Broadridge Financial Solutions' CEO Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)

| About: Broadridge Financial (BR)

Broadridge Financial Solutions, Inc. (NYSE:BR)

Credit Suisse 15th Annual Global Services Conference

March 12, 2013 4:00 pm ET


Richard J. Daly - Chief Executive Officer and Director


Georgios Mihalos - Crédit Suisse AG, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. So I think we're ready to begin with our next presentation. We're very pleased to have Broadridge here with us, and we have the CEO, Rich Daly, up here. And I do want to point out that Dan Sheldon is sitting there in the audience. If you had any financial questions, just go bother him; and David Ng, who runs IR.

And with that, turn it over to you, sir. Thank you .

Richard J. Daly

George, thank you. Thank you, everyone, for being here. Let me start here with acknowledging that we have forward-looking statements that everyone should read diligently and memorize.

So Broadridge. We feel very good about what we are right now. Broadridge has been a strong, resilient business. We were impacted by the financial crisis. We believe we're positioned now for significant growth potential. We've always had a history of market leadership. And certainly, since we spun out in '07 and throughout the financial crisis, we've increased our leadership. I'll give you examples today as to how we've done that.

We've got a strong position in large and attractive markets. And specifically, we're the leader in financial communications, and we're the leader in financial processing. So even though we have over 150 products, you should be thinking about Broadridge as 2 meaningful product groups, and what we love about financial services is that it's at the high end of the service food chain. Meaning, this is the area where accuracy or reliability is critical.

In our investment communications space, that has historically been and remains a great business. We have a very large market share in a number of our products. It's very sticky. There's a large moat between us and those who would want to be us just by the natures of investment in technology and the way we've built unique features into the product over time. I'll cover that in a little bit more. In the processing business -- both of our businesses will be impacted by financial activities, good or bad, as a lagging indicator. Our securities processing segment took longer to turn around after the financial crisis. We believe we are positioned now that as we leave '13, the SPS segment will now be making growth contributions, top and bottom line, for Broadridge overall. And the line that I used in the last call, which I'm going to repeat here, is that SPS is finally becoming the icing on the ICS cake.

We're deeply respected by our industry and by regulators, and so I even have an update today from the SEC chair confirmation hearings to prove that point. Let's start in the securities processing side. Post the financial crisis, Broadridge was named by the industry as the "too big to fail" platform. What does that mean? That means that next to Lehman -- we won't be handled like Lehman, but next Lehman, we'll be taken over by the industry, right, and those good positions, customer positions, will be moved to a new platform, which will be our platform. In the case of MF Global, they were not a client. The customer positions were moved to our platform to unwind the transactions so that the industry can have the reliability of a known established processor that can successfully process, as the industry needs to unwind something.

In the case of the communications business -- all right, I'm going to go into my iPhone now to read to you from some activities today at the SEC confirmation hearings of Mary Joe White. Now this is paraphrased and then e-mailed to me. We can all see it on C-SPAN repeats. Schumer has 2 questions to close the hearing. The second was on the Investor Mailbox or what the SEC calls enhanced broker Internet platforms. He asked whether Mary Jo White would support it. She said there were a tremendous amount of support of it, and it's an "excellent" -- there's quotes around excellent, so I think that's an actual -- her words -- idea, and that she would make it a priority.

That is our technology. That was included in our response going all the way back to the New York Stock Exchange fee committee study at the request of the SEC, and that technology will enable the industry to take out another $1 billion in paper and postage costs. That technology will also allow the industry to raise the participation because it's far easier to make a couple of clicks on this than it is to open mail, process mail and mail it out. The great news for Broadridge is that we don't get paid for postage, the post office does. We don't get paid for the materials, all right? And so what we're able to do is generate more fees, more profit and overall, lower the costs, so whether it be the issuer.

And when we go down 2 bullets down from here, the Fluent technology. The Fluent technology is going to achieve the same goals for the brokerage firm in statements and confirms by enabling customers to get access to brokerage data through Broadridge on ISO 27001, highest level of data security, all right, through any means at the most comfortable to the customer. So you can be on Facebook, you can be -- like I am on Apple Newsstand all the time, get a message that my statement's available, that a document from my broker is available and link right through that entry point into our ISO 27001 firewall. Broadridge will never show up, but you'll be looking then at a broker logo inside the broker website, okay, run by Broadridge. You could seamlessly move it to the broker's actual website while not ever believing you moved anywhere or then, go back to Google, Facebook, Apple Newsstand, et cetera, all through this Fluent universal front end.

