Computershare's (CMSQF) CEO Stuart Irving on Q2 2016 Results - Earnings Call Transcript

| About: Computershare Ltd. (CMSQF)

Computershare Ltd. (OTCPK:CMSQF) Q2 2016 Earnings Conference Call February 9, 2016 8:30 PM ET

Executives

Stuart Irving - CEO and President

Mark Davis - CFO

Darren Murphy - Head of Treasury and IR

Analysts

Simon Fitzgerald - Evans & Partners

Nigel Pittaway - Citi

Ed Henning - CLSA

Daniel Toohey - Morgan Stanley

Kieren Chidgey - Deutsche Bank

Frank Podrug - Bank of America Merrill Lynch

Adam Lee - UBS

Ryan Fisher - Goldman Sachs

Operator

Good afternoon and welcome to the Computershare Half-Yearly Results Briefing for 2016.

I'll now hand you over to Computershare's CEO, Mr. Stuart Irving, to begin the briefing.

Stuart Irving

Thanks, Todd [ph]. Good afternoon everybody and welcome to Computershare's first half 2016 results teleconference.

Today I'm joined by Mark Davis, our CFO, and Darren Murphy, our Investor Relations Manager.

On the call I will take you through an overview and summary of the results. Mark will then take you through the financial performance in detail. And then I'll close with comments on our growth drivers and strategic priorities. We'll then open up for questions. We've also released a presentation pack to the ASX this morning, and I'll be referring to these slides during the call.

Just before we get into the detail and the scorecard of the results, I do want to call out some context to the materials we released that I think is important. This result pack is a shift from what we presented to you before and part of the progression to the new for Computershare. We have listened to investors and took on your feedback. The slides point to the future much more than they talked [ph] in the past, a new simpler, disciplined and more profitable Computershare is emerging, with focus on building and protecting scale in core markets, with multiple growth drivers, strong free cash flow, and improved returns.

And I'd also say, a more transparent Computershare too, with greater disclosure, to help you understand and value our business. And this presentation is an early marker in that journey.

So let's start on Slide 2. We'll describe Computershare's performance as resilient for the first half, with some encouraging signs we will build on.

We faced some real challenges: lower yields on client balances, increased competitions in our plan [ph] business in Europe, and subdued level of shareholder employee transactions in the U.S. and Europe. Notwithstanding these and other factors, in constant currency, i.e. the same rate applied in first half FY15, management EBITDA, which is a key performance metric, was essentially flat. If we exclude the margin income component, which was depressed by low yields, we delivered operating EBITDA of just north of $173 million, which is growth of around 2%, and that's a number to focus on because that's in our control.

When we gave guidance for the year, we said the underlying business performance would be similar, and these results reflect that. Our two largest business segments delivered positive profit growth. Our registered maintenance and corporate action business, which operates as one, delivered in constant currency a pleasing $133.1 million EBITDA, an increase of over 4-1/2%. Business services also delivered a pleasing result, with EBITDA of $71.7 million for the half, an increase over 7-1/2% in constant currency terms.

In these results we had a part contribution from Gilardi but no contribution from the Russian registry business and ConnectNow that we sold.

I'll talk about more of our plans to address some of the challenges and some parts of our business later on in the call. But as you can see upfront, we're not shying away from these challenges and we're proactive in making changes to improve our market position, lower our costs, and improve productivity.

We have clear strategies to face the challenges [inaudible] registries and business services business that face headwinds. We have new product development and technology and innovation to drive productivity and lower costs. Again, execution is well on track.

And finally, we have a clear strategy to invest and reinforce, reinvigorate and grow our share plan business where we see a closer integration with our registry business and long-term upside. I'm encouraged by our progress on these fronts and what we are building.

Success to us is to build scale in our core businesses by leveraging our strength of accuracy, timeliness and efficiency to drive operating leverages, sustainable profit growth and improved returns on capital. We now have clear growth execution and [inaudible] management strategies. We're growing in mortgage servicing in the UK and in the US, and it's a business that suits our strengths. As we discussed with many of you last week on the CMC call, development of that strategy is well-advanced.

These are exciting and strong growth drivers, with our clear, deliberate and disciplined focus on execution, will drive results.

In the half we also established and announced a clear policy around capital management. This is both in terms of recycling capital for higher return, and you will have seen that with our disposals and acquisitions, but also ensuring we generate strong free cash flows to fund profitable growth and higher ROIG. That's what CMC is all about.

While doing this, we will maintain a disciplined balance sheet, with conservative leverage, well within the Company's policy for our capital structure. These are exciting times at Computershare and we look forward to delivering the potential.

So, moving on to Page 3, which shows our headline numbers. As you can see, total management revenue in constant currency was up 5% to just over $1 billion. Management EBITDA was down relatively flat, a resilient performance in what has been volatile markets. Management EPS was down by 5.9%, impacted by investing in future growth and productivity, and we'll talk a little bit more about that later on in the presentation.

So now onto guidance, which is Slide Number 4. As with previous years, we do expect a skew in earnings to the second half. But this is how we see the full-year results for 2016.

Guidance is affirmed and unchanged, but we are seeing the same things you are seeing as far as equity markets, FX and interest rates. As you would expect, there are a few things that have changed since initial guidance back in August 2015. We announced and started to execute our buyback, and Mark will give you an update as to where we are with that later in the call. We also added strength to our growing class actions administration business by purchasing Gilardi, a specialist in this space, although FY16 contribution will be small.

The U.S. dollar has continued to strengthen, and I don't need to tell many of you how volatile equity markets have been recently, which does impact some of our transactional volumes. So there are a few challenges out there and it's not going all our way, but we're working hard to meet the guidance. Also just want to confirm, any potential contribution from UKAR and CMC in FY16 is expected to be immaterial, which is mostly around timing of these transactions.

Now turning to Slide 6. I don't plan to go through this page in detail as many of you are familiar with Computershare. I would make the point though that, whilst there's a lot of market attention on macro factors outside our control that affect us, such as rates, FX and the M&A cycle, etcetera, we do have competencies and competitive strength at Computershare that enable us to deliver outstanding results for our customers, and I'm very proud of that. That's the basis of our confidence for growth.

