PEXA Group Limited

Good morning.

I'm Glen King, PEXA's Group Managing Director and Chief Executive Officer. And joining me this morning is our Chief Financial and Growth Officer, Scott Butterworth. We're pleased to welcome you to PEXA's results for the 12 months ended 30th of June, 2023. Now, before I start, please note slide two contains the important notice disclaimer information. I'm going to move on to slide three. In the spirit of reconciliation, PECSA acknowledges the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islanders people today. We at PECSA accept the invitation to walk with First Nations peoples to a better future for us all and invite you to join the movement. Now I'm going to move to slide four. And this is the agenda for this morning. We will cover PEXA's FY23 business review, financial performance and provide some commentary on the company's outlook. At the end, both Scott and I will be happy to take any questions. Now moving to slide 5, before we go into further detail of the FY23 performance, I did think it was important to take you through some important context about the PEXA group. Now, for those who aren't aware, we began over a decade ago with a key mission to solve a customer imperative. Our first phase was to build a safe, national, reliable electronic platform by which the purchase, sale and refinancing of property could be facilitated smoothly, reliably and improving the overall customer experience. It was a government COAG-sponsored initiative, co-designed by industry, government and customers to provide what is now a world-leading property exchange platform that has set the standard, not just in the property market, but also other registry-like services. Our second phase was building out the PEXA Exchange platform to provide comprehensive coverage across most of Australia. From 2021, we successfully processed millions of property transactions through the PEXA Exchange platform. That's right, millions. And during this period, we also successfully listed on the Australian Stock Exchange. And we began our expansion of our property exchange platform into the UK. And we commenced our extension into additional property, digital product and service adjacencies. And now, as a PEXA group, we're now into our third and current phase, where we have grown our PEXA exchange platform coverage to 88% of the Australian market. And we've extended and scaled up our property digital adjacent services, which includes leading digital businesses, such as Value Australia and DotID. And we are now rapidly expanding our UK platform into a business with UK lenders on our platform. Plus, we're transitioning Optima Legal to the PEXA UK group and exploring opportunities with additional UK financial institutions. And all of this progress has contributed to our solid FY23 results. So now moving to slide six. And there are three key messages which I would like you to take away from today's PEXA Group results and presentation. Number one, the PEXA Exchange continues to deliver. It is a robust, resilient property platform and it's performed based on world-class digital infrastructure. In addition to that, as I mentioned, our Australian market share increased to 88% in FY23. And further to that, we've had disciplined cost management with margin improvement from 52.2% in the first half of FY23 to 55.1% in the second half of FY23. Secondly, Our growth businesses are delivering and building to scale. Our PexaGo platform is now live in the UK market and processing transactions. The rollout of the PexaGo platform is favourable to where we were in the Australian rollout. Our digital growth businesses are innovative, AI orientated, unique and beginning to deliver revenue and scale. And we have a sizeable uptake with a path for sustainable growth. And thirdly, disciplined approach to cost efficiency and capital allocation. We delivered efficiencies this year. We have focused on continuous improvements which we will extend in FY24 to deliver on our margin expectations. We have strong operating cash flow and our capital is continually deployed in a disciplined fashion to support strategic growth. PEXA is powering the property markets in Australia and is now underway as a business in the UK. So moving to slide seven, turning to the opportunities that are available to PEXA. We now have multiple diverse revenue streams across three core areas, each with a significant total addressable market. So firstly, the PEXA Exchange, our world-leading digital property registration and settlement platform in Australia, has a current revenue of $263 million against a total addressable market of $300 million. Our PEXA digital growth business seeks to develop property insight solutions that enrich our customer proposition. The current revenue is now $12 million, which is from next to nothing in FY22, against a total addressable market of $500 million. That's right, $500 million. And we now have leading digital property businesses, tech and brands, such as Value Australia, .ID, and our recently acquired business, Land Insights. We are excited about the business growth opportunity in these areas. And our third business unit is PEXA International, which seeks to leverage our unique IP to expand into major torrents title markets, starting in the UK, where our business is now operational through both our PEXA Go platform combined with Optima Legal's distribution potential. Our current revenue is now $9 million against a total addressable market of $750 million in similar major torrents title markets. Like digital growth, we are investing for growth and we have a customer presence through PEXA and Optima offerings in the UK. We have a clear and consistent strategy to execute and unlock these opportunities. Now moving to slide eight. Our strategy is anchored in our purpose, connecting people to place, which frames how we work and is underpinned by our values. A purpose that is values-based for our customers, our people, our community and our shareholders. A purpose that motivates our people. And our strategy is simple. deliver sustainable business growth by enhancing the PEXA exchange, extending further into the property ecosystem and our customers through product adjacencies, and expanding our core capability into jurisdictions with similar customer opportunities to solve, and evolving our operating model to underpin a productive and engaged professional team, build on values of better together, making it happen and