Good morning, everyone, welcome to Computershare's H1 FY23 results conference call. I have Nick Oldfield, our CFO, and Michael Brown from our investor relations team with me. On this call, we'll take you through the highlights of the results and the outlook for the H2 of the year. As usual, we have released a presentation pack to the ASX, and it's on our website, and I'll focus my remarks on the key highlights in the opening pages. Nick will then take you through the financials in more detail, and following the presentation, we'll open the line for Q&A. Finally, just to remind you, we will be talking in constant currency and US dollars unless we state otherwise. Let me start with some highlights, and let me assure you, I did not get ChatGPT to write this. Too many input variables this half.
management EPS was up 95%. management EBIT more than doubled, and margins expanded to 29%. We have a natural hedge in Computershare's business model, which is very evident today. The model is driving record results in a volatile macro environment. As interest rates lifted across all our major markets, margin income increased almost five-fold, offsetting inflationary effects on costs and the impacts that uneven market backdrop has had on transaction and event-based revenues. The H1 was an abnormal period. The combination of the rapid frequency of rate rises and the corresponding impact that had on customer confidence led to unusual financial results for Computershare. This backdrop and volatility caused what I would term as temporary reductions in event and transaction activities. Our IPOs were down over 70%. Share plan trading was initially impacted, and bond and debt issuance slowed.
We are now returning to a more regular operating rhythm as we enter the H2. In the H1, management revenue was up 34%. On slide C3, you will see some further detail. Over the years, we have purposely built an integrated business model with a portfolio of recurring core fee revenues, cyclical event and transaction revenues, and large client cash balances which generate margin income. All three streams are inherent parts of the model. margin income is a central part of the underlying operating businesses. It's not just something that sits out on the side. It is factored in on pricing, contract wins, and renewals. Our core fees are highly resilient, recurring in nature, typically contracted, and long in duration. They account for over half of group revenue. They increased by 23%, helped by a full 6-month contribution from CCT.
Transaction and event fees are more market sensitive. They account for around 25% of total revenue. Event and transaction revenues were down 14% in the half. Coupled with the impact of inflation, EBIT ex MI was down 40%. These higher margin activities were volatile as I explained before. Remember too, all group costs are allocated to EBIT ex MI. That EBIT ex MI number also includes a disappointing loss in US Mortgage Services, where adverse market conditions worked against us. The question really is: Can EBIT ex MI recover? Well, yes. In fact, it's already underway. We expect EBIT ex MI to be down around 20% for the year overall, and you can see that improved H2 operating performance in the bridge on page 6.
In 2H, we have the benefits of the usual seasonality, the emerging recovery and employee share plans trading that we've also seen since December as equity markets improved. We also have the swing to profit in US Mortgage Services driven by cost out, MSR sales, and the return to our traditional amortisation policy as the useful life of mortgages extends. Let me reassure you that there are no structural issues in the operating businesses. EBIT ex MI is recovering and will recover further as markets settle, just as we've seen before. Of course, margin income, the third revenue stream, more than offset all of this. We delivered over $350 million of margin income in the half, and we're on track to deliver around $810 million this year. At the AGM, we provided a margin income outlook for 2024.
At the time, we expected MI to be around about $1 billion. We have now announced the sale of bankruptcy and class actions, which has some balances, and applied the most recent interest rate curves. Accounting for these, the 2024 projection is now around $990 million. What is the strategy with these higher earnings? Well, we will maintain a conservative balance sheet. And deploy these cash flows to strengthen our global businesses, invest in our growth strategies, drive technology innovation, and of course, reward shareholders. I'm sure some of you may be thinking, "Well, where is the buyback announcement?" I would like to see these margin income gains banked and the full CCT integration cost behind us before we take a more active approach to capital management. I also see opportunities to drive our inorganic growth strategy with good acquisitions.
We want to retain the balance sheet flexibility to move quickly as, and when the right opportunities present. Back to the financial details. In the H1, return on invested capital was up 500 basis points to over 15%. Free cash flow was almost $130 million, and the net debt to EBITDA leverage organically repaired by over 30 basis points to 1.33 times. In fact, it was over two times at this period last year. Yesterday, we determined an interim dividend of AUD 0.30 per share, which is a 25% increase on the PCP. The payout ratio is 45%, which is within our range. With our improving balance sheet, the dividend could have been higher, no doubt, but we do want to be prudent and retain flexibility to scale and strengthen our businesses.
The board will review this again in August. The final point I would make is that we are committed to building a simpler, higher quality and more efficient Computershare. Yesterday, we also announced part of that simplification process. We have agreed the sale of our bankruptcy and class actions business to GCP Capital Partners for a price of $100 million of cash consideration, plus a $40 million-$50 million earn out payable in total over the next four years based on the achievement of some agreed financial targets. This business lost money in FY22, so the consideration is reasonable, and we can recycle the capital into more recurring revenue opportunities. We will continue to review and refine the portfolio. The process to sell the UK Mortgage Services business has been interrupted by the market volatility, but talks are ongoing.