Put simply, we have three key growth engines. One, of course the macro factors can assist. For example, in the period, we have over $15 billion of client balances earning an average yield of just over 1%. We have tremendous leverage in improvement in rates. And our focus is on maintaining and growing the client balances.

Two, and most importantly, we're executing our own growth strategy. We have two strong growth potential businesses where we are investing -- market servicing and employee share plan. We expect this business to deliver sustainable profit growth and improved returns, albeit the near-term outlook for plans does look more challenging.

And three, finally, we will benefit from structural trends. These underpin our business every day: rising compliance requirements, the need for accurate, timely and efficient processing, payments, and reconciliation. The world will continue to become a more complex place, and that's good for us.

Now, turning to Page 7, I'd like to show you some information that we've never disclosed before. This is part of our strategy to be more transparent and user-friendly to investors. You'll be familiar with our geographic breakdowns of revenues and EBITDA, and as you can see, 48% of our revenue and 43% of our EBITDA come from the U.S. That's why we currently report in U.S. dollars.

You've also seen our revenue split by business unit before, however, we will now provide the breakdown of EBITDA by business unit. This is important as we're building Computershare on global business lines.

52% of our Group EBITDA in the half came from registered maintenance and corporate actions. 27% came from business services and employee share plans contributed 9%, both of which we expect to grow over time.

Now let me hand over to Mark who will take you through the financials.

Mark Davis

Thank you, Stuart, and good afternoon to everyone on the call. As Stuart mentioned and you will see in our finance slide, this period, there has been a greater emphasis on constant currency analysis. We're focused on this in the deck to help explain some of the underlying trends. So we hope you find that to be more useful.

Stuart's already touched on the high-level revenue and EBITDA highlights. I'll delve in to some further detail on each of those later in the presentation.

Profit before tax down 3.2% in constant currency. Management EPS down 5.9%. Again I'll come to the NPAT bridge shortly.

The stat EPS number up 445%. Really this is a result of the non-cash impairment charge that we took in 1H you've seen on the vouchers business not recurring. The management adjustments between -- and the reconciliation between stat and management are all set out in the appendices, on Slide 41 -- slides 41 and 42.

There is one management adjustment that I'd like to call out just to give some context. That is the loss in aggregate of $25 million, being the finalization of the disposal accounting for Russia, VEM, and the ConnectNow disposals. This was due to the write-off of the translation differences from the foreign currency translation reserve which are only reclassified to P&L upon completion of the disposal. So it's not a cash transaction; it's an FX issue and it's a timing issue.

And just to give a little bit of color on that, and by way of work examples, if for instance we bought a business in Australia for, say, $25 million, when the AUD and the USD was parity, and we sold that business a few years later for $31 million and made a $6 million profit in local currency, well, in the context of the USD having strengthened to, say, AUD0.70 cents to the dollar, you would book in the books a loss [inaudible] and given what's happened with the USD over the last few years, that is the net effect as it relates to the finalization of HBase3 [ph] disposal accounting.

Back on to the results summary slide on Page 8. Management EPS in AU cents equivalent up 12.2%. I'll come back to that one in a moment.

Free cash flow broadly in line with PCP. There is some additional complexity surrounding SLS cash movements, which I'll talk to later in the presentation. This number excludes operating cash flow requirements for SLS advances to a better underlying comparison of the operating cash performance. It's pretty consistent with the way that we look at things internally.

Onto the dividend, up AUD0.01 on PCP, the same as 2H15. It has been franked to 100%, which is a change, and I'll talk about that a little later in the presentation.

Moving now to Slide 9, 1H16 management NPAT analysis. Overall EBITDA pretty flat in constant currency. There has been some weakness in the UCIA region, largely as a result of [inaudible] business starting to run off and weakness in the plans business. That is largely predicated on the substantially lower share prices for a number of our clients, particularly those in the energy and marketing [ph] sectors impacting on dealing FX transactional activities.

The other one to call out on this slide is the tech and corp. EBITDA. We are maturing some of our e-charge [ph] methodologies, but in the meantime that is driving higher tick in corp. EBITDA and lower regional EBITDA outcomes. It does impact all regions, but probably the U.K. most significantly.

Interest, the interest is a deterioration of $3.5 million, in part due to the increased average borrowings during the period to fund the buyback, to fund some SLS expansion, and of course the Gilardi acquisition, depreciation and amortization, that is a little bit higher due to the higher CapEx in 2015, FY15, and some increased MSR amortization. The effective tax rate against the PCP. Really this is due to profit mix, the U.S. profits are a higher percentage of the overall pie. You can see some of the deterioration in the UCIA profits, which is a relatively lower tax jurisdiction that's impacting the effective tax rate.

On to Slide 10, management EPS FX impact. This is a repeat of the slide that we talked to at our AGM, and we want to reiterate the key messages. We report in USD the reduced FX translation volatility, but for Australian investors who represent the lion's share of our register, we wanted to reinforce the equivalent AUD management EPS earnings, which is an important metric that many use in valuation purposes.

You can see here that while USD management EPS is expected to be down in FY16 as per our guidance, in AUD equivalent terms, EPS is continuing to grow due to the relative weakening of the AUD against our other earning currencies. The numbers in this chart are of course predicated on our full-year guidance of around 7-1/2% down over FY15.

Moving to Slide 11, management revenue breakdown. Again in this slide we're using constant currency comparisons to better enable understanding of the underlying revenue trends. We will start off with register maintenance. You'll see that's down 5.2% in constant currency. That is largely as a result of the disposal of the Russian business, which we didn't have this period. There has also been some weakness in U.S. shareholder activity, but we did see some improvements in both Hong Kong and ANZ.

Corporate actions are up overall, largely driven by some stronger corporate actions performance out of the U.S. business. There is weaker results posted by ANZ in Hong Kong against the same time last year.

Employee share plan, I mentioned a moment ago, the weaker equity markets impacting the share price of a range of our larger clients, driving substantially lower transactional activity in employee share plans. There is also some margin income issues associated with that business as well, which you'll be able to see later in the presentation.

