Transcript of analysts briefing

MEDIA RELEASE 27 July 2005 Transcript of ASX’s full-year results briefing A transcript of ASX’s full-year results briefing to analysts and investors given on 27 July 2005 is attached. For further information Media: Gervase Greene National Manager Corporate Relations (BH) +61 2 9227 0464 OR ASX Media Office (BH) +61 2 9227 0410 Investors and analysts: Dimitri Burshtein Investor Relations Manager (BH) +61 2 9227 0279 (Mobile) 0414 629 751 TRANSCRIPT OF ASX ANALYSTS’ BRIEFING FULL YEAR RESULTS TO 30 JUNE 2005 TONY D’ALOISIO MANAGING DIRECTOR AND CEO: The order of proceedings today is I’ll go through – you have some material on your seat – I’ll go through an overview of ASX’s results for the past financial year, following me, John Hayes will provide more detail and if you could save your questions until after we’ve spoken and then we’ll have questions and I’ll also involve our senior executive team in those questions so that we can try and answer all your questions today. This session will go for about an hour. If I move to the highlights, first you’ll see from the market announcement that we’ve posted several notable achievements. Let me go through the highlights and then I’ll come back to some of the key points. Now just to explain here, we’re focusing on what we’ve called normal results, that is results adjusted for significant items which are around the restructure costs and the one-off things such as the National Guarantee Fund. John will cover those in more detail and I think they’re covered in your material, but basically we’re looking at the “normal” – what we call the “normal” results. Just going through this highlight slide, the normal net profit after tax for the 12 months is up 30.4% to $108.5 million. Our operating revenue is up 16% to $279.7 million, our expenses are also up by 3.3%. We are through the – and John will cover a bit more detail about the reasons for that increase - but we’re working through the outcome of the profit and loss drivers review, taking steps to better manage our expenses in the next. Our capital expenditure remains within target, our normal pre-goodwill earnings per share is up 29.5% to 108.5 cents. Our final dividend increases to 50.9 cents per share compared to 27.4 cents per share for the previous year. That increase is not only a strength of the result, but our previously announced change of policy of moving from 70% to 90% in terms of dividend payout. Total dividends for the year increased to 95.1 cents per share compared to 80.7 cents per share last year, or 17.8% increase. In the past year we’ve largely completed our profit and loss drivers review and we’ve said we’ve started our supervision review and I’ll provide more details on that shortly. So taken together, this is a very strong result for ASX and we of course thank all our customers, the investors, the stakeholders, in supporting our market. Now what’s behind that success? Quite clearly it’s the continued strong performance of our markets. It’s really what is at the heart of that performance. Our contribution to that success has been around providing first-rate supervision of those markets which allows businesses to be transacted, with utmost confidence and the infrastructure and services that we provide, whether they be 2 the 99.9% plus systems-up time and other services around listings and new asset classes and so on. So let me go through this in a little more detail. This picks up net profit after tax and operating revenue. You’ll see on the left-hand side what I said earlier that normal net profit after tax is up some 31.2% or $25.8 million. The orange portion on that slide shows the impact of the abnormal items, the National Guarantee Fund (NGF) and the restructure costs, the net of the NGF and restructure costs. The revenue growth in the second, on the right-hand side of the slide, shows that revenue increased by $38.5 million or 16%, the NGF is shown as a receipt of revenue but it’s been excluded as an abnormal item. When you look at where that growth has come from, that growth as John will show us comes across listings, equities, derivatives, market data across the board. SEATS trades went up from an average of 70,000 to 89,000 last financial year, an increase of 28%. Because of the operation of the settlement volume rebate or the SVR, our increase in equities revenue was kept to $12.4 million, ASX provided some $16.1 million in rebates back to the market participants through the operation of that rebate. These two slides pick up normal earnings per share pre goodwill. Our pre goodwill earnings, as I said earlier, was 108.5 cents per share or a 30% increase over the previous period, a five year compound average growth rate of 15%. Our dividend of 95.1 cents per share reflects a record total dividend. While no special dividend will be paid this year the total dividend is still some 17.8% up and the dividend represents a 90% pay out of normal net profit after tax. This is another slide that really emphasises where the growth in the market has come from across the board. Since then ASX has set a new record for total SEATS trades, on 7 July they reached over 150,000. The total capitalisation of the market reached $1 trillion on 21 July. Another slide looking at market conditions - this one picks up capital raised. There was a movement; total market capitalisation grew by $150 million on last financial year, $40 million of that was represented by the IPOs and secondary listings. Secondary listings as you can see from this slide are very important, but the difference between the $40 million and the $150 million, the $110 million is of course the share-value growth of the market - a strong performing market. Turning from profit and revenues to expenses, these two slides pick up the costto-income ratio and the operating leverage. The cost-to-income ratio, perhaps before commenting on that, I said earlier our expenses were up 3.3%, that left as I said clearly something we’re working on particularly through the P&L drivers review, but really you need to balance that against these two graphs. The cost-to-income ratio here fell below 50% and our objective is to better this 50% on an ongoing basis. The preliminary decisions on profit and loss drivers that 3 were announced on 25 May will provide some assistance in maintaining that sub-50%, but we recognise as no doubt you do that this sort of ratio is very much revenue sensitive, so if there’s a flattening or dropping of the market, the actual ability to maintain that sub-50% is going to be increasingly difficult and hence part of why we put a lot of emphasis in the P&L drivers review. The second chart demonstrates what we call “operating leverage”, that’s the rate of revenue increase compared to the rate of increase in expenses and over the last five years our revenues grow at a compound rate of 7%, whereas expenses grew at 2.6%. Moving from the financial highlights to supervision, as I said earlier, at ASX one of the things we do do is to provide first rate supervision of our markets to underpin the confidence in our markets. These statistics highlight the activities of market supervision. We have received a positive assessment from the Australian Securities and Investments Commission (ASIC) on the way that we supervise the market, we’ve also been commended for the substantial progress that we’ve made and although the ASIC report said there was scope to improve, it was quite clear that those improvements which we have embraced and are actioning, didn’t detract as they said from the overall positive assessment that we received from them. In other words, we continue to run and run well a fair orderly and transparent market. Let me now turn to the P&L drivers review, what we announced on 25 May and updates on three issues today. Turning first to the P&L drivers review, the left hand side, this has been as I said largely completed. We announced the results of that on 25 May. You’ll recall that our focus in the next two or three years is around the core business, expanding the DMA, direct market access business, trading options, listing businesses. The restructure of ASX’s business operations, the consequence of which was 61 redundancies. Of those 48 left ASX by 30 June and 17 are identified to leave progressively by 30 September. We scaled down ASX World Link and we commenced from 1 July 2005 a systematic re-examination of all areas of ASX on a project of continuous improvement. We’ve also said to the market that we’re looking at, as part of that $15 to $20 million, to save $4 to $6 million of our premises costs. In that 25 May announcement we promised further updates on pricing, adjacent businesses and capital management, let me go through those in turn. On pricing, we announced that we would be looking at three things – reviewing the settlement volume rebate, the SVR, and subsequent listing fees, pricing simplification and then pricing and benchmarking and reviewing with comparable exchanges. Simplification of pricing and price benchmarking with comparable exchanges will continue and are expected to be completed by the end of this calendar year. In relation to the SVR and subsequent listing fees, we’ve decided that for this financial year 05/06 we will not make changes, we will not make changes to the SVR or to subsequent listing fees. We are going to roll the review of the SVR 4 and subsequent listing fees in the pricing benchmarking project that we’ve described. Any changes to fee structures resulting from that project will be implemented from 1 July 2006. In coming to that decision we clearly looked at the market and looked at a number of factors, including the fact that we had cost increases due to inflation, but taking that into account and in particular the integrated trading systems (ITS) project which will require market participants to incur some initial costs in putting the systems in progressively next year, we felt that for this year we would keep our current pricing, roll it into the review and we would announce the outcome of that review around December and look at price changes coming into effect from 1 July 2006. Turing to adjacent businesses, our adjacent businesses are Orient Capital, a wholly owned subsidiary, ASX Perpetual Registrars, 50%, and IRESS Market Technology, 14.1%. We’ve decided to retain Orient Capital for strategic reasons, we’re also satisfied with our holding and performance of our 14.1% in Iris, we will continue to hold it as an investment. In relation to ASX Perpetual Registers, APRL, we’re pleased with the direction and improvement in performance of APRL but we are in the process of concluding our consideration of the strategic options for APRL. In other words we’ve not completed consideration of strategic options for APRL at this time, but we are nearly there, we hope. Capital management: the ASX has completed its review of capital management and in doing so has assessed reinvestment that may be required, the Australian Clearing House (ACH) needs, the potential effects flowing from the introduction of the international financial reporting standards (IFRS). We’ve concluded that we do not have an excess level of capital at this time and it’s not