In US Mortgage Services, we're also considering other opportunities to improve returns. We can also be more efficient. We also announced the first phase of our new cost out program, stage four. Starting with US Mortgage Services, we'll deliver additional gross savings of $40 million-$50 million over the next 3-four years. We had a $3 million contribution from this new program in the H1, and expect to see a further $22 million of additional savings in the H2. Let me now move to the outlook. We show this detail on page eight. I'll talk to guidance for FY 2023. First, we reaffirm earnings guidance for the year. In August, we expected management EPS to be up 50% this year. At the AGM, we upgraded our expectations for earnings to be up around 90%. That is unchanged.
Earnings for 2H are expected to be around $0.65 per share, that would be an increase of over 85% versus the 2H PCP. We have laid out our thinking as it has evolved on a couple of the moving parts as ever, the deltas compared to August last year, so to speak. On the positive side of the ledger, we have interest rates and our recapture rate for 2H, which are better than we anticipated as we successfully negotiated higher yields with some of our deposit institutions. Our stage four cost out program in the US Mortgage Services, as I said previously, is gathering pace. Also in US Mortgage Services, our MSR portfolio has increased in value and useful life has extended. The market value for the book is now in line with the IFRS book value.
Therefore, we have returned to the original U.S. amort policy of nine years, effective the first of January. As ever, there is some things going the other way. Client balances are likely to be lower in the H2, mainly due to lower corporate actions volume and of course, timing on closing on today's disposal. The EPS impact of the sale of bankruptcy and class actions, which we expect to complete in May, however, we should be able to absorb that. Finally, employee share plans transactions are running below previous expectations. However, again, as I said earlier, our 1H exit run rates were much improved. However, we're likely to be down overall for the year. Overall, these swings and roundabouts net off in FY23 and guidance is reaffirmed. I'll now hand over to Nick to take you through the financials in a little bit more detail.
Thank you, Stuart. I'll start with our financial results on slide 10. Our total revenue for the group increased 33.5% over the prior corresponding period, while revenue excluding margin income was up 9.3%. Legacy operating revenues fell 5.2%. As you've heard, this was in market-driven transactional and event revenues across corporate actions, bankruptcy, employee share plans, and US Mortgage Services. Encouragingly, recurring revenues improved to 83%, helped by CCT. margin income increased 467%, reflecting the rapid rise in global interest rates. Excluding CCT, margin income would still have been 245% higher. Total costs were up 18.4%. Again, this includes an extra four months of CCT. Assuming we'd own CCT for the full prior corresponding period, costs on a like-for-like basis were up 4.9%.
The majority of this uplift was effective 1st of October 2022, when we implemented our annual employee merit increases. Accordingly, there will be further cost increases in the H2, reflecting a full six months of the higher employee salary base. You can see this in our 1H to 2H bridge. EBIT doubled to $447.8 million, and the EBIT margin improved 970 basis points to 28.6%, both largely attributable to the higher margin income. Excluding margin income, EBIT was down 40%. Transactional and event revenues tend to be higher margin than our ongoing core client fees, whilst EBIT ex MI also bears the full weight of the inflationary impact on our cost base. We do not attribute any costs to our margin income revenue line, despite the integrated nature of our business model.
Interest expense almost doubled to $56 million. The average cost of debt in the H1 was 4.35%, and we expect this to be higher still in the H2 as rates continue to rise. To be clear, all of our debt is at floating rates so as to act as a natural hedge to our margin income in the event rates fall. As you'd expect, income tax expense was also higher, more than doubling to $119.3 million, whilst the ETR increased to 30.5%. This was largely due to higher levels of cash repatriation from Canada, where we pay a 5% withholding tax payment. It should be a little lower in the H2, reflecting less cash repatriation.
management MPAT was up 95% to $272.2 million. Similarly, management EPS was up 95% to $0.451 per share. Statutory results are on slides 49 and 50. Statutory MPAT was $177.1 million, with the difference largely attributable to the amortisation of non-MSR acquired intangible assets of $35.1 million, acquisition-related expense of $30 million, $11.8 million associated with our cost out programs, and $12.3 million related to the impairment of our UK Mortgage Services business. Slide 11 provides more detail on our margin income result. This was $344 million for the half, $352 million in constant currency.
Balances were down $2.2 billion on the prior half, largely non-exposed balances in CCT and corporate actions reflecting lower market activity. Staying with margin income, I'll now take you back to slide nine and talk about the outlook for the rest of the year and into FY 2024. We're expecting around $810 million of margin income in FY 2023, and this implies a further $458 million of margin income in the H2. Rates have been rising through the H1, and we're now factoring in just one more rate rise in the U.S. in March in our forecast. You can see the average rates used in the table on this slide. They are all sourced from Bloomberg as of Friday, the 10th of February.