Business services up 23.1% in constant currency. The key drivers in business services are, to start with, the full period of HML. We didn't have -- we only had HML for a few weeks in 1H15. HML is currently -- the margins in HML are currently relatively low. The cost-outs in HML are proceeding to plan, but the revenue growth, while there, is not coming on quite as fast as initially anticipated. But the pipeline is quite strong, and that's not including the development on UKAR.

We are seeing growth in both -- in class actions both organic and inorganic, benefiting from the Gilardi acquisition, albeit, as Stuart mentioned, it's relatively small in FY16. The growth there in those three segments is offsetting some of the weakness that we're seeing in service works in Australia.

The key driver of the increase in stakeholder relationship management revenue was a substantial external communication job in the U.S., which drove increases in recoverable income, largely as a result of a lot of postage that was involved in that transaction. And there's a corresponding increase in costs of sale, which you'll see later in the deck.

Moving to Slide 12, the management revenue bridge. This slide really does show the foreign currency translation significantly impacting the actual reported numbers. The impact of FX is almost $70m. The slide does show the movements -- the underlying movements in the various revenue segments, extracting the income -- the margin income effect which was shown towards the right-hand part of the slide. The factors driving those relative changes have been discussed earlier on Slide 11.

Onto Slide 13, client balances and margin income. Firstly, like many other financial metrics, the numbers in this slide are materially impacted by FX translation. This is not a constant currency slide, this is an actual slide. In constant currency terms, total balances would have been closer to $16 billion and margin income around $85.2 million. So the overall yield achieved is basically the same, whether it's actuals or constant currency.

The major shift in balance composition is the fall in exposed balances from an average of $5.7 billion in FY15 to $4.2 billion now. Now, give some context about some of those movements.

Around $400 million of that is attributable to the FX translation effect and around $600 million of that is as a result of the increase in fixed rate deposits. You'll be able to see that later in the deck in the appendices when you look at our term deposit slide. The remaining $500 million is the change in exposed balances. This can be driven by a number of factors in any given period.

You'll also note that the non-exposed balances have increased from $4.7 billion to $5.3 billion. This increase in the period was due to some of the balances that we inherited with the Gilardi acquisition, as well as some of the changes that we saw in escrow balances.

Moving on to client balances yield comparison on Slide 14. This slide shows the overall yield that we have extracted over recent years and the enhancement that's been able to be achieved relative to market cash rates. It's important to highlight the earnings upside from this factor. As the slide indicates, assuming balances stay where they are today or stay constant, if we're able to achieve an increase of 100 basis points in yield across the entire book, then an additional $150 million of EBITDA per annum would be earned in our business.

Clearly our capacity to achieve such an outcome will be largely predicated on future rate movements as well as the enhanced yield we can extract from the duration in the deposit books and any future derivative activity that we might undertake.

Moving to Slide 15, EBITDA by business stream. Again as Stuart highlighted earlier, this is new data that's been disclosed for the first time, i.e. EBITDA at the business stream level.

Start off with register maintenance and corporate actions. We've combined these two, reflecting the fact that we run this business jointly and pricing decisions that we make reflect the dual revenue stream. We did see a constant currency increase in EBITDA, driven by U.S. corporate actions, as well as some overall improvements in register maintenance EBITDA.

On business services, SLS and class actions were large drivers of the growth that we saw there. The contribution from HML, as I talked about earlier, is relatively small.

On employee share plan, we're seeing some lower transactional revenue and also some margin income deterioration, as well as some increased cost as a result of investments that we're making and previously flagged in product and service, and also a result of some regulatory costs in the U.K.

Onto Slide 16, operating costs analysis. We've covered the increasing cost of sales earlier in the discussion on stakeholder relationship management. As we highlighted in our August FY16 guidance statement, we anticipated high costs in FY16. This is due to the combined impact of net acquisitions, in particular HML, which we only had for a few weeks in 1H15; investments in product and innovation; regulatory costs; and some efficiency initiatives.

We always said that costs would not underpin the FY16 result the same way as we've seen in some recent periods. However, we certainly have not taken our eye off the cost ball and indeed we've launched some new cost initiatives in both the U.K. and the U.S. outside of the U.S. premises rationalization project. We expect these will have benefit in future periods. Locked with the U.S. premises project, as they progress, we'll be in a better position to provide greater insights into the likely impact.

Onto Slide 17, an update on the U.S. premises rationalization. We included a form of this slide at the November AGM, showing the estimated benefit from the U.S. premises rationalization project, which are all expected to be achieved in future periods, no benefit in FY16. The project continues to track to plan. We now have over 200 staff on the ground in Louisville and we expect to be around 320 staff by June.

Just reiterating, we expect the total project cost of circa $90 million to deliver an expected annual benefit of $25 million to $30 million. Of that $90 million of projected expenditure, one-off expenditure to achieve those benefits, almost $20 million have been spent to date.

Moving on to Slide 18, onto cash flows. Cash flows are broadly in line with PCP, but the first thing to note on this slide is that there is quite a lot of noise in the operating cash flow numbers following the purchase in December of a legacy non-performing MSR portfolio which was heavily advanced. This is really a good news story as the transaction represents the opening up of some of the stored legacy product that we'd expected to hit the market for some time now. This is the traditional SLS specialized product and it's more lucrative in terms of the earnings that we get out of servicing product of this nature.

While we do have capital structures to deal with heavily advanced portfolios, as part of the need to execute this transaction with a new counterparty, who is a large U.S. financial institution, we elected to undertake this transaction ourselves and we will sell the advances into a capital partner structure which we expect to take place in the coming months.

Typically, advanced heavy transactions would go straight into the capital partner structures, so this is a bit of an exception to the rule. The real underlying cash flow story here is broadly similar to the prior corresponding period, but impacted naturally by the strengthening USD as well as some of the Louisville costs that have been incurred to date in FY16.

Onto Slide 19, SLS, U.S. mortgage servicing cash flows. This slide sets out in further detail an explanation on movements in SLS cash flows and the statutory cash flow specifications. To start with, net increases in loan servicing advances are classified as operating cash flows. These advances are largely funded through a non-recourse advanced debt facility and drawdowns on this facility is shown as financing cash flows. It's the net of these two cash flows that Computershare need to fund in any given period.