count, and innovate for good. Now, over the next few slides, I'll touch on some key overview points about our business and strategy. So turning to slide nine and starting with the leading PEXA exchange platform. The exchange in the year continued to demonstrate resilience and robustness despite the property market headwinds. And it cemented its place as important national digital infrastructure with 88% market transactions, which was up on the prior year, with strong growth in ACT and Queensland, a positive customs score of 81, and 3.7 million transactions processed for the year. We're also now underway with Tasmania, exploring new Northern Territory, and we expect further transaction growth in WA. Now moving to slide 10. The strong capabilities we have built in the exchange has enabled us to appropriately extend into adjacent property products and service solutions through our digital growth business. Broad services that have now delivered 12 million of revenue, nine times year-on-year growth. And let me say, our guidance is that digital growth will break even at the operating EBITDA level for the month of June 24. Importantly, the scaling of our emerging digital businesses provides basis for further growth in Australia and the UK. Now let me take you through a few points on the UK as shown in slide 11. The UK business is building, scaling and operational. We have achieved this based on the Australian PEXA exchange learnings. We have built and had approved a new payment system integrated into the Bank of England, PEXA Pay. This payment system specifically supports property settlements in the market. We have nine banks tested on this payment system. Our PEXA Go platform, which is our settlements platform, has onboarded two financial institutions in the year, which are now successfully transacting remortgages. And it is important to distinguish there are differences between the Australian and UK markets. So, therefore, we acquired Optima Legal, which supports our ability to bring Remo volumes onto our Pexigo platform and understand how bulk conveyances operate and refine our solution to better support these customers. In terms of building scale and momentum in our UK business, I can also advise we are in discussions with some of the UK's largest lenders, some of which are already on the Optima Legal platform, such as Virgin Money, and Nottingham Building Society and some which are not, such as Metro Bank. We are not currently at liberty to disclose other lenders currently, but discussions are underway. So moving to slide 12 to illustrate the positive comparable position of the UK rollout when compared to Australia. While there are differences, we are trending well on our UK development to the equivalent time period when we were rolling out in Australia. And a few examples to call out. We have developed a PEXA Go platform that works. We have worked through the market dynamics and identified clear customer and regulatory imperatives for our PEXA platform. We have built scale and distribution potential through our UK acquisition. And we have managed to our financials and plan to deliver. We are pleased with our progress and the momentum we have underway in the UK. Now turning to slide 13 and briefly noting the FY23 market environment. As flagged at the half year, the results this year in the Australian property market were challenging due to the Reserve Bank's round of interest rate rises with house prices and transaction volumes receding from the highs in FY22. This was partially offset with the increase in refinancing activity, yet refinancing is has lower margins and fees for us on the Apexa Exchange platform. In addition to that, the UK market also saw a slowdown in prices and remortgaging activity. Yet, as illustrated on slide 14, we at Apexa proactively responded to the market conditions whilst building for future value. Part of our response included management actions targeting usage, productivity and pricing, which resulted in a positive impact. At the same time we continued to build for future value through growth investments which resulted in a $19 million impact on EBITDA. Now turning to a high level segment view of our performance. Starting with slide 15. This slide shows despite slowing markets we have achieved a solid and credible response. Our total group business revenue rose 1% to $283 million, with growth from our emerging digital growth and international businesses offering lower PEXA exchange revenues. Our exchange revenues did decrease 6% to $263 million due to challenging market conditions. However, and importantly, our second-half margins improved from 52.2% to 55.1%. Our PEXA digital growth delivered revenue of $12 million, as I said, a nine-fold increase year-on-year, and our PEXA international progress well with the acquisition of OptumLegal in the UK, delivering initial business revenues of $9 million. So turning to business review for FY23 on slide 16, we are pleased with the considerable momentum and a couple of call-outs. PEXA Exchange has achieved an average market share of 88%, up two percentage points. PEXA Digital Growth has commenced preparation for commercialisation of a number of businesses, including Value Australia Service, with a number of MOUs in place. And PEXA UK is progressing well, with a Group 3 mortgage offering in place, PEXA Go Live, and successfully launched with a number of financial institutions and a number of other financial institutions in discussion. In addition to this, we're also exploring other international markets. Now, going to slide 17, none of this would be possible without our people, customers, and the value we are providing to the communities in which we represent. And you can see the strength of PEXA through the highlights on this slide. For example, we have a highly engaged team as represented by a 77% engagement score and recognised through numerous industry awards. Now, going to slide 18, I'll now hand over to Scott to talk through our FY23 financial performance in more detail. As you will all be aware, Scott, who has worked as a CFO in major listed businesses in both Australia and the UK, was appointed to the role of Chief Financial and Growth Officer in May and assumed this role from 1 July. He is a highly credentialed finance executive, having been with Apexa Group since November 21, and has been instrumental in delivering our group strategy. He has added significant bench strength to the organisation. So over to you, Scott.