our intention in this financial year to return capital to shareholders. We’ve concluded that we simply don’t feel that there is an excess level of capital that would require that decision in this financial year. Let me make also a comment about staff morale. A reduction of 10% of nonsupervisory staff has not been easy for ASX, however we have for those that were affected been as financially generous as we could consistent with our obligations to shareholders. We’ve provided transition and other services to assist, we’ve now embarked on a program of rebuilding culture, elements of which are much clearer career direction for staff, information flows, really to enable them to do their jobs better. This is a start and it’s going very well and we recently held a senior management retreat involving our general managers and our group executives, some 30-35, and the enthusiasm and the approach and the way that they’re embarking on their business plans for the next two or three years, as a CEO I found extremely encouraging and pleasing and I’m sure that we have a senior management team in place that has the confidence of the staff and that will see us improve and deliver on the things that we’ve committed to do. 5 Supervision review, the interim outcomes, we announced that there was a delay in announcing that review which really follows similar reviews for the rest of ASX with the appointment of a new group executive, Eric Mayne. We put out a press release on Monday so you can get more detail of this for those of you that would like it. Just simply to update the market, two elements to it – the first one is essentially an internal reorganisation with no change of staff, in fact an additional three staff full-time equivalents going in to supervision to assist with workloads. That’s the first stage, an internal reorganisation. The second stage is more important, which is more about a broader review. We think it shows that we’re a healthy and strong business that we’re prepared to look at whether there are areas of supervision we should strengthen, whether there are areas of duplication where we should make changes, we are going to do that in an open, transparent and consultative way, we will come up with what we think the changes are, we will then talk to ASIC, we will talk to government and we will talk to the broader community before final decisions are taken. As I say, we believe that there have been significant changes in Australia’s equity markets, capital markets over the last 10 years, or since demutualisation and from time to time you need to review things and it’s opportune to do that now with the background that we’ve had ASIC reports which have not been totally issues-free, although have been very positive, I’d be concerned that we deal with any issues that may be concerning people. So in all, the year in review, and I’ll hand over to John in a moment – we’ve had a strong financial result, we’ve had a successful leadership transition and senior management restructure, the P&L drivers has been now largely completed, we’ve made an advance on the supervision review, completed the restructure of the NGF, changed our dividend policy and made advances in relation to the integrated trading system. All in all, as CEO and I know I speak for the senior team, the group executives, we feel that we’ve had a year where we’ve put a sound basis into the business going forward and we feel very enthusiastic and optimistic that over the next two to three years ASX will continue to perform strongly as a company in all areas, in the business side and in the supervisory side. I’ll now ask John to go into more detail on the financials. JOHN HAYES CHIEF FINANCIAL OFFICER: Thanks Tony. Well as you will note from the profit result release, ASX has passed $100 million for the first time in profit, a record which we hope to break again in the future. Normal profit, the focus on normal profit has been for a number of reasons, one of which is trying to eliminate all the significant and one off items, but it’s also now the definition if you like that we’re going to use for dividend payments 6 going forward, so what we’re really saying is that we will be eliminating any significant items to come to a normal level and then apply 90% of that number. So profit went up 31.2%. If you look back over the last five years and work out a compound growth rate, that represents a 16.3% compound growth rate over the last five years, which I think is a fairly strong and consistent result. However the statutory profit you’ll notice on the bottom there is $165.5 and the difference being in those significant items both the receipt of the NGF money as well as the restructuring costs that are detailed in the 4E. The $71.5 million that we received from the NGF split I really should emphasise that that is money that cannot be distributed to shareholders, it sits in a restricted asset on the balance sheet on one side and a restricted capital reserve on the other. Now in terms of the break up of the revenue, you’ll note that listings particularly is very strong with a 32.4% increase in revenue for the year, and that was on the back of a strong number of IPOs – 222 IPOs compared to 180, which in turn raised $14.9 million in capital. Secondary listings raised $22.3 million which in total is the $40 billion that Tony was referring to. But I also remind you that part of that factor was pricing effects if you like, and there’s really two pricing effects – the first one being the third year of the price increases for both annual listing fees and secondary and IPOs, which has flown through so