On this slide, it appears that circa 60% of the net advances were funded by the advance facility. However, we did have a drawdown in late June FY15 which funded early 1H16 advance receivables, and so the true number is close at 80%. In any event, as the advances are sold to capital partners, this working capital will largely be returned to Computershare in the coming months.

Really the underlying purpose of this slide is to give greater visibility and context into the SLS cash movements in any given period given they can be lumpy, they can have different statutory classifications, and they can extend across reporting periods. But to be clear, overall, the growth in receivables is a positive for the SLS business as it represents underlying growth in the book.

Onto Slide 20, talking about the balance sheet, just a couple of points to note here. The decline in total equity, being down 5.6%, this is largely attributable to the FX translation movements, but there is also some impact from the on-market-share buyback that we have been progressing.

The net debt has been impacted by lower cash balances. Some of the significant cash movements during the period relate to our buyback, the acquisition of Gilardi, contribution to SLS advances, and there is also some FX translation impact of the non-USD Computershare cash.

It is important to note that our net debt to EBITDA remains within our target range, and our published ROIC and ROE numbers remain health.

The last slide that I'll discuss before I hand back to Stuart is Slide 21, capital management. Start off with the share buyback. We did announce the share buyback on the 18th of August last year, and we've made very good progress on the buyback, completing almost 60% of the maximum amount of the buyback in the first four months. As at the 31st of December, we've acquired just under 7.2 million shares.

We have called out in this slide that, given the incomplete and confidential negotiations that are ongoing regarding the material UKAR transaction, that does present a bit of a challenge for us continuing the buyback in that context, so we do not intend to resume buying back until those negotiations have concluded.

We also discussed at our AGM a new and clearer articulation of our capital management strategy, which I'd like to reiterate here. And that is we intend to maintain our gearing level such that net debt to EBITDA is between 1-3/4 and 2-1/4 times, excluding the non-recourse SLS advance facility debt. This gives us flexibility to temporarily go above this range if we want to take advantage of compelling opportunities that may present themselves. Otherwise, we intend to continue to pursue capital management to maintain leverage within this target band.

Finally, onto the dividend. We have announced an interim dividend of AUD0.16 franked at 100%. This is an increase of AUD0.01 over PCP. Fully franking the March dividend to 100% reflects a new policy of providing shareholders with access to franking credits to the maximum extent possible when we can. What that means naturally, given the composition of our earnings, is that, very unlikely to be able to continue to frank dividends at 100%, and in fact we think the short-term sustainable franking rate is going to be close to the 20% to 30%, not dissimilar to where it's been over recent periods.

I will now hand back to Stuart.

Stuart Irving

Thank you, Mark. Let me take you through some of the key points on pages 22 to 24 presentation. These pages show the way we think, plan, build and measure businesses at Computershare.

Growth potential, strategy, execution priorities, and capital employed. This is our framework. We list how these factors affect and relate to our main businesses, both for those [inaudible] that we're addressing and those where we have a strong growth agenda. Our plan is to build sustainable profit growth and improve returns on capital.

In U.S. registries, we are the leading player. We service 77% of the DOW. Our strategy is reinforce that position by broadening our suite of products and services. As Mark mentioned, our focus is on ongoing cost reductions and efficiencies, which should improve our returns. But we can win market share in the U.S. Let me be clear about that.

Our strategy is to win a large share of the IPO market, and we've had some initial successes in doing that. Even though an IPO is normally very competitively priced in the market, the ongoing relationships and ability to provide further products and features are key.

Onto blockchain. We too are following blockchain closely. It's a complex but potentially exciting technology and it's gaining some traction. We understand that well.

In our view, new disruptive players may struggle to challenge key established players in the market, structured chain, but the existing players will have to invest and partner with thought leaders and technology providers to lower costs and potentially drive volume. Regulation of course is a critical factor. Regulators will still look for centralized companies to regulate, so, many of their existing equity landscape players such as exchanges, depositories, custodians and registry providers will endure, although they may have to implement a new technology to benefit and in some cases survive.

In competitive markets there will always be a change. This change also brings opportunity. As a company with a strong IT background, we've had a team working on this internally for quite some time. And the number of initiatives both minor investments and trials are at an advanced stage.

Notwithstanding that it's very early in the blockchain journey, with our registry capability, we expect on all scenarios to have a central and sustainable role in the industry value chain.

We've talked a lot this week about our opportunity in U.S. mortgage servicing, and as you can see here, it's a top priority for us. There are some more slides on CMC in the appendix that show the acquisition rationale and the way we will enhance ROIC. With UKAR and CMC, our growth strategy is clearly on track and well advanced.

The growth potential in U.K. market servicing is high. UKAR is an exciting and significant development for us. Our execution priority is to get the contract signed, then we will start to integrate these operations. And we've already put together a detailed plan for that. We're also focused on continuing to deliver all of the HML synergies which currently are on track.

We're not financial engineers at Computershare. We don't simply buy businesses for short-term accretion and then leave them alone as part of a disparate conglomerate. We are building cohesive, well-managed, fully-integrated global business units, with scale and operating leverage. We integrate, we get the synergies, we'll keep doing that.

But we're also realistic and pragmatic. As we have said previously, our U.K. voucher business is on runoff, and we expect it to run down over future periods. We also expect reduced profitability in our U.K. deposit protection scheme business. It's not so much from competition but the fact that we are achieving lower rates and therefore lower returns in the balances. That's reality. We can, however, reduce costs and actively manage this to partly mitigate the impact.

Employee share plans are different. We see it as a strong growth opportunity. But there have been difficult challenges that we have addressed. We've rebuilt the European management team and have a clear product and investment plan. We have had excessive concentration of customers in the energy and mining sectors. And as you would know, these sectors are at a lower point in the cycle and this has adversely affected us, although clearly we benefited when resources prices were higher.

But we see a strong future. It's a business that can scale and deliver high returns on capital. The growth strategy is based on building a single integrated business and investing for growth. These investments will improve productivity and bring new innovations to our customers.

As an example of these investments, we recently acquired small financial reporting provider and will look to integrate the platform into ours. This is so important to us that we're deploying additional senior management to the U.K. to oversee these technology changes. Equity compensation will continue to be an important feature of remuneration around the world. That's not going away. We aim to be at the heart of that structural trend.