Thank you, Glenn, and thanks also to those who have joined the call today. Turning first to the performance of the overall PEXA group as outlined on slide 19, revenue for the group increased by 1%, or $3.6 million over FY22. This was achieved despite a net $15 million decline in exchange revenue with our emerging digital growth in international businesses, contributing $19 million of new revenue to the group. Operating expenses increased by $38 million over the period. To break this down a little, $22 million of this increase is associated with the businesses we bought in the period, ID, Optima and Value Australia. Around $12 million was driven by investing in the capabilities of our emerging businesses as they began to scale over the period. Additional cost growth was primarily driven by capitalisation effects and a range of smaller cost items and inflation. Pleasingly, our efficiency and productivity efforts generated in-year benefits equivalent to 3% of FY22's cost base. These movements have led to the group's operating EBITDA margin moving from 48% in FY22 to 35% in FY23. As previously outlined by Glenn, This represents the effect of investing in future value creation by the group, partially offset by strong management of key levers, whilst digesting the effects of macroeconomic uncertainty in our major markets. Before turning to the performance of our individual businesses, I want to address three items below the operating EBITDA line as set out on slide 20. Firstly, you will see that we have set out the specified items for FY22 and FY23. These are items that are sufficiently unusual and or non-recurring in nature that they should be separately called out. A full delineation of those items for FY23 and 22 is contained in the appendices on slides 40 to 41. However, as you can see, these items declined by $7.5 million over the year. This was primarily due to the non-recurrence of FY22's IPO costs partly offset by a range of M&A and related strategic costs incurred during FY23. Secondly, depreciation and amortisation increased by $8.5 million due to both our organic investment in our exchange and emerging businesses, as well as increases associated with businesses we bought in the period. Lastly, you can see a very large jump in our effective tax rate, which, together with the reduction in EBITDA, explains much of the decline in NPATA. This was driven by the need to write off certain non-cash R&D tax credits following links in specie distribution of its PEXA shares. I will now turn to the performance of each of our lines of business, starting with exchange, revenues, costs and CapEx on slides 21 to 23. Summarising the key themes, Firstly, as stated previously, exchange revenues declined by $15 million or 6% over the year. This was driven by a combination of declining market volumes, particularly during the second half, and an increase in the mix of lower revenue refi products. These market movements had the effect of reducing our revenues by the equivalent of $36 million. To partially offset them by the equivalent of $20 million, We benefited from repricing decisions made at the beginning of the year, as well as encouraging further exchange usage in the ACT and Queensland. We managed our cost base effectively, with a particular emphasis on managing our labour mix and driving efficiencies in our non-labour costs. As a result, despite the decline in revenues, we held the reduction in year-on-year margins to 1% and remained within our guidance range of 50% to 55%. Margins also improved sequentially in the second half. We increased our investment in the exchange by $11 million during the year. These investments resulted in improved resilience and cybersecurity, over 250 customer innovations, additional customer APIs, and the fulfillment of regulatory-related requirements. Slides 24 and 25 deal with the progress made by our digital growth business over the past year. Again, I'll summarise the key revenue, expense and CapEx themes covered by these slides. Revenues for digital growth increased by 10.3 million, or nine times over the period, mostly in the second half. Much of this was driven by the acquisition of ID, which gave us nine months of revenue during the year. It is pleasing that we've seen an acceleration of ID's revenue trajectory under PEX's ownership as the business takes advantage of the distribution and other resources that we can provide. Outside of ID, we have also had good initial traction with our suite of organically developed data and digital solutions, with their revenue increasing by 2.6 times relative to FY22. Costs did increase in this business over the year. reflecting about $8 million of costs added through acquisitions and additional costs representing investment in the capability of the business as it starts to grow. To partly offset this cost growth, we generated efficiencies equivalent to 17% of FY22's costs, and this helped to improve operating margins by nearly 390 percentage points over the year as the business started to scale. The increase in specified items for the period reflects the impact of restructuring activity and transaction and integration costs associated with investments and acquisitions made during the year. CapEx was largely flat over the period. However, the mix of capital expenditures did change over the year as we ramped down development for some of our existing organic products, commenced work on new products and started work on commercialising Value Australia. I turn now to the revenue expense and CapEx performance of our international businesses as outlined on slides 26 and 27. With the acquisition of Optima Legal, we've now started to generate revenue in this business for the first time. However, Optima's revenue performed at a lower rate than typical for the business. This was for two reasons. Firstly, there was a marked post-January slowdown in overall market remortgage activity as banks and consumers digested the effects of the Bank of England's changes to monetary policy. Secondly, as widely noted at the time, Capita PLC suffered from a range of technology related issues around the end of the third fiscal quarter. As a former member of the Capita Group still consuming Capita related services, Optima was also impacted by these issues. The combined revenue effect of these issues was around $5 to $6 million in the period, noting that we have lodged a claim for the Capita technology related issues with our insurers. Operating costs associated with our international activities increased by $22 million over the period. Around $14 million of this cost increase was associated with Optima Legal. The remaining cost uplift was driven by the spend on resources required to further build out our international PEXA Go platform, as well as undertaking business development and other related sales activities. Specified items increased by $8 million over the year. These mainly related to the cost associated with acquiring and integrating Optima Legal and the associated strategic positioning activities that we have undertaken. CAPEX increased by $6 million over the year, largely reflecting increased expenditure on PEXA Go. The cash effects of the group's performance are set out on slide 28. The group's operating cash flow generation was only $6 million lower than in FY22, despite the $27 million reduction in cash-adjusted EBITDA over the period. This was due to the favourable impact of net working capital movements as the effect of certain prepaid IPO costs incurred in FY22 were not repeated in FY23. Reflecting the investment's Noted earlier, CAPEX consumed about $67 million of our cash flows, up by $17 million relative to the previous year. Much of this was for the exchange and for international. We spent a further $52 million on investments, including $24.3