We now expect average balances for the year to be just over $36 billion, and this reflects a further reduction in the H2. This is primarily due to runoff of SPAC balances and lower levels of bond issuance in CCT. Looking to FY24, we are projecting some $990 million in margin income, a yield of 291 basis points on average balances of $34 billion. This balance figure, to be clear, reflects the closing of the bankruptcy and class action sale in May. Let me just take you through our FY24 rate assumptions. First, exposed rates are a function of central bank cash rates and the rate at which we recapture that rate from our network of banks. We expect that recapture rate to continue to be around 90%.
Second, hedged rates are a function of the fixed rate deposits and interest rate swaps in place at the time and their overall tenor. You can see the rates and the runoff of these hedges on slide 55. To be clear, we have not assumed any more hedging in these numbers. Third, the non-exposed rate is essentially a blend of client-negotiated interest sharing and giveback arrangements across all our business lines. Going back to hedging, we've currently got around $8 billion in place, and we expect to add more as we go forward. Our aim is to stabilize earnings to the extent that we can, subject to liquidity requirements. We think we have capacity to do another $2 billion-$4 billion of hedging over the next 6-12 months. There's more detail about balances on slides 52, 54 and 55.
I'll now talk about operating costs on slide 17. Here we show the bridge in operating costs between 1H 2022 and 1H 2023. Like most companies around the world, we've been impacted by inflation in all our major operating markets, we've set out clearly what this has cost us in the half. $52.2 million in the legacy business and a further $7.5 million in CCT. We also show the offset from our cost out programs, which yielded $9.7 million of gross benefit in 1H 2023. Our new stage four cost out program will deliver $40 million-$50 million in savings over the next 3-4 years, of which $25 million will come through this fiscal year.
This is all in US mortgage servicing and is a key part of returning this business to profitability in the H2. This pro-program was also responsible for $3 million of the $9.7 million H1 cost out benefit. Equatex and the ongoing Stage three program made up the rest. Overall, our operating cost base was $1.0149 billion, an increase of $157.5 million or 18.4% over the PCP. Of course, this increase includes the extra four months of CCT as well. The legacy business was up 6.4%, while inflation within CCT was a little lower at around 4.3%. I'll finish with some comments on our balance sheet and cash flow on slide 18.
In the period, we generated $247.5 million of net operating cash flow, representing an EBITDA to cash conversion rate of around 46% at actual rates. Free cash flow was $128.3 million. Net spend on MSRs was $102 million. This was higher than intended as we deferred a couple of recycling trades to the H2. For the full year, we still anticipate net MSR spend to be in the region of $65 million-$70 million, which will help us bring the invested capital in that business back down to our targeted levels. Net debt is $1.26 billion at the half. This is slightly higher than at year-end, reflecting the acquisition of those MSRs and the investment in the CCT integration and our ongoing cost out programs.
With earnings growth and deferred capital recycling trades occurring in the H2, we do expect a much lower net debt position at year-end. I'll now hand back to Stuart.
Thank you, Nick. As you have heard, we have confidence going into the H2. Computershare is performing strongly and the model is working well, delivering record results for the half with more to come. margin income gains are also very welcome, of course, and we will use the cash flow wisely. We also are focused on building more recurring fee revenue across the group, strengthening our moats, using technology to become more efficient, adding more value to clients, and of course, simplifying the portfolio. Thank you for dialing in, and we will now open the line for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ed Henning with CLSA. Please go ahead.
Hi, guys. Thank you very much for taking my questions. I've got two questions for you. Firstly, in the presentation, you mentioned, the US Mortgage Services, business, the market value is now in line with the IFRS book value. Can you just tell us, what that book value is currently? If you are potentially looking to sell this business, is the book value of the MSRs the key driver of valuation and given rates are high at the moment, is this the opportune time to look for a sale? As a first question, please.
Thanks, Ed. If you look at our invested capital slide in the appendix to the deck, you'll see the latest position. That includes the book value of the MSR portfolio, and that book value, which is the IFRS book value, is in line with the US GAAP value. These businesses, to your point, generally trade on a multiple of net asset value, and so that invested capital position on that slide is a good proxy of what the business would be worth, subject to any multiple on top of that. I think if you I'll just read out the actual number. You see invested capital was $793.9 million at the end of December. That's a reasonable proxy.
Okay. Then you've got potentially, as you say, obviously, you've got the business on top of it and the non-ancillary revenues that would be potentially something on top of just the book value of the MSRs.
Typically, these businesses trade on a multiple to book value. You might expect that it would be worth one and a bit times net book value.
Okay. Okay, no, that's helpful. You know, potentially, if you are to sell this business, you know, given where rates are, is this the opportune time to look for a sale?
Look, I mean, part of that is the value of the underlying MSRs. Obviously as the, you know, mortgage rates have increased in the U.S., origination is low. Therefore, the amount of MSRs coming to the market is a little bit lower, which, you know, just sort of drives the price up a little bit. Certainly it's a lot better position than it was 18 months ago, Ed.