Margin income, as we've already discussed, is a key profit driver for Computershare. However, we're not simply hostage to fortune. We have a clear strategy to protect the client balance levels. Once we have these funds, we can, always adhering to the mandate and compliance framework, actively apply first-rate treasury management expertise for enhanced returns. Again this requires little capital to support growth.

Moving on to the cost book is absolute here. As Mark mentioned, we have kicked off a number of initiatives to drive costs down [ph], and we'll work through them. We will, like we did with Louisville, keep you updated. The cost-downs [ph] are part of U.S. restructuring and the implementation of automated reconciliation features to meet regulatory requirements in the U.K. that are currently being handled manually.

Finally, but not least, we call out innovation and technology as a key driver of growth and productivity. In the future, the outcomes of our investments will define our value proposition, our product suite and our financial model. We have implemented our innovation lab and getting real value from an agile approach to product development and fresh thinking from outside the Group. We can successfully disrupt ourselves. But more on that for another day.

While there's a lot of information and detail in the appendices of this pack, let me finally turn to Page 25 to make some simple conclusions.

As I said at the start, a simpler, disciplined and more profitable Computershare is emerging, with focus on building and protecting scale in core markets, with multiple growth drivers, strong free cash flow, and improved returns. We have a resilient underlying business, with sustainable high-margin, high-returns, with over 70% of revenues recurring. We've made a significant amount of progress over the last six months to develop strategies to drive growth, address challenges, remove costs, and improve productivity. Whilst from a macro perspective not everything is going our way, we have reaffirmed guidance.

Our next steps are to complete the CMC acquisition, finalize the UKAR contract. And once we do that, reengage on the buyback. And we look forward to updating you as we progress.

Now that's from me. I'm now going to hand over to the logistics for taking questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

The first question today comes from Simon Fitzgerald from Evans & Partners. Please go ahead, Simon.

Simon Fitzgerald - Evans & Partners

Thank you for taking my question. Stuart, you mentioned before that 70% of the revenue would be recurring in nature. Just any specifics for that a little bit more and whether there might be some influences from equity markets within that 70% that you think about?

Stuart Irving

Most of our contracts we have are client contracts where the client pays, yes? So if you look at our core businesses such as register, maintenance and employee plans, it's really sort of three good areas of revenue. One that comes from client paid fees, then there's what we call the shareholder or employee paid fees, which are related to equity markets, and then we have margin income. Yes?

So when we calculate that 70%, we don't actually include the shareholder employee paid fees because they're not recurring, they're not of a contractual thing. It really depends on whether individuals are actually exercising stock options or deciding to trade their dividend reinvestment shares.

So whilst [inaudible] acknowledge the equity market does affect us, it lags [ph] on the recurring nature of our revenues, more the event-based ones.

Simon Fitzgerald - Evans & Partners

Sure. That sounds fair.

Also you guys touched a little bit on those advances and how the typical sort of format of those advances would go to capital partners [inaudible] sort of taking those onboard. I was wondering whether there was any risk in terms of timing particularly for the amount that's gone through the cash flow at the moment, or is there any risk that you could stuck with those advances and that you couldn't find a capital partner or something could happen to the market in the meantime and you're stuck with that?

Mark Davis

No, that's not at all our expectation. You know, we're very confident with the structure that we've been putting in place to get the advances into those capital partners, and the appetite for investments there. This was really to bring about efficiency in taking advantage of the particular transaction that we did in December. That pipeline is opening up and we think that we'll be able to get that off the balance sheet into one of those structures in the coming months, probably as part of some other transactions that we're seeing in the pipeline, and it's just really a matter of executing that in a positive and efficient way, and it was also about getting that deal done in the way that we did in December.

So, no concern that we're envisaging at all there.

Simon Fitzgerald - Evans & Partners

Thank you very much. And just one final one about the UKAR transaction. I know that the buyback has been put on hold until you get that signed off. Sorry for my ignorance on this, but I was wondering what sort of capital costs or working capital might be needed to put aside for that UKAR transaction and why it means that the buyback is being put on hold at this stage?

Stuart Irving

Yeah. I think in terms of UKAR, you got to look at that more as a contract win as opposed to an acquisition, in terms of any upfront capital. Clearly it is a reasonable-sized transaction. Therefore, that's why we had to announce it, and obviously with the U.K. government, their policy of announcing a preferred bidder status, we had to inform the market.

It is a material contract for Computershare. We understand that there's still a number of items to be resolved with UKAR over the coming months, but we do have a view on the relative size of that, and therefore, for good governance reasons, we'll steer the market from a buyback perspective.

Simon Fitzgerald - Evans & Partners

Okay. Yes. No, no, that's very clear. All right, thank you very much for that.

Stuart Irving

Thanks, Simon.

Operator

The next question comes from Nigel Pittaway from Citi. Please ask your question, Nigel.

Darren Murphy

Nigel, Darren here. Before you start, in an effort for us to be equitable, could we please ask that the analysts could keep themselves to two questions? Thank you.

Nigel Pittaway - Citi

Sure. Sure, no problem. Okay.

Well, my two questions then are on mortgage servicing. First of all, six months ago, I think you gave us, Stuart, the UPV and loan count at SLS. I was hoping, in the spirit of enhanced disclosure, we might be able to get that again for 31st of December.

Stuart Irving

Yeah. The UPV has trended up, Nigel. I don't have the exact number in front of me. But last time I checked, it was around a $43 billion number. I don't have the loan count in front of me.

Nigel Pittaway - Citi

That's okay. Fine. And then just secondly, I mean obviously as you were going through the cash flow, you did talk about the MSR deal reflecting the opening up of stored legacy product. So I was just wondering if you could give us more of a feel as to how you're sort of viewing the opportunities available in acquiring legacy MSRs vis-à-vis the sort of more agency-related opportunities that again opened up the CMC.

Mark Davis

Yeah. Look, as I said, we think that the opening up of the legacy component of the market, in terms of MSR trades, is a good news story, because that product fits fairly and squarely within the sort of traditional specialized servicing that SLS is world-renowned for, and it tends to be more lucrative work.