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Apologies everyone for the dropout there. I'll just restart on slide 29. As described in that slide, notwithstanding the cash consumption over the year, the group's balance sheet remains on a sound footing. Debt metrics remain within appropriate levels, and we have about $35 million in undrawn facilities. Met finance costs remain manageable, with the effect of increasing loan interest rates being partially mitigated by the interest on source and other cash account balances. Having been involved in much of the group's development over the past two years, one of my highest priorities is incoming CFGO, is to ensure we have a strong and disciplined approach to managing our shareholders' capital. As set out on slide 30, Glen and I are highly committed to ensuring that the group's resources are invested for long-term value creation. We have a clear framework for managing the allocation of capital to appropriate opportunities across the group and for reporting on the outcomes of those allocations. At present, and as suggested by the growth expectations built into our market trading multiples, We believe that applying this framework suggests that disciplined investment in our new business activities will create long-term value for the group. Of course, if this were to be no longer the case, we would take appropriate actions to ensure the efficient deployment of capital on behalf of our shareholders. In closing, the group has turned out a solid result for the year. We produced a strong margin outcome for the exchange despite falling revenues. Our PDG and international businesses are beginning to scale and we created good operating cash flows. I'll now hand over to Glenn to provide some closing comments and perspectives on our outlook.

Thank you, Scott. Now, just turning to slide 32, I'll provide some thoughts on the outlook and where our priorities are for the year ahead. To support Scott's comments, we are committed to maturing and scaling our business through a clear set of productivity enhancement levers. We have scaled our business rapidly, and as our operating environment remains uncertain, we will prudently review our expense base to ensure we remain efficient and continue to ensure that we deliver for our customers. There are several things that we've been progressing already, and this has delivered efficiencies this year. We will be maintaining this momentum as we head into FY24. These initiatives will cover our purchasing scale, our increasing use of technology such as AI, and different initiatives that support productivity. I will now outline our focus priorities for FY24. Turning to slide 33 shows the key strategic initiatives under each of our pillars of enhance, extend, and expand. For example, we'll continue to enhance Apex Exchange to be in a competitive position, growing transaction coverage, including working with Tasmania as planned for launching FY25, maintaining critical resilience and maturing our service proposition through accelerated API connectivity, all the whilst ensuring regulatory compliance. We will continue to extend our reach by deepening our service and distribution across key customer segments in Australia. This includes commercialisation of Value Australia and building out our digital business scale. And we will continually expand our international business in the UK with both PEXA and Optima Legal. Seek to sign up more financial institutions by converting Optima Legal remortgage flow to PEXA and build on the work of our PEXA Go platform in purchase and sale. We will also continue to explore other Torrens title markets. We will deliver these initiatives through disciplined execution, productivity enhancements secure and reliable services whilst delivering on our customer, shareholder and people expectations. Now turning to slide 34, notwithstanding this, the ongoing challenges in the property markets, we expect the PEXA Exchange to continue its resilience performance, delivering strong cash flow and operating EBITDA margins in a consistent 50 to 55% range through FY24. We expect our digital growth business to be operating EBITDA break even for the month of June 24. We also expect to manage our investment in our emerging businesses, digital growth and international to a combined 70 to 80 million, which remains broadly in line with our FY23 results. And as we continue to build out our range of business units, we are increasingly focused on the group margin. The group margin currently sits at 35% and we expect this will be a flaw for our performance in FY24. So to conclude and turn into slide 35, we are delivering on our promise. That's right, we are delivering on our promise. These results demonstrate we're doing exactly what we said we would do we are in a phase of investing for future growth. We're using the expertise and experience built up through the development of the world's first digital property exchange to build new adjacent revenue streams. It shows the resilience of our business model built on the consistent high margin performance of the exchange and growth from new revenue streams. To close out, I'd like to leave you these key takeouts. One, the PEXA exchange continues to deliver and has demonstrated its resilience in the face of challenging market conditions. Two, our growth businesses are delivering and beginning to scale both in Australia and the UK. And three, we are focused on executing against our strategy with a disciplined approach to cost efficiency and capital allocation. Can I thank you all for listening, for your attention, and on behalf of Scott and I, we would be happy to take questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the headset to ask your question. Your first question comes from Ed Henning from CLSA. Please go ahead.

Thank you for taking my questions. I've got a couple, if possible. Just firstly, the change in the UK CEO. Can you just touch on what happened there? And also, just on the UK, you haven't given us many signposts for 2024. What do you actually expect to deliver in 2024? And when do you expect this division to break even? Is it still around 25 or has that been pushed out a little bit as things are taking a little bit longer?