Yeah. Yeah. No, that's very helpful. Just a second question on issuer services. Both the issuer paid and the broker paid fees were down on the PCP. Can you just touch on the outlook there? Is there some transactional revenue in there that should be bounced back or, you know, do you expect to see growth, you know, in the H2 or even in 2024, or are you winning market share there?
Yeah. Look, the issuer paid fees are sort of a combination of, you know, core registry fees, you know, annual general meeting sort of fees and also recoverables. They were pretty flat year-on-year. One of the main reasons why they were flat was because normally we replenish through IPOs, which, you know, not only do you get a little bit of corporate action type revenue with the IPO, you then get that annuity revenue going forward, they were down. You know, that put some pressure on that line and held it flat. In terms of the holder and the broker-paid fees, you know, I think it was down round about, you know, certainly less than 3% overall.
You know, that's a little bit to do with equity markets and, you know, because there is some trading in there. Then also some of the broker fees, you know, they're the sort of, especially in the U.S., the DWAC fees, for example, like the number of DWACs throughout that period were down 20%. Now we had forecast that we would be down, and we were able to actually increase the pricing of these, but you know, just with timing, didn't quite net off. I mean, nothing underlying structural, just a little bit what I talked about in terms of, you know, how the sort of equity markets were in the H1 of the year.
Okay. No, that's great. Very helpful. Thank you.
Your next question comes from Kieren Chidgey with Jarden. Please go ahead.
Morning, guys. couple of questions if I could. Maybe just starting, Stuart, on sort of the profile for EBIT ex margin income into H2. you know, you've highlighted in the waterfall, the bridge, both seasonality and sort of operational improvements. Just wondering if you can unpack more at a segmental level where sort of outside, I guess, that incremental cost out benefit you've flagged in Mortgage Services, what else, sort of drives, that confidence in the H2 outlook?
Yeah. I mean, we've always had seasonality, Kieren, you know, in Computershare. You know, as part of a sort of bigger group, it's probably a little bit more profound. You know, part of that seasonality is the sort of larger meeting season through issuer services in the northern hemisphere. We are seeing a number of European companies sort of drag their AGMs, which typically were sort of July, August into sort of May and June, you know, which sort of brings that sort of forward and, you know, well, certainly into the H2. You know, operational earnings growth, you know, we estimate just, you know, over $0.06 in the H2.
you know, I think I mentioned earlier, we do have that, you know, pretty reasonable exit run rates on the employee share plans trading. you know, certainly the first sort of, five months of FY23 with the way equity markets were, you know, that was consistently down. We're seeing sort of reasonable recovery in that through December and, certainly, January and also the first initial trading days of this month. That really goes to some of that sort of, you know, operational earnings growth, across the business as an example. I mean, the US Mortgage Services return to profitability. you know, that's really the cost out program that's quite specifically in that one there.
You know, as we mentioned, slightly lower amortisation charge for that particular business as well. I think as I mentioned, you know, the H1 was fairly, you know, abnormal for Computershare, in so much that, you know, the sort of, you know, velocity of rate rises happening so fast spooked a number of markets. And it's not about rates have to come down for those to return. It's much more about stability more than anything else. And, you know, we can see that sort of picking up a little bit.
We'll see slight improvement, you know, seasonality a little bit more in sort of corporate actions compared to what we had, employee share plans returning, and then the factors that I called out in US Mortgage Services, which are fairly pleasing. Most of them are actually within our control for a change, Kieren. You know, that's why we've got confidence on that.
Okay, thank you. Secondly, just following up on US Mortgage Services. You know, you've outlined additional cost savings. There's been some UPB growth, and the amortization charge is changing, and Nick's flagged, I guess, some sell down of MSR is coming through in H2, which reduces the capital base. All that in the mix, what should that be producing in terms of a ROIC outlook sort of heading into 2024 and sort of how is that sitting relative to your target or requirement for the business?
I think in the H2, you know, the first objective, Kieren, is to get the business back to profitability. Assuming that we can deliver our, we can deliver that return to profitability coming through 2024 and assuming market conditions stabilize somewhat so that we see a return of a return of those transactional items. You look at other sort of other revenue lines, servicing related fees in that business. Assuming that they come back to more normalized levels, I would expect in FY 2024 it would be delivering, you know, a ROIC more in line with where we would target that business to be, particularly given where rates are.
Okay. And sort of is that ROIC kind of what it was a number of years ago in the-
Yeah.
sort of our current.
Yeah. I would.
Plus type range.
Yeah. FY 2024 should be, you know, in the 12 months, you know, if we've always said that if we annualized 12 months coming into COVID, we were right bang on our return targets in that business. You know, I'd expect all things being equal, that, 2024 should be, you know, close to that.