When we announced the press release on this, both Morgan Stanley Wealth and UBS Wealth announced in that press release that they were looking to be a part of it. So again, it's a strong market position to begin with, 99%-plus client retention rate, very sticky activities, very complex, with over $1 billion invested in the technology and at the same time, the opportunity to take that to the next level, particularly in digital distribution. So as you can tell, we feel very, very good about that.

On this slide, let me just use just a couple of examples. So this past year, Microsoft. I got to vote my Microsoft shares with my iPhone. I got to participate in a survey ahead of time through the shareholder form which Microsoft used, and then I got to participate in the virtual annual meeting through any device, all right? The survey, the form, the virtual annual meeting are all new services that we get paid for on top of the traditional proxy communications activity. In order to do that, you need to have, as a process, your registered shares, where we have over 2,000 companies that we do that for. We think it's a natural extension for people who consider our transfer agency capabilities now because the reality is those transfer agents are servicing the least important part of the marketplace to an issuer, it's the physical certificated shareholders.

We believe companies need to focus on communicating with all shareholders and not spending a multiple of times on the lowest and smallest number of shareholders on the registered side that generally have between 5% and 20% of the outstanding shares but spend the bulk of their money on all of their shareholders and particularly, the 80% on the street side. So our model, going forward, leveraging technology like this, we believe gives us opportunity. And when you see the number of products and the market segment that we're in, you'll understand why it's so important for us to continue to push technology as an advantage to be part of the process.

If you go to the securities processing side, again, in both businesses we have over 150 products, but it's communications and its processing solely focused on financial services. A great example on the processing side is that, whether it be the E*TRADE baby, that when the E*TRADE baby hits that keystroke, everything from that moment, people and systems, is Broadridge, okay, or Schwab who just announced the ability to go through Schwab to do Global. If you look at the advertisements that are in CNBC all the time, the screens behind that advertisement are Broadridge screens. So what we've done since then is we've taken our model, which was originally in the processing side -- to Henry Ford, you could have it in any color you want as long as it's black -- to create a true menu of services.

So in the case of Schwab, all they needed and all they wanted was Global capabilities. So for Schwab, we're doing both the system and the people, and we've reengineered it back into their platform, all right? What's great about it is whether it be Schwab or anyone else who picks a piece, the ability then for them to add more activities, because now they're on the platform and it's integrated into their platform, is far easier for them to do. So if volumes took off and scale is a concern to anyone who's even on just part of our platform, they can run other equities, fixed income pieces through that same platform pretty easily.

Being #1 across everything we do is more important than just to my relatives. What it does is it shows the position we're in, the position of trust that we're in, all right? And what it enables us to do is have meaningful dialogues about new products and new opportunities. When we talk about sales, the reason we feel so good about sales is because we are so well respected in the industry and this positions us to go with new offerings and services. And what we tell people all the time is whether we build a product or we acquire a tuck-in product, the first thing we do is we make sure it meets our standards, whether that be reliability, data security, but bulletproof overall industrial strength. So we feel very, very good about having 150-plus products.

So lots of people think of us as proxy. That's the wrong way to think about us, all right? And the communications business, it's less than half our revenue, all right, and we're servicing a $10 billion financial communication market, all right? And as you can see here, we have multiple products across that, okay, well beyond proxy, prospectus and statements.

I spoke for a long time about why this is my favorite slide. What this slide shows is how, first, we connect virtually every broker and every bank trust department with every active corporate issuer and mutual fund, all right? That's expensive. We have a lot of T1s, lots of data security, and you can't run that on your laptop, all right? So if you want to do that, somebody's got to make a very, very, very big upfront investment to do that. The more important thing though is in all the digital work that we've been doing, all the digital investments we've been making with our shareholders' cash, for the long-term, all right, we've built the databases down below, which have eliminated over 50% of the proxy material and a high percentage of other materials, whether it be prospectuses, statements, conference.

When we talk about Fluent, when we talk about the piece that was raised by Senator Schumer today with Mary Jo White, if you don't have this architecture, if you haven't spent the $1 billion we built this with, over the last 20-plus years, that's table stakes to do these things, all right? So nobody's better positioned to take financial services to digital, take the paper and postage cost out than Broadridge. The great news is it's a great arbitrage play for us. We can go in there with a far lower cost. So whether it be the broker or the issuer, we can go in there with that lower cost, which has far better fees for us and far better profits, both overall and margins than where we are today.