Firstly, thank you, Ed, for your question or your questions. So firstly, let me just touch on our UK CEO, James Bower. He was responsible for establishing the PECSA's early presence in the UK and got us up and running and we've achieved significant momentum to get to this stage. James decided to take the opportunity to pursue other endeavours and opportunities and he'll be leaving at the end of August. He's been a strong leader to get us to this stage. He's worked with us for a couple of years and worked very hard to actually get our platform up and running. But we're now at a different stage where we've acquired OptumLegal and with the PEXA UK business, we're bringing that together under one UK country head. And we're working through that at the moment, and we're in a good place to announce something in the near future. The second thing in terms of, let me just take you through in terms of signposts or a bit of areas in terms of what we're progressing on. The first thing, we're well placed in the UK. And as I mentioned, Ed, the platform, PepsiGo platform is up and running, and it's progressing well if you compare it to the Australian timelines. Secondly, we've got financial institutions already processing remortgages on that platform, which is important. And we've got a number of other financial institutions lined up. Thirdly, with Optima Legal now, which we're building into the broader PEXA UK business, we're now looking to put our PEXA tech into the Optima Legal business. We're looking to get some remortgage flow from Optima Legal onto the PEXA GoTech platform. And we're working with a number of financial institutions as we explore that out in FY24. As I flagged, two of those are Virgin Money and Nottingham Building Society. So we'll be working those through in the FY24 period. But we're also talking to a number of other financial institutions, such as Metro Bank, who does not operate on the Optum Legal platform. But let me also say, in addition to that, as I flagged, when you look at the guidance lens, we've given an indication of what we expect to invest in the UK and digital growth businesses, which is pretty much in line with the FY23 period. But the other guidance I can give you, as I flagged, is we're also looking at the group margin, and that group margin at a floor would be around 35%, which is consistent with this year as well. They're the key areas I can give you guidance on. If I was then to wrap up, we are in a good place. We understand that our platforms is working and we're in a good place in terms of the customer and the regulatory imperatives. We're in a good place because we've got distribution and we're in a good place because we're delivering on everything we said we're going to do.

Thank you. And just one more on Optima. Firstly, when will your systems be integrated with Optima? And then secondly, once that's done, how long will it take a bank to sign up and then test so then you can actually see revenue in the door. Is it a short, you know, a couple of month period? Is it a six month period? I'm just trying to get the lag of when people sign up once it's all up and running with Optima.

There's a couple of things on this one, Ed, and I'm not going to give you in terms of definitive timelines for a start on, you know, two months, three months. But I think the first thing to consider is is we already have customers now as customers of Optum Legal. So as we've flagged, we've got six of the eight major banks already using the Optum Legal business. So we're in discussion with those in terms of how can we ensure we deliver a better experience using a combination of Optum Legal and the PEXA platform. We're already working through at the moment of how do we bring the PEXA tech into the Optum Legal business. And over FY24, we'll give some indications of how that is actually progressing And we would also expect to get some remortgage flow from OptumLegal onto the PepsiCo platform. And I would also expect that the remortgage flow on the PepsiCo platform will increase from what we had in FY23. In fact, I'd be pretty disappointed if it doesn't increase, Ed. And as it does progress, we will show that.

Okay, that's great. I'll leave it there for other people to ask questions. Thank you.

Your next question comes from Josh Kanarukis from Baron Joey. Please go ahead.

Hi Glenn and Scott. Thank you for taking my questions. First one, just a point of clarification around the MPAT-A and I guess reconciling to an underlying MPAT-A number. Obviously there's the tax sort of movements, but should we be assuming

know on a normalized and obviously income tax rather cash tax rate sort of 30 that that mpad a number this year on an underlying basis would have been around 50. could you just give us a bit of clarification on that yeah thanks thanks josh um we last year the effective tax rate was circa 32 percent um and we didn't have any r d tax credit write-offs i would expect over time that we would converge down to the statutory rate. The only small piece on that would be UK tax rates, given we have an increasing portion of the business there, but that won't be a material effect for the next couple of years, I would have thought.

Yeah, got it. So just, I mean, is there any way, just to put it, because I think a few people are just trying to clarify what your sort of underlying impact would sort of be circa, you know, this year, if you were sort of in a normalised tax environment?

I would use 30% tax rate to normalise it. And then you just have the depreciation to run through.

Yeah, so about 50 mil MPAD A underlying to take out the one-off.

Thereabouts. I think we saw your note earlier. It seemed to be in line with the sort of things we were thinking of. But if there's any... We'll take another look at that if there's any departure and that will obviously come back. Yeah.

Yeah, okay. No, that's fine. And then just in terms of the base PEXA, you know, the exchange business, obviously a cracking margin into the second half. Can we just talk about a little bit some of the, you know, I guess some of the restructuring or costs you did and how should we be thinking about some of the cost base into next year for the PEXA exchange business?

So a lot of the specified items in the exchange this year are were either for some regulatory work that we undertook during the period or associated with restructuring and redundancy. It's not a business that consumes a lot of those strategic sorts of costs on an ongoing basis. So what I would say is that if you were modelling it take the approach that we've achieved this year, I think. That's not guidance, by the way. That's a modelling approach.