Okay. Just to clarify sort of that outlook with Stuart's sort of comments around it being a opportune time to consider selling the business. Can you just sort of provide a bit more clarity on strategically whether or not, you know, you are likely to or are considering divesting the business at the current point?
Yeah. Again, you know, the challenge we've had with mortgage services over the last sort of 18-24 months is a number of factors really out with our control, macro factors affecting that particular business. You know, I've kind of described it as whack-a-mole at times, right? When, just when you think something happens, you know, a regulator comes in, changes it. I mean, the overall outlook of it is a little bit more positive. The growth in the H2 are all things that we can control. Even though originations are down, you know, that's got a little bit of an impact on our fulfillment business. You know, refinances are obviously down because mortgage rates are up, which is affecting some of the recovery revenues.
Servicing revenues are on the improve, margin income is on the improve. You know, the value of our MSRs is good. You know, as you can see, we continue to deploy capital into growing that. We expect to, you know, we called out that we'll do some MSR sales. I think that, you know, we are carrying out a sort of strategic review on the portfolio. We talked about simplification. We are not in a process to sell that business at the moment. Like many of them, it is under review, and it may well be an optimal time.
All right. Thanks. Just a final question, Stuart, sort of on your capital management comments, sort of a bit too early to consider buybacks. Just wondering if you can sort of clarify. I think one of the things you mentioned there, aside from collecting the margin income, was CCT integration. How far through it do you need to be before do you consider sort of deploying or redeploying that balance sheet perhaps into capital management? Also on the acquisition side, you know, where you clearly flagged interest, you know, if you've refined or changed sort of some of the areas you're looking at in terms of potential deal flow?
Sure. Just in terms of CCT in-integration, as you'll remember, you know, we've got quite considerable stand-up costs. You know, we had sort of, you know, regulatory costs, et cetera, et cetera, which was just north of $200 million. Now a major chunk of that is going to be spent over the next eight to nine months. The Transition Services Agreement completes in November this year. We have already commenced moving systems, you know, building out platforms and moving data across into the Computershare environment, and that is tracking well and, you know, a little bit part of the synergies. You know, we've got a chunk of change that we have to deploy, you know, this year up until to November, right? In terms of these costs.
You know, I think there's probably close to $140 million roughly from memory that will be spent on standing up CCT for the remainder. Certainly this calendar year. That goes to a little bit of timing. As I say, I think it's prudent that we, you know, that is money out the door. I want that to see sort of behind us. The other part of that question, which is really about where we're actually able to deploy capital. You know, clearly issuer services, employee share plans, and our corporate trust businesses are really the areas that we wanna focus on to strengthen, increase our moats, drive some inorganic. There is some, you know, opportunities there.
Holistically, we've got to look at, you know, the large amount of margin income that we're getting just now. And even though rates, you know, invariably will move around in the future, you know, we'll go through a period of trying to, you know, bring that exposure to the group a little bit down and increase our recurring revenues. That's really going to be the sort of the focus for the group, which is just all about long-term, sort of planning and improving, overall Computershare.
Right. Thank you. I'll leave it there. Thanks.
Your next question comes from Andrew Buncombe with Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. The first one is in relation to issuer services margins for the H2. Previously, I think you said that you expected margins in that division to be higher in 2023 than 2022. With what you've printed in the H1, how are you thinking about those in the H2? Thank you.
When you talk about margins, are you looking at it with including margin income because?
Excluding, sorry.
Well, you know, I mean, margin income is very much part of that business, right? As I, you know, talked about earlier on, there was certainly certain components of, you know, equity markets and capital raising that sort of brought that down in the period. It's a fairly abnormal period. You know, I know that our issuer services team, when they're talking with clients, you know, renewing contracts, bidding for contracts, margin income is an important part of that. You know, while headline rates are high, you look at our sort of FY23 exposed balances, they're really just sort of mid-cycle interest rates at the moment, and margins are improving.
I don't think it's quite right looking at that sort of abnormal half and challenging where the margin went in that particular period because it was a little bit unusual. You should include margin income, certainly in issuer services, 'cause it's really quite core to the operating structure of that business.
Yeah, understood. The next one's a similar question on CCT. Previously, you'd expected EBITDA in that division of close to $450 million this year. How are you thinking about that now that margin income is so much higher? Thanks.
I think these estimates were with the margin income yield curves at the time. The yield curves seem to be sort of moving around a fair bit. Certainly, they softened through January a little bit, you know, seems like every day there's a different view and a different opinion on where we're at. I think it's clear that there's further rate rises to come, although they'll probably be a little bit more stable. I think that's really good for the CCT business because that will actually improve the trust fee revenue because, you know, markets will be stable, debt and bond issuers will know where they're going. I think that we're on track to be able to deliver that EBITDA this year.
Excellent. Then just the final one from me, please. How should we be thinking about the bounce back in ancillary revenue in the US Mortgage Services business? What have you assumed in guidance for 2023? Thanks.