Our strategy on SLS, and I think we talked about this last week on the CMC call, in terms of what's going to drive higher returns, it is about getting the mix right, and that's getting the mix right of both owned MSR and sub-service products, and getting the mix right between performing product and non-performing product.

We still envisage continuing to service non-performing product, and particularly some of the, you know, there is a good deal of legacy product that is still out there with the large originating banks. And over time, especially both on how originations are playing out, we would expect a proportion of performing product to increase. But sub-servicing or owning MSRs relating to legacy product is still going to be an important part of our overall product mix.

Nigel Pittaway - Citi

Okay. Thank you.

Operator

Your next question comes from the line of Ed Henning. Please ask your question, Ed.

Ed Henning - CLSA

Hi guys. You know, you talked a lot the thing about the low growth to the registry business and also the high growth of the mortgage servicing business. Do you envisage sometime in the future that mortgage servicings can be a bigger part of your business going forward?

Stuart Irving

Well, we think that we can certainly maintain the registered maintenance revenue, I mean, and also grow in some areas. But we've never ever called out, absent acquisitions, that's a high growth business. It's dependent on a number of things out of our control, such as IPOs, you know, whether there's any sort of spin-offs, and/or ability to win accounts in markets.

Now we've laid out a growth story for mortgage servicing both in the U.K. and the U.S. We've acquired CMC and hope to close that transaction in a few months' time. And that will lead to a real sort of sustainable volume of both MSR, sub-servicing coming into our mortgage group. So you would expect higher revenue and greater sort of financial returns out of that business. And therefore, if you go back to the pie charts, you will actually start seeing a skew on the numbers a little bit as that increases.

But that doesn't necessarily mean that we see registered maintenance in decline. And I think certainly on a constant currency basis, we're actually able to increase EBITDA in registered maintenance this half.

Ed Henning - CLSA

Okay. Just one other while I've got you. Just on the cost and the cost trajectory, you kind of ran through it there. You're talking of investment in new technologies and all thing. Do you envisage a large, and excluding I guess the taking out of the cost of the U.K. program, but do you envisage continued investment in technologies being a headwind for you guys as technology is rapidly changing?

Stuart Irving

Technology is changing. I mean, one thing that Computershare doesn't have, because we have always been willing to invest in IT and, you know, we published a chart of IT costs that go between sort of 10% and 12% of revenues for forever and a day. As a result, we don't have a massive technical debt where we're going to have to replace an entire huge system that we use in one of our business lines, because we have been gradually, over the years, using more up-to-date and different technologies to take advantage of opportunities. So we don't see that huge technical debt as a particular issue.

You know, we're always a believer on technology in terms of driving efficiencies across the business, new ways in which our clients can communicate with shareholders. So we're always strong believers in investing.

I mean, I think whilst there are some areas where our technology costs are going down, and we see opportunities with things such as cloud and elsewhere, we're also sort of investing in different ways, in different methods of innovation and creation of new products. So it's a bit of a mix.

Ed Henning - CLSA

Okay. Thanks guys.

Stuart Irving

Thank you.

Operator

Your next question comes from Daniel Toohey from Morgan Stanley. Please go ahead, Daniel.

Daniel Toohey - Morgan Stanley

Thanks very much. Good afternoon guys. Two questions.

Just on the U.K. rental deposit scheme, just in terms of the earnings risks and how that's playing out versus your expectations, can you provide any commentary?

Mark Davis

Yeah, I'll take that one. I mean, look, I don't think there's been any change in terms of what we're seeing on the JPS [ph] from what we've talked about previously. As we roll into the new contract, we'd always anticipated that was going to be one of the drags on margin income in FY16, particularly as we reinvest balances in the current environment at lower rates than the ones that we're rolling off in some of the positions that we have previously. So I mean we've called it out, you know, as an earnings headwind previously, it's playing out pretty much as we'd anticipated.

Daniel Toohey - Morgan Stanley

Okay. And just on the --

Mark Davis

That's factored into our -- that is one of the -- that is clearly factored into our FY16 guidance, the impact of a lower performance that we're expecting JPS [ph] in FY16. It will be a, you know, we will have a full year of that drag in FY17. So there is, you know, we're seeing some of it this period, a bit more in the full year next year.

Daniel Toohey - Morgan Stanley

Yeah. Okay. And just on the SLS working capital advances and the commentary suggested that you were pretty comfortable that it was no risk to moving to the off-balance-sheet funding and the capital providers. Can you just outline maybe what, you know, what you see is the sort of turnkey [ph] risk to executing on that?

Mark Davis

We're not calling it out as a risk in executing that. You know, we've done a number of these transactions before with capital partners. I think we've talked about in the past, you know, a transaction that we did with Blackrock. We've also done transactions with other equivalent-type entities. There is strong investor appetite for it. So we think it's really a timing issue rather than execution risk issue.

Stuart Irving

Yeah. I mean the fundamentals of that was there's a lot of banking clients in the U.S. who wanted to sell chunks of MSR. And on the first book that they sold, they wanted us to take it on balance sheet, to have skin in the game, to make sure that the onboarding process was very, very smooth and effective, and then suggested that, should that be the case, we could look at perhaps future books and we'd be able to sell that down the track.

So it was a really a nature of establishing, which is really a good news story for that business in terms of getting some potential regular flow.

Daniel Toohey - Morgan Stanley

Okay. So you're not concerned about any dislocation in markets that may impede execution on that?

Mark Davis

We're not concerned of our execution of that.

Daniel Toohey - Morgan Stanley

Thank you.

Operator

[Operator Instructions]

The next question comes from Kieren Chidgey from Deutsche Bank. Please go ahead, Kieren.

Kieren Chidgey - Deutsche Bank

Good afternoon guys. Two questions if I can, and apologies if I missed some earlier commentary around them. But Stuart, sort of you referred to a couple of areas of I guess weaker transactional activity around the employee plans businesses, is one example. Your commentary around the softer environment you're seeing at the moment, is it more around equity market-related transactional activity or are there other things aside from that you're seeing from a pricing or volume point of view in the business?