Yeah. I guess a lot of people would be looking at it and thinking, in an environment where, you know, we might see potentially volumes higher, is there any reason why, you know, some of that second half margin couldn't continue on? Or is there any big step changes in costs that we should be thinking about into next year for the PEXA-based businesses?

The great thing about the exchange is it's a very high fixed cost business. So the unit costs of operation tend to drop pretty sharply when volumes increase and margins widen. Similarly though, this year we've been able to manage non-labour costs pretty effectively and also our labour mix pretty effectively. The way we're thinking about cost growth overall in the company is about making sure that ex-acquisitions, the cost growth is no greater than inflation so that we find productivity improvements and efficiency improvements both in our labour and non-labour costs to keep us within that end globe.

Got it. And so if we did get a recovery just theoretically into next year, there's not a significant change in the cost base within the PEXA exchange business?

We'll manage it to a margin of 50% to 55%.

Okay. Thanks, guys. Appreciate it.

Your next question comes from Brendan Carrick from Macquarie. Please go ahead.

Good morning, everyone. Maybe just to follow up to Josh's questions there, just on the core exchange, obviously the strong outcome on the OPEX, just noticing the big tick up in the second half CAPEX. Should we expect that for the second half rate going forward or should we think that that should ratchet down? I think 25 to 30 was kind of the capex range that we were told to sort of consider for that business because it seems a bit elevated and just wondering sort of why it's so high and what kind of projects that is being spent on.

I'll talk to the projects first. We did a bit of a step up in the second half on some of our regulatory requirements. We also brought a number of our projects to a close around some of the customer innovations I touched on earlier and some of the API work that I touched on earlier. What I would think about is what Richard has previously said about

overall spend in the exchange which is around about 20 of revenue um including the relevant um opex and i don't see any particular reason just apart from that notion i think brendan just to add to scott's point and we've been consistent on it we have to keep investing in the exchange but we'll do it in a very prudent discipline why you can't do it on a uh do too much but you can't do too little So some of that also ties into some of the expansion areas in, for example, in the Tasmania, as we explore that, or Western Australia, where we're looking to increase the number of volumes through the platform. Thirdly, some of the areas such as the APIs, that removes a number of friction points. And then also you've got the broader cyber dimension. That's going to be continuing on, but we're always doing it within an envelope.

Okay, that's clear. And then maybe just moving on to revenue and the core exchange. obviously fairly progressed through the current quarter and you obviously have a six-week-plus line of sight. Maybe just any comments that you'd like to provide around the progress on the revenue front in the core exchange to date and anything we should be considering just from a penetration or uptick in WA and or Queensland and things like that that we should think about?

No, what we've done there, Brendan, is we've given you the guidance on the 50 to 55 margin on the exchange. I think a couple of things that we can just comment, obviously, the property market's still got some interesting dynamics going on in terms of sale and transfer and refi. We've still got a bit of refi coming through the market, as you expect from the past couple of years. We have been working with WA, where we've got a lower share, so... market share we've been doing more work on getting some transactions uh digitalized which we expect that should come through in the first half of the year but the thing i would say is that when we're doing our full year result uh at the agm so the agm later this year will give a guidance of what the first half looks like okay and then just one more quick one if i may just on the uk can you just provide a little bit more of an elaboration as to

why the penetration rates are so low in terms of only two out of the nine banks that have tested have signed up. And you mentioned those other three banks, so it feels like there's some progress there. But what is the impediment that they're pointing to? Because, I mean, we can debate whether you're tracking to progress or not, but it certainly feels like Things are not progressing as quickly as they may have, and it feels like the bank resistance is probably the stumbling block there relative to where market expectations were.

I've made just a couple of things to say on this, and this is not guidance, mind you. I am more comfortable on where we are now than what I've ever actually been in terms of the picture UK business. And the second element I'd add to it is if you go back to the investment pack, which you obviously will and have a look, if you do it on a comparable basis with Australia, we're in a pretty strong position. That's the second element. The third part I'd flag is in terms of those two financial institutions that are on, we've got more releases coming out that will allow more volume to go through that. The fourth part is now that we've got Optima Legal, that gives us a distribution footprint to be working with a number of financial institutions that are already customers. And we're actually working through with those organizations on how we can actually improve the experience by OptumLegal and the PEXA Go platform. And Virgin Money is a classic example of that. But we're not just relying on that. There's the other organizations such as Metro that are already working through us in terms of coming onto the PEXA Go platform that are not customers of OptumLegal. So I wouldn't say that there's resistance at all, Brendan. What I would say is actually it's continually working through the execution and delivery, and I think we're in a really solid base.

Maybe Glenn, I'll see you another way. Sorry, what was the hold-up then from the two banks that you said were going to be signed up by 30 June, or were targeting to be signed up by 30 June, given sort of neither of those ultimately have signed up at this point?

I'm thinking of... through in terms of the best response, probably the best thing to actually say to you is that we've got a number of customers on Optima Legal and let's just say some of those might be an overlap. Brendan, that's probably the best response I'd give you. Thanks, Oliver.