Look, we all clearly have factored in what we think on that. On that ancillary revenue, the biggest impact there is really in something that we call recovery fees. Recovery fees are obtained when a loan is refinanced, right? You know, it's when someone is refinancing a loan, you know, perhaps, you know, they'd missed a few payments refinancing, we get a set of recovery fees, right? One of the challenges in that market at the moment is clearly mortgage rates have increased again fairly rapidly as base rates went out, and it's a little bit harder for some of these customers to actually refinance at the moment. Therefore, recovery fees are not as strong as what they were in the height of recovery.
Again, I think that will settle down, you know, over time.
Great. That's it from me. Thank you.
Your next question comes from Simon Fitzgerald with Jefferies. Please go ahead.
Hi, there. Thank you for taking my questions. Just one starting point on US Mortgage Services. Understand that it's an opportune time to now look at selling the US business, but we're now at a stage where it's the highest level of investor capital despite the fact that we've got the largest recorded loss on history. You know, I guess, in the absence of being able to sell the business at the moment, what level of capital do you think you can bring that down to? Then I guess also, I'm interested to know a little bit more about the advances which have gone up substantially over the half and you know, do you expect those to continue to go up just given, you know, the sort of outlook, let's say, you know, mortgage repayments in the States? I've got a couple other questions after that.
Thanks. Thanks, Simon. Let me try and take those one by one. The first question around invested capital. Well, look, that is inflated by two things at December. The first one is, as you point out, in advances are a little bit higher. Secondly, as we've discussed already, we spent a fair amount on MSRs in the H1, but we've not done the recycling trades, which is the other side of that balancing that MSR investment out. We sort of flagged that we expect net spend for the year will be $65 million-$70 million. It'll be cash back, capital coming back in the H2 for that. That's over and above the amortization charge for the half.
You've then got advances. You're right. Advances are a fair bit higher than we would normally expect at this point. There is a normal seasonality impact in there. They're typically higher at December. What I can tell you already is that, you know, that of that seasonality impact is about $50 million. $30 million has come back already in January. That number is already materially lower in January. We've also got some subservicing advances within there where we are. We just drew back those from our clients. As the subservicing books grown, we just have to fund more advances on behalf of our clients. There's no counterparty risk at all. It's just a timing thing.
The capital on both those items will come back down, and I think that you'll see at the end of this financial year, that invested capital figure will be materially lower. You know, as we look towards FY 2024, I think that should get back down to somewhere in the 600s.
Okay. That's helpful. Just on the sort of cost savings that you've highlighted for the US Mortgage Services around about that $25 million mark. I'm correct to assume that that's all sort of operational targets. There's no sort of non-cash items in that?
Yeah. Look, that's right. As you know, Computershare has always had sort of large programs to take cost out. Quite often, we, you know, we rely and we wait on some kind of new technology innovation that is gonna make us more efficiently. You know, we had a lot of, you know, back in the day, robotic process automation when that was maturing, et cetera, et cetera. You know, what we've done here, we've actually worked with a company, you know, called Harvest Earnings. You know, they have a structure in terms of we actually go in, we look at operational efficiencies.
You know, everything from how many screens it takes to, you know, action something for a customer, to, you know, the types of communications that we are doing to encourage sort of use of more sort of digital techniques, et cetera. Rather than sort of one big program delivering all these benefits, it's actually made up of, you know, tens and tens and tens of sort of smaller programs that sort of all add up, and a little bit more sort of mindful. That's just a little bit of a context in terms of, you know, what that program is all about. You know, mortgage services is, you know, certainly a good area to be able to start and do that. As you know, that business hasn't performed as well as we had liked.
That's where we're starting. The, the philosophy behind it can also be used elsewhere in Computershare. Which is, as we gain more experience with this sort of approach to reducing costs, we should be able to sort of flow out further in the group down the track.
Makes perfect sense. Just the last one. I just wanted to get a bit of a handle about how we should think about the leverage ratio into the close of FY23, just given the, you know, huge amount of free cash flow that's going through the business and the reductions that we've already seen in that leverage ratio in the H1.
Yeah, you should expect to see that ratio continue to come down, Simon. You know, as we expect, we, you know, higher earnings in the H2. Those capital recycling trades that I mentioned, you'll see both net debt and the leverage ratio come down. I think that the ratio itself will be comfortably below one times at the end of June.
Okay. Thank you for that.
Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Good morning, guys. Most of the question's been answered, but just in terms of the non-performing space in US mortgage servicing, previously you've pointed to that as a potential uplift in that as sort of helping a recovery in US mortgage servicing. Obviously, it doesn't seem to be happening as yet. Are the prospects for that sort of still out there at some stage, or do you think, you know, what's happened at the moment means that that's less likely?
Yeah, Look, it's a good question, Nigel. I feel like a bit of a broken record on this one because we've been waiting for it for a while. It's been like waiting for Godot. We continue to expect, and the market does, to be fair. The market is expecting a return of special servicing. We just, it's waiting for that sort of economic trigger really to bring it through. You know, as we talk to people in the market, both investors and who are looking to buy these distressed loans and banks with mortgage portfolios who don't have that special servicing capability, everyone's expecting it to happen. It's just a question of time.
