 5% on PCP basis on a constant currency model. Operating NPATA, excluding PEXA, was up circa 5%, despite being impacted by high interest expense and a higher effective tax rate due to geographic mix of earnings.

The first half of FY23 we reported a statutory loss of $410 million. This was mainly driven by a non-cash impairment of circa $449 million due to Fund Solutions assets and about $15 million related to the BCM goodwill and was partially offset by a $48 million gain on the sale of our PEXA holding in November 2022. With the PEXA in-specie distribution now implemented we expect to book a further gain of approximately $322 million in the second half of FY23.

Our balance sheet remains strong with leverage ratio at 2.3 times. On a pro forma basis once adjusted for the PEXA distribution that happened last month our leverage ratio will be 2.5 times, which is smack in the middle of our guidance range of 2 times to 3 times.

In addition, we continue to make progress towards our sustainability, our environmental and our social goals as we strive to build a sustainable, diverse, caring and inclusive organisation. We remain on track to achieving our climate goals with strong progress in our Absolute Scope 2 Emissions and Emissions Intensity for full-time employees.

December 2022 was a giving back month at Link Group and we raised over $80,000 during the month through donations and volunteering by our people, an increase of about 35% from the same time last year. We are very proud

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of the diversity of our people and the richness that it brings to the business and we continue to deliver on our 40/40/20 goal.

As I've said many times before, one of the key differentiators of Link Group is the resilience and diversity of our business and our client base. This give us the confidence that our businesses will be able to navigate the macro operating conditions that we are facing as evidenced from consistency of our results in FY22, which has continued in the first half of '23.

Our two core businesses of RSS and Corporate Markets continue to perform well. They collectively comprise 94% of our operating EBITDA. India in particular has once again performed very well for Corporate Markets during this period, demonstrating the continued buoyancy of capital markets activity there and our strong leadership position in that market.

Leveraging our robust, scalable and, importantly, secure technology platforms, data and digital solutions, we now administer around 41% of all superannuation accounts in Australia and approximately 1.5 million member accounts in the UK. Corporate Markets also has improved its market share of FTSE350 to 33% and its market share of ASX300 to 38%. Our high levels of recurring revenue, solid performance from our core businesses as well as the geographic and sector diversification of our overall client base continues to provide us a degree of resilience and a solid foundation from which we can deliver consistent growth.

I will now hand over to Andrew to take us through the financial summary.

Andrew McLachlan: Thank you, Vivek, and good morning, everyone. I am going to provide some 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 would 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 delivered on our guidance for the first half of financial year '23. Our operating EBIT performance for the first half of $80.2 million was up 14% on the first half of financial year '22. Overall Group revenue was $592.2 million, which was up 1.9% in constant currency terms and flat once adjusted for FX.

Group revenue saw benefits from higher member numbers in RSS, higher number of shareholders from Corporate Markets in India and higher margin income from Corporate Markets in the UK and Australia. This was offset by lower revenue in Fund Solutions, BCM and lower Capital Markets related revenue for Corporate Markets in the UK and Australia.

Operating costs were down by 2% as the benefits of our now completed Global Transformation program helped offset inflationary pressures across staff and vendor costs. We've also seen the new operating model start to deliver benefits as our businesses take greater control of their costs. At the operating NPATA level we have reported earnings of $48 million, which includes a PEXA contribution of $9.9 million.

As you're aware, the PEXA in-specie distribution was implemented in June was implemented in January '23. In the second half of FY23 there will be only nine days of contribution from PEXA to our results. The first half of financial year '23 operating NPATA, excluding PEXA's contribution, was $38.2 million, up 4.9%. Operating NPATA excluding PEXA will be the metric to focus on for the current year.

As Vivek mentioned, our statutory NPAT loss of $410.1 million included a non-cash impairment charge of $448.9 million related to the Fund Solutions asset and a non-cash impairment charge of $15.4 million related to the BCM goodwill. Our statutory loss also includes $14.4 million of related acquisition and transaction costs offset by a fair value gain of $47.9 million on the PEXA selldown executed in November last year.

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As we've disclosed in our first half accounts, there will be approximately a $322 million fair value gain that will be booked in the second half of this financial year related to the PEXA in-specie distribution, which was implemented in early January '23.

Improved EBITDA performance and timing benefits have seen us deliver net operating cash flow of $150.4 million and a conversion ratio of 117%. We continue to expect a full year conversion ratio to be in the 90-100% range as some of the timing benefits from the first half reverse.

CapEx for the first half of '23 was $33.9 million, or 5.7% of Group revenue. Since FY20 Link Group has now spent over $250 million in capital expenditure as we continue to invest in our digital capabilities, innovative technology and market leading platforms.

Free cash flow of $33.7 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. This was partially offset by higher interest costs on our corporate debt. We ended the period with net debt of $617 million and our pro forma leverage ratio adjusted for the PEXA in-specie distribution was in the middle of our preferred guidance range of two to three times. Our interest cover remains very comfortable at 9.6 times.

Looking now at each of our four businesses in turn starting with our largest business, Retirement and Superannuation Solutions, or RSS. RSS revenue for the first half of '23 increased by 6.2% to $267.9 million. RSS recurring revenue for the first half of '23 was underpinned by higher member numbers and indexation and the benefits from the UK acquisition, partly offset by the impact of unclaimed super money and previously announced client exits on account of industry consolidation.

