PEXA Group Limited

Thank you for standing by and welcome to the PEXA full year results announcement. 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 via the phones, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Glenn King, Group Managing Director and CEO. Please go ahead.

Thank you. Good morning. And thank you for joining us on our FY24 full-year earnings call update. I'm Glen King, PEX's Group Managing Director and Chief Executive Officer. And with me this morning is our Group Chief Financial Officer, Scott Butterworth. Turning to slide two. Before I begin, in the spirit of reconciliation, I'd like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples here today. Turning to slide three. Today's briefing will begin with an overview of PEXA's FY24 performance. I will also touch on how we deliver these results and the work over the year to deliver against our priorities. Scott will then walk you through the detailed operational performance and financial results for the group. I'll come back to you and provide a perspective on the new financial year. We will then be happy to take your questions. Turning to slide four. The momentum in the business in terms of financial performance highlights can be seen on this page. For example, Group revenue, group operating EBITDA and free cash flow all made positive gains, delivered by revenue growth, cost and capex management and operational improvements. Non-exchange revenue has improved and now represents 15% of total business revenues, highlighting the growth of our new revenue streams with Apexa Group, which were non-existent at the time of the IPO in 2021. At a group level, our operating margin was 36.5% against guidance of greater than 35%, a 1.7 percentage points higher than the prior year on a like-for-like basis. The exchange continues to be the foundation of the business with improved revenues and margin, which at 54.5% is up almost one percentage point on the prior year. Overall, NPAD A was $21 million, increased by 22%, and this was driven by a combination of factors, including higher revenue, improved margins, combined with controlled cost growth. Turning to slide five, let me summarise our strategic position today. The exchange business continues to demonstrate its strength and prominent position as a digital infrastructure asset. Its resilience, national coverage and financial performance are testament to this. Digital Solutions, which was previously Digital Growth, brought Value Australia to market to complement the other businesses. We now have a suite of bundled and unbundled solutions to support our customers. This business also achieved operating EBITDA break-even for the month of June, as forecast. International. The build of the platform in modular form for multiple markets remains on schedule, with our estimate that up to 85% of the platform build is reusable in multi-jurisdictions. This year, we also successfully integrated the platform into OptumLegal, and following the NatWest announcement, the momentum with meaningful discussions with lenders has accelerated. We currently have additional lenders, including T1 lenders, requesting to participate in the Bank of England PEXA testing slots. All these activities are underpinned by approved efficiencies and by the capabilities that we continue to invest across PEXA, our people, technology and ESG. We continue to be well placed to deliver, given our business momentum and our sound financial position. Turning to slide six. Across all our brands and segments, we have a broad, interconnected customer base of government, financial institutions, lawyers, conveyancers and developers. In Australia, we support approximately 160 financial institutions, more than 10,000 conveyancing and legal practitioners, more than 70 property developers and 345 local councils. And in the UK, We provide services to approximately 18 financial institutions, including seven out of the eight largest institutions and more than 2000 conveyances. Turning to slide seven, our consistent goal and strategy is to deepen our customer service and deliver long term sustainable value in line with our purpose of connecting people to place. To do this in Australia, we support our customers by enhancing our exchange to maintain Australia's leading electronic lodgement platform. We have further extended our relationships with existing customers with Property Insights and other digital solutions that use our distribution and data capability. And internationally, we are expanding. utilising our intellectual property to solve customer problems in markets with Australia-like land title systems, starting with the UK. Now, turning to slide eight. In financial year 24, we brought together the PEXA exchange and the digital solutions business under a single Australian leadership structure. And in the year, the exchange platform maintained and strengthened its position. Transaction volumes grew, as did our market penetration. Customer satisfaction and platform uptime remained at 90% and 100% respectively. Importantly, we rolled out more APIs to our FI customers and PMS providers, contributing to improved service. All these positive outcomes supported our improved exchange margins. overall the exchange in fy24 had a solid year despite stubborn inflation and relatively high interest rates presenting challenging conditions now despite a modest overall contribution and below our expectation digital solutions remains strategically important and is growing it provides a foundation to build non-regulated revenues as the economy improves when the right outlook restores investor confidence. And Digital Solutions also delivered break-even operating EBITDA for the month of June, as forecast, due to our focus on financial management. Now turning to slide nine. There has been significant commentary around interoperability, and it is important to note interoperability requires multiple participants, such as banks, land title offices, revenue offices, and so on. It is complex with questionable consumer benefits. Now, PEXA was formed out of a public-private partnership. It is a successful COAG initiative which materially transformed property transactions, delivering continued and ongoing material benefits to all stakeholders and also material