So we are leading the digital transformation in financial services, and the reason why it's unique is that this is the only level that had of -- area of processing or communications that have the amount of regulation around it, the amount of exposure to personal information. This is something where the government plays a meaningful role in saying what can or can't be done and to have, whether it be the senator raise it as the opportunity or the likely incoming SEC chair raise it as an excellent idea is exactly why we believe we're so well positioned for the long term. That, combined with the processing side -- again repeating, it was the Fed that said we need a "too big to fail" platform and the industry's agreement with the Fed that, that platform will be Broadridge, all right, which covers then the $14 billion segment that we're in on the processing side.

We're about 5% of the processing here right now, all right, and even on the other products we do. So JP Morgan uses us for equities and fixed income. Crédit Suisse right now uses us for the communications standard pieces or proxy, but they're only using us for Paladyne , all right? Great opportunity to go in that, Paladyne being our hedge fund, multi-prime processor, all right? The opportunities for us in the buy side, as well as the sell side, going forward, we believe, is very significant. And there's never been more pressure on the industry to outsource. It's in every CEO's regular updates in their earnings calls. And as we go forward, even with markets improving, we don't see that changing.

Again, on the processing side, lots of products, and it covers the full gamut, Paladyne hedge fund processing, $4 trillion to $5 trillion a day in fixed income settlement processing, significant largest player in equity processing, all right? And then, all the other activities we can do for people, whether it be tax reporting, TARP-related activities, helping them manage through Dodd-Frank, data aggregation, et cetera, et cetera, et cetera. So let's end here with strong regulated business, good growth potential, a proven history of market leadership, strong positions in attractive markets, where we will continue to invest to service that marketplace, all right? We will continue to look for tuck-in acquisitions, all right, with very, very strict criteria.

We're not going to compete without private equity. They can lever up 4:1. They get a 6% return. They get a 24% return. We put a minimum 20% return marker out there. Not that we always expect it at 20%, but our internal standard says, "You come forward with a business plan that you're committed to with a 20% IRR, without some crazy terminal value calculation or don't come forward." Come forward with a view on why under our umbrella and our distribution channel, taking advantage of the trust that we've built with our clients, why it's more valuable under our umbrella than under somebody else's umbrella. Don't come forward and say that, "Through divine intervention, we're going to know how to run this business, that is in the existing management," I don't buy it, all right? So that criteria will remain very strict and very, very strong.

We intend to maintain a long-term investment grade. Again, not something we want to talk to our relatives proudly about, but because we provide mission-critical services. Because we are so trusted, right, we want our clients to be very, very confident that when they outsource mission-critical activities to us, they don't need to be concerned about our financial stability.

Paying a dividend, we believe, is the right thing to do. We have a unique business, in that it can grow, okay, and it has low capital intensity. So we have the ability to pay a meaningful dividend, whether it be a 40% payout or a minimum of $0.72 per share. We intend for that dividend today to be meaningful and going forward, to be meaningful. That still gives us plenty of cash, because of that low capital intensity and strong cash flow generation, to do tuck-in acquisitions, to always offset equity comp dilution and to buy back opportunistically. So we believe we have the right team, we take our fiduciary responsibilities of growth and managing your cash very, very seriously.

We believe both of the businesses right now have worked their way through the financial crisis. ICS has been out of it for 3 years. This is the third year. SPS is coming out of it this year, and I hope in my tone and in my words and in the proof statements I've given you, you'll leave with confidence that we have a very, very strong future as we go forward.

With that, I'm going to open it for questions.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. I think I'll kick it off. Rich, thanks for the overview.

Richard J. Daly

I thought you know everything already.

Georgios Mihalos - Crédit Suisse AG, Research Division

I forgot.

Question-and-Answer Session

Georgios Mihalos - Crédit Suisse AG, Research Division

I was going to say, usually, I save the regulatory questions until the end so the presenters don't walk off the stage, but I think your situation is a little bit unique. You seem to be a beneficiary of a lot of regulatory changes that could be going on, specifically as we think about the NYSE proxy working group. In the past, you've said you always feel you could at least maintain pricing for many changes that come out of there. Maybe talk a little bit more about your ability to improve on pricing throughout a challenging environment.