Stuart Irving

We're not -- the softness that we're trying to convey, it's the same thing that you're seeing in the market. I mean there is volatile equity markets, and when there is, you get less transactional activity, you know, there's less IPOs coming to the market, there's less individual sort of selling stock in some of our plans. And as both Mark and I highlighted in our employee plans business, in Europe we have some fabulous names in the mining and resources sector who have been distributing broad-based plans to their employees for a number of years, and, you know, fundamentally, some of these awards will be underwater now, and as a result, you don't get the transactional volume.

I'm not highlighting anything structural in terms of, you know, client contracts or, you know, abnormal competitive behaviors in the marketplace. It's the general softening that everyone's seeing at the moment with regards to equity markets, you know, the strength of FX and also just the sort of the yield curve softening a little bit and less optimism about rate rises. So these are really the factors which are all the macro factors that do have quite impact on Computershare, as you would know, Kieren. But nothing structural in the group.

Kieren Chidgey - Deutsche Bank

Right. Thanks for clarifying that. And the employee plans transactional activity, obviously we saw that come off the boil this half. Do you think the run rate last half is -- sort of, are you expecting a deterioration in the second half relative to what you've just shown in the first half results?

Mark Davis

Yeah, I think that's one of the factors. Clearly it was affected in the first half. If anything, you know, it's gotten worse in the second half with, you know, the way equity markets have performed over recent weeks. And that was taken into consideration as we -- you know, I think as you know and as we've talked about previously, we do periodic bottoms-up assessment of what we're seeing in the business, and that was clearly one of the areas of the business that's deteriorated as the year has progressed.

Kieren Chidgey - Deutsche Bank

Yeah, all right. And the second question, for my two-question limit, is around costs. The initiatives in the U.K. and U.S., I know it's early days, you don't want to elaborate on a quantum of potential savings, but can you give us an idea around the sort of areas where you're looking through just costs and the likely timing around hitting the benefits [ph]?

Stuart Irving

Yes. So I'll give you an example. I mean it's not just a throwaway line just for a call, yeah? There are real projects. An example of one, there's been a number of regulatory changes in the U.K. The fact that our U.K. business assets -- client assets under management has grown exponentially as we've expanded in a number of business areas, has increased this regulatory burden and also the amount of reporting that we have to do. There is a lag time between developing complex reconciliation platforms that at the moment is being filled with personnel. We are deploying, you know, these reconciliation platforms and systems and going for automation over the next 12 to 18 months, and as a result, we'll see costs being taken out of that business.

So as we firm up some of the timelines, etcetera, you know, we'll certainly be able to sort of comment on it down the track. But that's an example of some of the areas.

Mark Davis

The U.S. is more -- the U.S. is, you know, more broad-based and, you know, as we said earlier in the call, this is -- cost-outs remain a pretty key focus and it'll occur in the U.S. across a range of areas as part of the efficiency -- broader efficiency programs outside of the premises rationalization.

Kieren Chidgey - Deutsche Bank

Okay. And should we be thinking about a net drag as those benefits emerge sort of over that [inaudible] period from sort of the additional cost investments [inaudible]?

Mark Davis

Nothing that we're calling out at the moment.

Kieren Chidgey - Deutsche Bank

All right. Thank you.

Stuart Irving

Thanks, Kieren.

Operator

Your next question comes from Frank Podrug from Merrill Lynch. Please ask your question, Frank.

Frank Podrug - Bank of America Merrill Lynch

Thank you. Hi guys. Two questions.

The first, you note any further changes in cash rates are expected to be immaterial to the FY16 results. Is this because of the hedging profile or is it because you feel the yield is effectively hit or is coming close to a trough given that the vast bulk of those high-yielding hedges now roll off?

Mark Davis

It's really as a result of just our expectations. We're not, you know, earlier in the year we thought that there was a chance for a rise in the U.K. We'd say that that's pretty unlikely at the moment. And I think, you know, the prospects of multiple rises in the U.S. appeared more likely than what they do at the moment. There may or may not be another rise in the U.S. Either way, it won't be material given the timing in which it will occur and the relative tax [ph] rate that will apply to any additional profit should it occur.

Frank Podrug - Bank of America Merrill Lynch

And if you, sorry, just to extend that, if you flip that on its head and given you did have high-yielding deposits in there previously, if you look at the downside potential, you're thinking you're pretty close to a trough given there doesn't appear to be a huge amount of that high-yielding stuff left?

Mark Davis

Well, the reinvestment rates have been a challenge. I mean, you'll have a better idea of where rates are heading than us, I'd imagine, Frank. But, you know, Canada is still finely balanced, Australia is finely balanced, you know, the U.S. remains uncertain, and the U.K. is taking quite a while to lift off. So it's, you know, what we have done is built it from the bottom up for FY16. As to what yields do in FY17, we're not going to call it out at this stage.

Frank Podrug - Bank of America Merrill Lynch

Okay, thank you. Just a second question is, credit to you for pursuing a strategy of a simpler, more transparent and disciplined BU. If conditions were to get materially worse, how far are you willing to go and how aggressively are you prepared to act in pursuit of that first objective?

Stuart Irving

I presume you mean simplifying the business lines, yup?

Frank Podrug - Bank of America Merrill Lynch

Yes.

Stuart Irving

We will continue to review a number of areas and a number of geographies as part of what we're doing. I mean it's not something that we're calling out now. A lot of the simplification that we're talking about is how we present ourselves into the market and helping you guys be able to value us appropriately, because we realize that we can and have come across a little bit of a conflict in the past, yeah? And a lot of that is how we're going to be reporting more disclosure going forward.

But also on the flipside, internally, we will be looking pretty hard going forward at what makes sense for us in terms of simplification. Yeah? And when it makes sense, we'll do things. I mean Russia was a good example. We got the tea leaves right there. Just a couple of weeks we got word that they just passed the laws that stated that no -- significant company in Russia that's important to fabric as a nation, then you're not allowed to have a registrar that's got any ownership overseas or is run by someone who's from overseas, etcetera.

So the world is an evolving place and we keep monitoring it.

Frank Podrug - Bank of America Merrill Lynch

Thank you.