value to Australian taxpayers. The PetroExchange platform contributes approximately $300 million per annum of savings to industry, while the cost to consumers is as little as 0.01% on an average property transaction. I think this point is absolutely critical given that we are heavily price regulated but have been able to demonstrate 90% customer satisfaction and on-day settlement for major banks at over 80%. PEXA has continued to invest heavily to ensure innovation and improvements for customers, and we should note that there are also numerous other regulatory priorities supported by PEXA, such as the Tasmanian and Northern Territory e-conveyancing rollout. We will continue to work actively with the regulators on well-thought-through customer-led reform. Turning to slide 10, Over the last year, UK market activity was challenging, which was depicted by lower mortgage volumes, and this did impact our business, including Optima, Smooth and delivery against our FY24 targets. However, green shoots are emerging and we are seeing conditions improving. We do remain confident of our UK aspirations due to our unique position, our platform progress, size of the market, consumer needs, government policy, and now our distribution network. Let me touch on the points as referenced on the slide. Firstly, our PEXA platform is established, unique and tracking well. We have had several FIs complete testing with PEXA Pay, including two of the top 10 lenders, and we continue to progress both onto our platform. Also note Those that have PEXA Pay tested represent approximately 20% of the UK mortgage flow. Since NatWest, there is growing interest, momentum, active discussions and engagement with lenders, including the majors. It is clear that FIs want to explore and test the benefits of PEXA. It's important to note that onboarding, though, takes time, as it includes Bank of England providing testing slots, and those slots are limited. PEXA is working constructively with the Bank of England and FIs to streamline this where possible. Secondly, the strength of our technology and PEXA UK platform progress is demonstrated by Shawbrooke Bank's successful completion of a market-leading remortgage transaction within 36 hours. And the PEXA platform delivery is progressing with our UK sale and purchase build underway. Thirdly, The acquisition of OptumLegal and SMUV provides us with distribution scale in terms of FI and conveyancing customers and mortgage processing flow. During the year, we completed the integration of OptumLegal into the PEXA tech and are also now working towards the conversion of the customer base onto the PEXA platform. Turning to slide 11. From FY20 to FY24, we have spent approximately $127 million on our international platform, a platform which we believe is unique in its modular design and potential reusability for multiple international markets. In fact, our expectation is that 85% of the platform is reusable in different markets. We also anticipate that the UK platform tech spend will reduce over the future years. Now turning to slide 12, I wanted to highlight our focus on our sustainable business. For example, we made positive steps towards operational efficiencies, gender parity within our leadership group, strong reputation with our stakeholders and community at large, as well as our continued focus on sound ESG practices. You can see more of our work with today's publication of our inaugural ESG report, This details our ongoing partnerships with organisations such as Homes for Homes, our work on policy reform in areas of housing affordability, and our continued maturity in our ESG governance practices. I will now hand over to Scott to walk you through the financials in more detail.

Thank you, Glenn. As Glenn indicated, I will now spend some time taking you through the group's financial performance over the past year. In general, we've taken a good step forward with our results this year, reflecting our focus and discipline. Before starting, could I please ask you to turn to slide 14. As the slide shows, this section is presented on a pro forma basis, unless otherwise stated. To assist with comparability between periods, the pro forma analysis contains the full FY23 and FY24 effects of the operating businesses acquired during that period. as published information for our business is contained in the appendices to this pack. I turn now to slide 15, which sets out PEX's overall financial performance for the year. Revenues increased by 10% on a pro forma basis, reflecting growth in the exchange, digital solutions and SMUV, offset by lower revenues in Optima Legal. Operating expenses were well controlled, growing by only 4% on a pro forma basis. This was the net result of the benefits of our productivity enhancement program offset by the effects of capability investments and underlying cost inflation. Proforma operating EBITDA increased by 22% and EBITDA grew by 15% with the difference relating to specified items which grew during the year as will be discussed in a few moments. Reflecting the positive revenue and expense draws experienced by the group, our operating EBITDA margin expanded by about 300 basis points during the year. CapEx was broadly flat at around $69 million, with spend on regulatory matters, API building and integration activities being offset by lower spend on customer enhancements. Given this profile, operating cash flow yield increased by 4 percentage points during the year. Turning now to slide 16, I want to spend a few moments on the various line items below operating EBITDA. Firstly, specified items increased by about $9 million during the year. Restructuring costs were up about $10 to $11 million, driven by redundancy costs of around $7 million and non-cash impairments of around $4 million. This increase was partially offset by a net $3 million reduction in other costs, mostly associated with professional services fees. Secondly, depreciation and amortisation costs increased by about $13 million. This was due to the carry-forward effect of assets constructed in the current and previous periods and the amortisation of assets obtained through our recent acquisitions. Slide 40 provides more information on the drivers of amortisation during the year. Thirdly, net finance charges fell