Project activity was in line with expectations, although slightly below the first half of '22, as evidenced by the slightly lower non-recurring revenue. Strong member growth in RSS continued with ANZ member numbers up 9.6% year on year. This underlying growth largely reflects continuing growth in member numbers, as shown in the graph at the bottom left of the slide.

In the UK RSS reported revenue of $5.2 million, which was up from $3.1 million in the PCP. This includes the inclusion of HS Pensions from 1 November, which contributed $1.2 million. RSS now administers approximately 1.5 million member accounts in the UK and we continue to see a strong pipeline of opportunity within that market, which is transitioning from DB to DC.

RSS's first half operating EBIT of $55.3 million was up 20% on the prior period, driven by revenue growth and strong cost control with the benefits of our now completed transformation program. Operating EBIT margin improved by over 230 basis points to 20.7%.

Turning now to Corporate Markets, this business, which is our most diverse in terms of geographical presence, had a solid revenue performance with revenues of $200.2 million, which was flat compared to the PCP. However, on a constant currency basis revenue was up by 2.5%. Corporate Markets in India continues on its strong growth trajectory with first half '23 revenues up 35% on the first half of '22, now accounting for 10% of divisional revenue ex-margin income in the first half of '23.

Industry and employee share plans saw low single digit recurring revenue growth. [Unclear] print and mail revenue for Corporate Markets was significantly impacted as volumes normalised to pre-Covid levels, together with lower Capital Markets related activity, and to a lesser extent impacted by clients transitioning to digital services. Print and mail revenue was approximately a 450bps headwind of Corporate Markets revenue growth rate in the first half of financial year '23.

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Not surprisingly considering the current macro conditions in the UK and Australia, Capital Markets related revenue, which we categories as non-recurring revenue, has been very subdued during the first half of '23. However, high central bank interest rates in both Australia and the UK have resulted in a positive as margin income has significantly improved. The earn through rates have been broadly in line with expectations, while float balances have been lower on lower Capital Markets related activity.

Despite the flat revenue performance, operating EBIT for Corporate Markets was $43.6 million, up from $25.5 million, reflecting the strong cost performance with the realisation of benefits from the Global Transformation program and the new operating model. Operating EBIT excluding margin income was $28 million. This was up 15% on the PCP.

I'll finish with Fund Solutions and Banking Credit Management. Fund Solutions generated $73.4 million of revenue in the first half of 2023. This was down 11.5% or $9.5 million on the first half 2022. Currency moves clearly had an impact on this business with revenues down 5.9% on constant currency terms. Fund Solutions first half operating EBIT of $5.9 million was down by $11.2 million compared to the first half of 2022. This was due to the flow through impact of lower revenue and inflation impacts on the cost base.

Average assets under administration were down 10% on increased market volatility and broader UK investment market dynamics. According to Morningstar in calendar year 2022 withdrawals from UK open-ended funds exceeded GBP23 billion, the largest outflow in a decade. Comparison 2021 saw over GBP27 billion in inflows. In addition, actively managed funds had the highest net outflows on record whilst equity funds saw almost GBP22 billion in withdrawals and non-sustainable funds saw over GBP50 billion in outflows.

For our BCM business, while the financial year started well with good origination volumes across the UK, Netherlands and Ireland, our interest rates have started to have an impact on our origination related revenue lines in the second quarter of the financial year. BCM generated $59.1 million of revenues in the first half of 2023, down 11.8% on the previous period or down 7.4% on a constant currency basis. Economic factors had a direct and immediate impact on the business. However, despite the challenging operating environment, BCM has delivered a credible result with operating EBITDA flat year on year and the first half operating EBIT of negative $7.7 million a small improvement of $0.4 million year on year despite the $7.9 million reduction in revenues. NPL run off remains a headwind and the outlook for the pipeline of new books coming to market in the next six to nine months remains challenging.

I will now hand back to Vivek to provide an update on our outlook.

Vivek Bhatia: Thank you Andrew. Looking at the outlook for FY23. We have provided more detail and metrics around out thinking on the remainder of the financial year. We are pleased to reaffirm our guidance for financial year 2023 with revenues expected to be at the lower end of our range. We are very well positioned to deliver operating EBITDA growth over the medium term underpinned by our scale, expertise of our people and modern proprietary technology platforms. Our core businesses are in very good shape with both RSS and Corporate Markets delivering on revenue growth and margin improvement for the first half of 2023 and continuing to see good prospects.

We have been diligently focused on executing on our strategy to simplify, deliver and grow over the last 18 months, taking key steps to simplify our operating model and are coming to the tail end of the simplification strategy over the next six months. We continue to deliver to guidance with consistent business and financial performance as we successfully deliver for our clients. Our focus is now on strategic growth and to reinforce and further expand our core businesses.

We are confident that our core businesses of RSS and Corporate Markets have the diversity and resilience required to navigate the current macro-operating conditions as evidenced by their strong performance over FY22 and the continuing growth that we have seen in the first half of 2023. We continue to expect FY23 operating EBIT to be up 10% to 12% on FY22 which is consistent with our prior guidance.

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