You know, you still got high levels of employment and high levels of house, home equity, right now. We, we just need something to change. Yeah, I think it will. We, we should see an opportunity in FY 2024.
Okay. maybe just a big picture question on the sort of guidance for H2. I mean, obviously you're saying that sort of the idea behind that is that markets are stabilizing. I mean, what do you think would have to happen in the macro environment to make that guidance challenging to achieve?
look, I think that, you know, if all of a sudden, you know, predominantly US Fed jumped up and went back to 75 basis point rises, et cetera, which was gonna spook the overall markets. You know, the important markets for us clearly is equity markets, because equity markets have a factor on some of the trades, that we do with the shareholders and issuer. It also has an impact on the employee share plan. Do you know that transactional as they kind of vest stock, and also has an impact. That's the equity side, and I think also rates may well sort of, spooks of debt and bond issuances, et cetera. You know, everything sort of is pointing towards, that no longer being the case, in terms of rapid rising.
That's probably the main sort of macro issue that I am concerned about in the H2. Yep.
Okay. That's great. Thank you.
Your next question comes from Andrey Stadnik with Morgan Stanley. Please go ahead.
Good morning. Can I ask around the combination of the dividend being a bit lower than I think what consensus was looking for, and also at the same time, the leverage at 1.33 being well below the target range? What, what is that potentially signaling, lower dividend and yet very healthy leverage ratio versus your target range?
Look, the dividend itself, we matched last year's final, and in itself it was 25% up on the prior interim dividend. All right? If you look at Computershare's history, we normally match the interim dividend with our final and then look to increase at the final dividend. That's tended to be our pattern over the years. Our payout ratio is 40%-60%. And, you know, in the past, you know, we've been closer to 60%, which was really signaling our confidence and our ability to, with future earnings. We're at 45% at payout ratio this time. It's not signaling any sort of concern on future earnings. It does go back to my point about, you know, let's bank these margin income gains.
Let's get the CCT cost behind us, and then the board will turn itself to sort of active capital management as part of the final dividend. You know, I think that we are being prudent in this marketplace. Yeah, I wouldn't read too much in between the lines there.
Thank you. My second question, just wanna ask around the additional cost savings on slide 48. The additional cost savings that identified about $55 million in return for only $15 million costs are achieved. That's almost like a four to one , you know, benefit to investment ratio, which is unusually high. Can you talk a little bit about that? Cause that seems like quite a, yeah, unusually positive development.
Yeah. Look, this new cost out program, Andrey Stadnik, that we've launched has been a really interesting one. You know, we went out to we hired a consulting firm who has got a sort of a reputation for the doing these sorts of projects. We went out to all of our employees and we identified... This savings program is a collection of employee-led savings initiatives. The employees have come up with the ideas they've worked on, refining how they could be implemented and how we can deliver the savings. They're the ones who've calculated the returns here. Rather than... You know, in the past we focused on big top-down initiatives that often have big investments attaching to them.
This is a collection of smaller programs which, individually don't cost that much. It might be process changes, it might be, you know, deploying new technology in a certain area. They just tends to be much less investment. There are some capacity reductions in there as well in the origination business. You're absolutely right. We think it is a big return on investment, and it's just a reflection on the nature of the of the individual constituent parts.
Thank you very much.
Your next question comes from Scott Russell with UBS. Please go ahead.
Morning, all. A few questions on CCT, please. Firstly, the synergies, the cost synergies. I hear you that they're on track for 5 years' time, $80 million. Am I right in saying that they've been pushed out a little, though, over the next 18 months? Is that proving more complex integration than first thought?
No. I don't think they have been. We always said with CCT that the first 24 months of ownership was really about extracting ourselves out of Wells Fargo and standing up that business on, you know, in a Computershare environment. That's really the major focus of what we're actually doing. You know, but in saying that, the same team that we used in mortgage servicing to do that cost out program, you know, we're also workshopping with our CCT people so that when we actually complete, you know, the separation from Wells, which is gonna be later this calendar year, that we can really start getting ahead at some of these sort of either new product development and also cost savings.
you know, there hasn't been any sort of major change in our view on the timing of these synergies.
Okay. Okay. Then on the revenue side, $23 million of money market fund fee revenue. It seems, rough calculations, but a little higher than the 10 basis points. Can you maybe update us on what more perhaps is being done to optimize that line, whether 10 bps is indeed the ceiling? Indeed that $40 odd billion of money market fund, can you update us on how much of that you can see being recaptured as balances for margin income? Revenue.