Sorry, Brendan, maybe just to add to what Colleen is saying. I think you're looking at this from the context of PECSA would be the only thing that a bank has to do. The reality is in the UK, in the first six months of this year, most retail banks, if not all, were entirely consumed by the FCA's new consumer duty regulations. And pretty much most of the available management bandwidth and change management capacity within a retail bank in the UK was devoted to consumer duty issues. That came into effect at the beginning of July for on-sale products, legacy products, a year later. we don't know this, but I suspect the fact that that round of work has started to come to an end has led to the sorts of conversations, has led and enabled the sort of conversations that Glenn has just described.

Yeah, that's useful, Scott. No, that's what I mean. So just management bandwidth and bank bandwidth is one of those sort of, yeah, a bit of an impediment. So that's useful. Thank you.

I appreciate the colour. I'll let it go there.

Your next question comes from Roger Samuel from Jefferies, Australia. Please go ahead.

Okay. Hi, morning, guys. I've got a couple of questions. Firstly, just going back to PaxExchange, have you changed the capitalization rate of your development cost in FY23? Because I noticed that you've got that $3.8 million step up on slide 23. And, yeah, I note that the amount that you capitalised was around 50% in FY22. So I just want to confirm if you changed the capitalisation rate in FY23.

We don't really think about capitalisation rates as such. What we do is we look through each project, where is it at in its life cycle, what's the sort of work that we're doing on that project, and then capitalise it accordingly. What we did have over the course of particularly the second half is a set of work which linked itself more to capitalisation given the stage of those projects that it did in the first half. But we don't sort of think about an overall capitalisation rate for the company.

Okay, got it. And my second question is on your guidance for FY24 for PEXA exchange. So the margin of... 50% to 55% while you've been making around 54%, so the top end of that guidance range. Are you implying that you may put some cost in as the property market improves in FR24? So there's a risk that you may go down to that 50% level?

No. Firstly, it's a range, 50 to 55. If you take the first half, it was at 52.2, and you take the second half, it was 55.1. So that's the first element, just a note. The second, which is a significant improvement, let me just say, the second thing that we're also conscious of is the property market. So if the property market doesn't improve in terms of sale and purchase, which is a higher margin product through to us, and it's more on the refinance side, We have to take that into consideration from an income generating aspect as we also consider it from the investment elements. But what I can also add to it is that we're very considered with our due diligence and what we're going to do in terms of operating within an envelope as well. That's why we're saying it's within a range of 50% to 55%.

Maybe a third to add to Glenn's question. Because of the fixed cost structure of the exchange, you'll naturally... As volumes vary, you'll naturally get some variation in margin off the back of that. Now, this year we've taken a range of steps to offset the effect of volume and mix issues, as you saw from earlier in the presentation. One of the reasons why we're undertaking our productivity enhancement program is to provide the appropriate level of activity to offset some of those swings and roundabouts during the course of the year.

Okay, got it. Thanks.

Your next question comes from Elizabeth Miliatis from Jarden. Please go ahead.

Good morning, gentlemen, and thank you for taking my questions. The first one's just on you know, the lenders that you've already sort of tested with thus far, you've given us now a number of names which kind of point to pretty small market share across all of them except for Virgin Money. Out of the ones that you've not sort of flagged to us thus far, could you give us a colour of how big they are, whether it be, you know, large, medium or small or even better yet, how much market share they might collectively make up?

Well, if it's... Firstly, Elizabeth, thanks for your question. I think there's a couple of things just to think through. Virgin Money in its own right, you know your point about market share, but let's just talk about Virgin Money. They're an important financial institution. They're a retail clearing bank and they operate across multi-dimensions in the UK. So I would not underestimate them as a financial institution. The second element not in them is also not necessarily a small financial institution too. So if you look at the building society fraternity, you've got nationwide Yorkshire building society and not in them, not in them as a reasonable size financial institution. The third area that I would add and noting that Metro is also a good institution to be working with. I would also add that we are working with six of the eight major financial institutions on Optima Legal. I'm not going to be talking about which ones they are and where they're at. in terms of coming on our journey. But let's just say that we've got a relationship with those financial institutions as they're already customers of the Broadpex UK group. I'll leave that with you to work out where we can actually go with those organisations.

Okay, thank you. And then just another question on the UK. I noticed somewhere in the slide deck that the TAM for the UK has been sort of restated at $500 million. I think in the prospectus and also at the investor day, the total UK TAM was closer to 720. So just wondering what exactly has happened with that revision. I suspect it's just due to pricing given population would have only expanded over the last few years. So yeah, just getting a bit of color on what's happened there.

Yeah, so again, on an element of TAM, you have to take it into consideration firstly on the calculation on pricing dimension, but also in terms of what volume is going through at that particular time. So that's an important consideration. Similarly, if you take on the Australian element, there has been movement in terms of number of volume or widgets or units going through Australian transactions as well. We take that into consideration. So if you take $263 million off of $300 million, that's where you get your 88%. So you do get a bit of movement of that. The other element you can also look at his remortgages in the UK in the past year also dropped. And that also has a contribution in terms of movement of TAN. And the final element, when we talk about the $500 million versus $750 million, the $750 million is also inclusive at this particular point in time of Canada and New Zealand and the UK.