Richard J. Daly

Sure. And here's the great news. This EBIP proposal, which is enhanced broker Internet platform, okay, which is the name that the SEC created, we call a Investor Mailbox. When you click on that Investor Mailbox, the broker and Broadridge will be entitled to earn additional fees for the new customers going digital. That's great, okay? Going forward, so there'll be a onetime fee opportunity and then the digital fee going forward beyond that, that's established today. The great news is everybody wins. The broker creates a customer who's going more digital, which gives us the opportunity, through Fluent and other activities, to get that same customer to give up the paper statement. The issuer has the opportunity to better engage retail investors, who, it's proven over and over again, virtually always vote in a large majority with management or they don't own the stock. So to go after those retail investors to engage them to vote more is a win in and of itself and should be worth more money to the issuer. But in this case, the digital activity actually costs the issuers less in paper and postage. So there's no question what was discussed with the SEC potential incoming chair today in the confirmation hearing is financially positive for Broadridge, all right? But the real issue is, is to take everything we do digital. When you look at the processing side, all right, we went through Hurricane Sandy. We were on the call Sunday night. Is the market going to open or not? Our position is just tell us your decision. We have been and will be always ready to process. After 9/11, we were ready to process. After 9/11 -- Cantor was not a client. We got Cantor on our platforms in the grand ballroom of the Pierre Hotel and got them processing for the Friday settlement after 9/11, all right? Understand something, we're not smarter than anyone else, okay? Our clients are running a far more complex world. I was out visiting a large client in the West Coast yesterday morning. Their world is 10 miles wide and 10 miles deep, okay? Our world is a couple of football fields wide, but still 10 miles deep. Across what we do, we have 6,600 associates, far more focused on a far narrower segment, and that's all we do. So we can be bulletproof in those activities, and that's what we are. So whether it be never missing the settlement party, always the leader in that activity. In a world where there's not anyone in this room or at the end of the day goes home and says "George, we love doing business with Crédit Suisse because the way you guys route those orders and get them to DTCC at the end of the day for settlement is just a thing of beauty." So for firms like Crédit Suisse and others, they have to be challenged why are they letting their competitors, okay, do that far more cost effectively than they are, in a far more reliable environment, all right? So it's those activities with the regulators who know everything Broadridge does has been very supportive of what we do. So there's no question that regulation is our friend, and I'll let everyone in the room be the judge. So going forward, will there be more or less regulation? I think most of us would guess there's going to be more because that's certainly been the trend for my 35 years in the industry. And I will argue that, that trend will long exceed my tenure in the industry going forward

Georgios Mihalos - Crédit Suisse AG, Research Division

Rich, I think one other point I want to focus on is obviously the markets have been in, I guess, what you call a funk for a very prolonged period of time. Certainly, trade volumes are -- have not been terribly encouraging over the last couple of years. Are you seeing more conversations with some of the larger banks that traditionally run their own processing platforms? Are you starting to get kind of a better feel for them potentially looking to outsource?

Richard J. Daly

I'm glad you raised that because in the last call -- our style is to get everything out there upfront and easy to read, and in our earnings release, okay, we put right out there that sales year-to-date were down 45% from the same point last year and then immediately followed with a sentence, which I guess the people who react very quickly didn't read, which said that the pipeline has never been better. And we went out there to acknowledge that we were pretty far in for more than one large transaction. I think I said a couple or a few, but something that was more than a transaction. Why do we do that? Because we want to get out all the information we have at the time we had it. We feel very good about sales. We feel very good about where we are. And the thing in our business, this is not a retail business. So if people don't show up in the Christmas season, and they show up the week later, given that it takes us anywhere from 3 months to 18 months or even 24 months to convert revenue, if the sale is closed a week earlier or a week later, it's not going to change anything in our trajectory. We reaffirm the guidance of the $110 million to the $150 million. More importantly, we said that SPS would finally become the icing on the ICS cake. So we feel very good about the product breadth that we've expanded on, the tuck-ins that we've done and also, the strong pipeline that we have, including launched transactions. So if we didn't feel good about the pipeline, we couldn't say the things that we said. And if we didn't -- when I say feel good, have the actual activity.

Georgios Mihalos - Crédit Suisse AG, Research Division

Well, I think we're going to have to leave it there. Rich, thank you so much for your time.

Richard J. Daly

George, thank you.

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