Operator

Your next question comes from Adam Lee from UBS. Please go ahead, Adam.

Adam Lee - UBS

Hi guys. Thanks very much for taking my questions. Just firstly on the Slide 14 with the movement in yield and client balances. Just to clarify your sensitivity comment. Was 100 basis points of yield or $150 million EBITDA per annum, I mean talking about the materiality of any assumption you've made in next -- for the next six months into the guidance, it still looks like that the, I guess, an annualized 30 million [inaudible] averaging impacts, is there anything in that assumption that you got out of the way, that that would mean that the assumption is lower than the 30 million?

Mark Davis

I mean really that comment is about, you know, if you look at that slide at the moment, we're achieving a bit over 100 basis points in yield, and we've got, on the $15 billion of client assets that we're looking after. It's simple arithmetic of, you know, if there was to be an increase of 100 basis points in that yield on the $15 billion, then there would be an additional $150 million of EBITDA.

We're not saying that that is our working assumption, right? We're saying that that's what would be the outcome if that was able to be achieved. As I said earlier when I talked to that slide, that's going to be dependent upon a range of factors, it's going to be dependent on what happens to cash rates themselves most significantly. It's going to be dependent on us being able to achieve, you know, a spread over cash rate as a result of [inaudible] two things like put term into the book and undertake through these transactions which of the ways in which we have been able to enhance yield in the past.

But the statement is just simply the arithmetic of 100 basis points increasing yield on what we were achieving at the moment.

Adam Lee - UBS

Sure. Okay, thanks for clarifying that. Just to follow up on that then, the kind of futures blended yield curve that you put on there is only one input obviously of your management guidance, not a translatable impact?

Mark Davis

That futures yield curve goes out to June 21, right? Anything that we've guided on -- anything that we've guided on is FY16, is a rolled-up assessment of our earnings based on a whole variety of factors. And we've taken into account our expectations of yield on the client book in FY16.

Adam Lee - UBS

Okay, no problem. Second question, just following on a couple of questions on the cost base and taking into account, I guess pulling forward some of the benefits that you guys are looking to extract from U.S. property rationalization, over a long period of time, the cost-to-income ratio Computershare's remained fairly stable over a long period of time. It's been in a period of modest decline since, I guess, since the SLS acquisition has come onboard. And factoring in the U.S. property rationalization, you're still looking like it will probably be in the low 70s. Is that the right level? Are the investments that you're making in efficiencies going to deliver a step-down in that? Or are we really looking at investments --

Mark Davis

I think if we're referencing the time that SLS came onboard, I mean to be fair, you've got to look at the very significant amounts of margin income that have fallen out of the books since that time period to date, right? There's probably, you know, north of $50 million, $60 million of margin income that's come out of the books over that corresponding period. And as you know, there's not a lot of cost that attaches to that.

We don't, you know, obviously we try and run our business as efficiently as possible. We don't have, you know, hard metrics on, you know, cost-to-income ratios that absolutely have to be achieved because in some respects they're an outcome and they have regard to investments that need to be made or business factors that you need to contend with at any point in time. The point that we have made is that we are -- we continue to be very focused on cost -- the cost outcome in FY16 are pretty much as expected. It's a different period to previous periods where costs have supported the result, which they won't in this period in the same way.

Adam Lee - UBS

Okay. Thanks, Mark.

Operator

Your next question comes from Ryan Fisher from Goldman Sachs. Please go ahead, Ryan.

Ryan Fisher - Goldman Sachs

Thank you. Thanks guys. Just two quick questions, both about U.K. business services.

Firstly, on the vouchers, can you outline how significant the runoff was in the half you're reporting today? And just give us an updated idea of how fast that runoff is going to happen.

Mark Davis

Yeah. It was -- we haven't called out the specific number, but it was a part of -- a part of that UCIA deterioration. It's probably fair to say that a bigger part of it related to plans rather than the vouchers runoff.

Once it is dropping, it's probably fair to say that it's dropping not as fast as we initially thought. And in fact, one of the things that we previously disclosed is about 29 million of remaining goodwill that we said when we took that write-down, which was the written-down progressively as the business winds down. And we've tested, you know, the CBS [ph] business for impairment FY16. And probably what we learned from that impairment testing process, which we do at each half, is that some of the original assumptions were perhaps too conservative and that it is going to stick around for a bit longer. So it's not running down rapidly but it is in gradual decline.

Ryan Fisher - Goldman Sachs

Mark, I think you might have mentioned in the past that it's going to be like a three-year runoff. Is that broadly correct?

Mark Davis

Probably looking like it might even be a little longer than that.

Stuart Irving

Yeah. A little bird told me that their project to get the plan up and running is delayed a little bit. But the people that go into the old scheme are sort of grandfathered in there and so their child pits [ph] education. So, you know, that's sort of five-year-old kids. So you're going to have to reach that out, and we thought that it would be sort of two-and-a-half to three. But with some of the delays in moving across, it might be a little bit longer.

Mark Davis

Yeah. And if things can change here, Ryan, so -- but -- and, you know, how long it actually takes is something that we continue to monitor. But the only thing I would say is it's probably -- it's -- whilst it's running off, it's not running off at quite the same rate as we perhaps originally thought.

Ryan Fisher - Goldman Sachs

Okay, thank you. And just coming back to the previous question and just looking at the drivers rather than the cost-to-income outcome, are you broadly comfortable -- if we put margin income to one side, are you broadly comfortable that over the next few years you can keep cost growth below revenue growth?

Stuart Irving

Yes. I mean I know that doesn't do that in this particular result, but that is clearly our goal, yes? But as Mark said, when you -- for this period, we would see increased costs, and we called out what they were in the past. And clearly, you know, revenue mix is a big part of that and margin income, which is not got a lot of costs associated with that revenue, etcetera, has hampered that. But that's certainly our goal.

Ryan Fisher - Goldman Sachs

Right, thanks. That's all for me. And thank you for the extra disclosure today.

Stuart Irving

Appreciate that. Thank you.

Operator

Thank you. At this stage there are no further questions on the telephone.

Darren Murphy

Okay. So on that basis we will close the call. Thank you everyone for your attendance today. And we will speak to you at the next results. Good afternoon.

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