by about $0.4 million during the period, despite an increase in average debt. This was due to higher group and source account balances and a higher earning rate on these balances. Lastly, income tax expense fell by about $9 million during the period. This is largely due to the non-recurrence of the tax credit write-off that we experienced in FY23. However, you will note that our effective tax rate remains high. This is because of the tax expense attributable to our profitable operations in Australia and the losses incurred in the UK, which out of conservatism, we only partly tax affected. I will now review the performance of our underlying businesses, starting with slide 17 and the exchange. As you can see from the slide, we've experienced a modest around 70 basis point increase in market level transactions during FY24 relative to FY23. However, PEXA volumes increased by 1.6% over the period, reflecting an increase of about one percentage point in our market penetration. The increased volumes were skewed to the more profitable transfer segment, with our refi mix falling by around 300 basis points in the period. Having said that, as shown on slide 18, There has been some unevenness in transfer volume activity across our various jurisdictions, reflecting the individual economic circumstances of each of them. Overall, national PEXA transfer volumes reached the previous peak of first quarter 22 levels during the first quarter of 24. This was led by growth in Sydney, Brisbane and Perth and in the Queensland regions, offset by slower growth in Melbourne and regional Victoria and in South Australia. Turning now to slide 19, these market and other dynamics have had a favourable impact on our economics. Exchange revenues increased 11%, mainly due to CPI-linked repricing at the beginning of the year, and improved transaction mix with smaller effects from market growth and improved coverage. Expenses grew by 9%, reflecting inflation and the cost of investing in capabilities such as risk management, sales and support for our customers, and data management. These were offset by one-off cost improvements and ongoing efficiency benefits, as well as the effects of capitalisation. Overall, operating EBITDA increased by 13% and EBITDA rose by 12%. Specified items for the exchange mainly reflected restructuring costs. CapEx was relatively flat, with increased regulatory spend, including on the interoperability program and on our API suite, being offset by lower spend on customer enhancements and support. including running down the spend associated with our Salesforce implementation project, which occurred in FY23. The effect of these movements was that the exchange's operating EBITDA margin increased to 54.5%, an increase of about 80 basis points, and its operating cash flow yield increased by around 220 basis points to reach 41.6%. I'll now turn to the performance of Digital Solutions, starting with slide 20. Overall, the year saw good improvements in customer demand for Digital Solutions products. Particularly pleasingly, ID's proposal pipeline grew, and the subscription win rate was generally solid. We also saw a good uplift in new business sales across our product portfolio, while subscription churn was well managed. As a result, we saw improved revenues across the period, underpinned by a growth in subscription revenue alongside growing levels of project activity. To put this in a business context, ID benefited from record revenues during the period, and Value Australia made its inaugural sales, including to major banks. Way and Insight also settled well into the portfolio, making its first ever financial institution sale, and we continue to support demand for transaction solutions such as workflow and FX products. Slide 21 sets out the economics of digital solutions. As you can see, pro forma revenues grew by 8% even after absorbing the non-recurrence of a large one-off transaction fee that we received in FY23. Notwithstanding the positive momentum during the year, we had been targeting a higher revenue outcome for this business. However, to offset this shortfall in our expectations, we did take steps to achieve half-on-half reductions in the business's operating costs, which fell by $7 million in total over the period. The cost reduction reflects four factors. First, professional fees fell, reflecting the end of the various market entry studies that we performed in FY23. Second, we managed our discretionary expenditures more tightly. Third, we benefited from our productivity enhancement program, particularly with respect to removing overheads and duplication. Fourthly, we were able to benefit from the investments made in group-wide infrastructure, such as data management. Overall, these effects mean that we have been able to break even in the business at the operating EBITDA line as we exited June 24, and the business's operating loss narrowed by $4.6 million in the second half. You will note that specified items did step up during the period. This reflected a modest increase in earn-out costs and primarily the cost of restructuring the business and the non-cash cost of impairing some of the business's initial in-house built products. We've also started stepping down our capex, particularly in second half 24, albeit there is still some work to do in FY25 on building up Value Australia's capabilities. The effect of these changes is that the business's operating EBITDA margin and operating cash flow yield improved during the year, particularly in the second half. In other matters, we have previously guided to a revenue target of $50 million for digital solutions. This was based on organic and inorganic activity. As previously said, and in line with our capital management framework, we are not currently planning any material acquisitions for this business. As a result, rather than focusing on a revenue target, management's objective is to drive appropriate returns from our existing portfolio of assets and achieve value-creating, capital-efficient pathways towards scale. The effect of this is that we are withdrawing the previous guidance provided for digital solutions. I will now turn to slide 22, which provides a snapshot of market activity in the UK. As you can see, market remortgage volumes have remained