One further point to add, which is at the time when the prospectus was struck, the sale and purchase market in the UK was at all-time high. and that was a function of various COVID-related initiatives that the UK government had taken at the time, including stamp duty relief. Those incentives have now been wound entirely back, and there has been a reduction in sale and purchase activity in the UK as a result. Still at higher levels than Australia, but nonetheless quite down from the record levels in 2020.

Which is one of the areas that, to Elizabeth, to Scott's point, you always look at the timing dimensions as well. One of the good things is that we know from the market that we're operating in is firstly this population growth, this housing demand exceeds supply. We also know there's going to be continuation in Australia, UK and other markets as well of needing to build more transactions and further that there's going to be some growth in valuations and climate risk associated areas, all things that we're well positioned to take advantage of appropriately.

Okay, thank you. Can I just ask some follow-up questions on the TAM then? So that TAM is then, as of today, it's not on sort of through cycle volumes and maybe as at pricing today. And then just secondly, what kind of pricing are you assuming within that TAM? Is it at similar levels to the Australian pricing or is it a pretty meaningful premium, which as I understand, that's where you'll be pitching your pricing at in the UK?

Elizabeth, I think that's getting down to a level of detail.

It's not appropriate for these conversations. Okay, thank you.

Your next question comes from Scott Russell from UBS. Please go ahead.

Good morning, all. A couple of questions, please. Firstly, the slide about the Optima volumes and the impact of market and the outage, Can you clarify what you're trying to say here with the actual run rate at 3,800 transactions per month? Is that... Are you indicating that that's sort of the new normal heading into FY24? Or is the previous kind of... I think it was 6,300 transactions a month that we're getting heading back there. I'm just not quite sure of the message.

I think the way to think about this is these slides where it shows Optima and then a reduction from Optima, which is the five and a bit million. I think that shows Optima at around about $14 odd million X that movement. That was for the seven months. I would think about it on that basis. The business ran at around about $21 million 22% market share prior to the outage over the first few months of the year. So I'd be thinking about that would be a natural level at which the business should be operating. And then it's a question of where is the remortgage market going?

So Scott, just to clarify, are the ramifications of the outage now behind you?

Yes, they are. Yes, they are. So the business, the Optima Legal is now processing transactions, Scott.

Okay. Glenn, you mentioned that you're able to guide down to the operating EBITDA line and the 35% floor going forward. But in the most recent results, some of the noisy items are actually below that, and you ought to have some visibility into some of these. So I was hoping for maybe a bit of guidance on the specified items, particularly around integration costs, which was a good $19 million, wasn't it? And also the amortization. What should we expect in the next couple of years at those items? Yeah.

Let me provide a few thoughts on those. First of all, As you would have seen, the biggest driver of the specified items has been the M&A activity we've undertaken and associated strategic and integration activities that have been attended upon it. I think you can take from that that those specified items will cycle in relation to that sort of inorganic activity. As you would expect, it's difficult to predict M&A because it depends on when the opportunities present themselves to you in a way that's value accretive. I think on the amortization point, it's difficult to draw a mechanical extrapolation from this year because around... there's been a reasonable amount of the money that we have had to amortise this year has been inherited from businesses that we've bought but equally the intangibles associated with those businesses also contributed a fair bit of non-amortisable goodwill I think in the round I would expect a modest uptick in amortisation over the next year or so but I wouldn't extrapolate from the increase in the total level of intangible assets that you've seen on the balance sheet this year.

Okay. And just on those UK integration costs, I hear you on the M&A being less predictable, but in terms of upgrading Optima, I think that was 11 million Aussie dollars in a year. Is there more of that to come?

Not at that rate. There's still a few things we're doing to exit the TSA arrangements that we have with Capita. That should be largely, if not completely done by the end of this financial year, sorry, this financial half. That would imply we wouldn't be running at anywhere near that same rate over this year.

Okay. And just to confirm, all of those specified items are in the 70 to 80 million of development spend across the emerging businesses this year?

No. No, it's been defined at the operating cash flow level, which is pre-specified items. And that's the same as the 70 to 80 this year across those businesses.

So the 70 to 80 mil, just to clarify, I think last year that included operating cash flow. Can I clarify now that the sum of operating expenses plus CapEx.

Yes, it includes the CapEx, of course, but not specified items because they're unpredictable.

Got it. Thank you.

That does conclude our question and answer session. I will now hand back to Mr King for closing remarks.

Look, again, I just want to say thank you for everyone who's actually listened to the call. We really appreciate the questions. We believe we've delivered a solid result. We're well positioned for FY24. And as I mentioned, with the guidance, 50% to 55% on the operating EBITDA margin for the exchange, a floor of 35% group margin, and also in terms of 70% to 80% in terms of investment for our growth businesses. And lastly is break-even operating EBITDA break-even for the month of June 24 for the digital growth business. That's our guidance for it.

Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.