I think it's a good question. When interest rates were low, it's a lot easier to be able to move these funds and get the capture, right? Probably a little bit harder to actually do that. I think like 10 basis points is probably the average ceiling. You know, we just have, you know, a few funds in there that probably pay closer to 11 basis points, right? As a result, it averages out just a little bit higher than 10. I think that it's a little bit more challenging to move some of that MMF fee revenue into, you know, sort of core, you know, non-exposed sort of balances in Computershare when rates are pretty high.
You know, we got some early runs on the board when rates were low, but it certainly slowed down. You know, we continue to look at that as an opportunity to switch balances, but a little bit harder than we thought given the higher rate nature that we're in now.
Okay. One of the changes in the margin income slide, page 9, was also around CCT, and I think you've moved that to a 90% recapture assumption. Can you just remind us the history of that 90% assumption and to what extent that you can actually outperform that?
Yes.
Whether it's CCT or margin incomes generally.
Look, the CCT one was interesting. One of the main drivers to sell this business from the, you know, the seller, to us was, you know, they had some caps on, you know, the, their balances that they held, right? They were at the time, this was a very low rate environment, and they were in, you know, incentivizing us to move the balances off the Wells Fargo balance sheet. The way in which they incentivized us was that they were giving us, you know, roughly 60% of Fed effective, right, throughout the TSA period. The world changed. Wells wanted to retain these balances. We weren't that interested in retaining them at 60% of Fed effective, right?
That wasn't just Wells, there was a few other of our banking partners that were a little bit slow in passing on some of these rate rises. Because it, you know, we were able to renegotiate that and, you know, for a chunk of balances, we're, you know, either getting Fed effective or 90% of Fed effective. These negotiations really took place in late October, early November, and it was actually a major factor in our upgraded guidance for the year. We obviously, you know, I think our recapture rate at the moment is just a tad over 90, right? You know, you know, we're not calling out that that's going to materially change in the H2 for us to be able to reach our H2.
We're always finding ways to try and get closer to the effective rate and/or get yield enhancement, which is, you know, other strategies to do that. Look, I think that was a good outcome for Computershare this year, being able to get in and renegotiate these rates, clearly. That's really the background.
Okay. Just the last one. After you sell bankruptcy and class actions, your business services division will be primarily or exclusively Canada Corporate Trust. Is the plan there to either for reporting or perhaps operational purposes to integrate that with the reporting of CCT?
Yeah.
Is there an opportunity there?
There is. You know, I think from, you know, FY 2024 going forward, we'll show it as a line item under Computershare Corporate Trust rather than the business services separate division. That's where from a financial perspective we'll actually report it. Yes.
From an operational standpoint, none of your guidance allows for any operational integration of Canada with the US Corporate Trust. Is that right?
That is correct. Not at this stage. Yeah. I mean, you know, again, our core focus is getting out of Wells. You know, that remains true until the end of the TSA, which is November this year. They, they are quite separate markets. They are sharing technology, and that's started already, which is good. You know, we are winning some deals because we have capability in the US for Can-Canadian clients and also capability in Canada for US clients, and that's helpful at the moment. We're not flagging a large scale integration and rationalization of the two businesses at this stage.
Okay. Thanks, Stuart.
Your next question comes from James Cordukes with Credit Suisse. Please go ahead.
Morning, guys. Just a question on Corporate Trust. Across the industry, origination, it's slowing. Can you talk about how that impacts the growth outlook for your debt under administration? You know, should we expect that to start to decline or does runoff act as a. You know, runoff might slow and act as a natural hedge? Maybe you could just talk a little bit more as well to, you know, what is the runoff each year from that portfolio or what's the average contract life of the portfolio?
Yeah. Look, just quickly. There's no doubt about it that, you know, that some volatile sort of rate environment that I spoke of earlier has caused some debt issuers to pause. You know, as a result, you know, a little bit down on the trust fees. You know, if you're recycling mortgages into some kind of residential mortgage-backed security and you need Computershare as trustee. There's not as many sort of mortgages out there, it will have an impact. You know, I think that's just a little bit like some of our other businesses. Just impact by some of the, you know, really rapidly rising sort of volatile marketplace.
A little bit like our Canadian business, you know, there might be ups and downs in any half of a reporting period, but the structural long-term, you know, growth plans remain intact. I'm not so worried about that.
Thank you.
The other question was on runoff. Was that CCT or on mortgages? What? Yeah.
That was on CCT. Like, I guess I'm just trying to work out what the churn in the portfolio is. I mean, is it kinda average contract of 7-10 years in that portfolio?
I mean, obviously it depends on the underlying instrument, but, you know, that's a reasonable proxy. It's pretty lengthy, and then they tend to just roll over and recycle. Yep. I don't have an exact number, but I mean, I think 7 to 10 is not too far off.
Okay. Thank you.
Thank you.
There are no further questions at this time. I'll now hand back to Mr. Irving for closing remarks.
Listen, I'd just like to say thank you very much for your interest in Computershare and, you know, Nick, Mike, and I really look forward to chatting with you more over the coming days. Appreciate it. Thank you.