at below trend levels as UK consumers have adopted a wait-and-see attitude to the Bank of England's rate cycle. There has also been somewhat of a trend away from fees-assisted remortgages of the type performed by Optima Legal towards cashback offers. Salmon purchase volumes have been impacted by similar interest rate issues, as well as the short recession that occurred in the September and December quarters of 2023. However, we did see a pickup in housing market activity during the June 24 quarter. As additional context for the performance of international, slide 23 describes the movements in the PEXA platform sales pipeline in the UK. As Glenn stated, we announced on May 2 that we are working with NatWest and another large lender in the UK, and our work with them remains ongoing. Additionally, we have gained agreement from two large banks and four smaller ones to conduct Bank of England testing of the payment flows associated with our platform. Further activity also includes working with an additional two smaller institutions to bring them onto our platform. Finally, PEXA remains focused on working towards our ambition of achieving 25% to 40% Remo market share and 25% sale and purchase market share. There is momentum and engagement with lenders. Building on this, our desire and focus is to work towards achieving these market share goals on a run rate basis by the end of calendar 25 for Remo and 2027 calendar for sale and purchase. However, because of external factors beyond PEX's control, the timing of when these market share aspirations may be achieved is inherently uncertain. We note that management and board continue to heavily scrutinise our progress in the UK and the expenditures that we are incurring in respect to the market. A further update will be provided at our first half 25 result. I turn now to slide 24, which sets out the results for international. Proforma revenues were relatively flat over the period. We saw a 16% pro forma increase in smooth revenues, largely due to improved sale and purchase volumes, repricing during the period and improved search revenues. However, this was offset by lower optimal legal revenue, mainly due to lower market activity and lower average market share than in FY23, albeit there was improvement in this latter metric during the year. Operating expenses did step up during the period by 9%. This was mainly due to the investments we made in PEXA UK as we increased our platform development and commercialisation activities. Costs in SMOOVE were flat, with the impact of staff reductions offsetting cost inflation. Optima Legal costs were also flat, with the benefits of the capacity release made in first half 24 being offset by the cost of improving the business's employee proposition and normalising bonus arrangements. We also saw specified items increased by $3.3 million during the period, mainly due to the cost of integrating Optima Legal and restructuring activities. CapEx was relatively flat, with increased sale and purchase development and integration costs offsetting lower spend on building our remortgage proposition. Overall, operating cash outflows increased by $8.8 million over the period, mainly due to increased PEXI UK operating costs and Optima Legal losses. I now want to return to group matters and discuss our cash flow as a balance sheet shape as set out on slide 25. As you can see, the effect of our improved profitability together with improved working capital management and flat capex has led to an increase in cash flow conversion and consequently free cash flow. Overall, free cash flow increased by about 175% to reach $38.5 million for the year and we ended the period with a cash balance of $90.5 million after paying down about $10 million of debt in the second half. Slide 26 sets out further matters relating to our balance sheet. Firstly, as you can see, we reshaped our debt facility during the period, replacing our previous arrangements with a longer tenner, more flexible and larger facility. Secondly, we have also benefited from an increase in average cash balances associated with our own group cash balances and our third-party source account to about $380 million and an earning rate that has improved by 150 basis points over the period. Turning now to slide 27, our improved earnings and relatively flat net debt has meant that we have continued to see a trend of balance sheet deleveraging that started in the first half of 24. Importantly, our net debt to operating EBITDA ratio improved by 0.3 turns during the year. We did see a decline in the times interest cover ratio on a gross basis, from 7 times in FY23 to 5.4 times in FY24. However, adjusting for the effects of interest income from our own balances and the source account, this ratio does remain at comfortable levels, with an adjusted ratio of 18.8 times, up from 15 times in the previous year. Much of the improved performance of the business has been underpinned by the results of our productivity enhancement program, which is set out on slide 28. Overall, our work on improved operating model design, better ways of working in technology, capacity release in the UK, and better non-labour expense disciplines has allowed us to generate cash, that is to say OPEX and CAPEX savings, with an annual run rate benefit of about $16 million. These have been used to fund the investments in the business and deal with headwinds associated with foreign exchange, particularly in relation to operating expenses. In closing, our financial performance improved sharply over the year whilst we've also improved our strategic position. Given that, I would like to turn to slide 29. Our framework Glenn, my colleagues and I are very cognizant of the need to manage shareholder capital wisely to create sustainable long-run returns for all shareholders. Our framework for achieving this is set out on this slide. As you can see, we have met the targets we set ourselves for FY24. However, as Glenn will discuss, we remain focused on delivering additional capital efficiencies in FY25 including finding appropriate capital light mechanisms to support growth, provided they create value for all shareholders. I'll now pass over to Glenn, who will provide some closing perspectives, including our views on the outlook for FY25.