the third year of that has been completed, and secondly that our annual listing fees are based off market cap as at the end of the financial year and as the market cap has been going up that gives rise to basically higher fees. Equities was 11.7% increase in revenue, and we had a very strong increase in turnover as you know, the number of trades went up 28% reaching 22 million for the year, which is a very strong number. However the revenue, as you will appreciate, was significantly impacted by the SVR. Now the total of the SVR during the year was $16.1 million as Tony has mentioned, and if you work that back into trades, that represents about 70 cents a trade. Derivatives increased by 13.7% which also represents a very strong growth over a period of time. If you worked out the five year growth rate on that, it’s about 6.2%. It also had roughly the same number of trades if you like, or contracts, as equities, in other words they averaged about 89,000 contracts a day. The fee there has also reduced slightly. Now one of the impacts on fees this year has been an increase in index options which forms part of the overall option contract numbers and they’re now averaging about 4,000 index options a day and the reason I highlight that is because the fee for those index options is significantly less than the fee for normal options. For normal options we get about a $1.02 a side, for index options we only get 26 cents a side. Now it’s not significant enough to make a 7 big difference to the fee, but it is one of the reasons why the fee has dropped from $1.54 to $1.47 during the year. Market data revenue was up 9.9% and you’ll notice the compound growth rate there is slightly negative because if you go back to 2000, if you remember the number of terminals that were taking our signals overseas reduced significantly, I’m pleased to say that that’s now back over 35,000 terminals and that’s largely the reason why that revenue has gone up and in addition to that of course … a new product, has also continued to gain traction which has also helped to increase revenue. Other revenue went up 3% and that’s reflecting a significant contribution from Orient Capital. There were some other sections of revenue that didn’t do quite as well such as investor education, but overall there is still a net increase. So the compound growth rate in revenue over that period is 7.7%. When you work out the compound expense rate over the five year period at 2.6, that also reflects that operating leverage that Tony referred to. When you look at the operating expenses you’ll notice that 3.3% increase overall. The large components of those increases were both in staff and occupancy. In relation to staff there’s roughly $2 million in what I would call one off expenses. I think I highlighted at the half year that we had some one off expenses incorporated in that number, those one off expenses have continued into the second year. They mostly relate to retention payments for people building the new system plus some top up numbers for bonuses. All in all that’s about $2 million. Occupancy costs I flagged before as influenced by a number of factors, one of them being surplus lease space particularly in the office we have in Melbourne. So during the second half I think the base level of costs are roughly about the same level as the first half, in other words the first half occupancy expense was $10.6 million, the base of that number is roughly the same, so you get to $21 million as a result of that. The extra $2 million if you like was a result of taking up a make good provision for offices. Going through the process of reviewing our leases with a view to trying to exit some of those leases, the probability of us having to provide some make good increases and so we’ve provided for that at the present time. In addition to that of course, there’s always been the normal increase in energy charges, security and things of that nature. So they’re really the two main components of our expense increases. Equipment expenses on the other hand have decreased significantly. That continues a trend of a reduction in software maintenance particularly and also if you look at the numbers about a $0.5 million reduction in depreciation. Admin costs are almost entirely accounted for the increased number of CHESS statements that we’ve had to print and mail as a result of the increased activity. 8 The restructuring costs you’ll notice are broken up into two categories here, the full detail of that is provided in the 4E. Essentially the restructuring costs of $11.4 million is made up of redundancy costs of $7.4 million and outplacement and consulting costs of roughly about $4 million. The write offs of $9.3 are made up of $7.3 million for the write off of World Link and $2 million for other smaller software systems that were coming to the end of their life that we chose to write off in this period. Turning to capex, $10.2 million is what we achieved during the year, up very, very slightly on last year, still within the bounds of what we have indicated in the past, in other words our target range of $10 to $15 million. We expect even with the continuing development of the ITS system or the CLICK OM system that we can still maintain that capex within the $10 to $15 million range. The only other major project that is going on at the present time is the redevelopment of the CAP system, which is the Company Announcements Platform, and while that will be a couple of million dollars in expenditure, we still think we can contain both of those within this bound. Depreciation as you notice is trending downwards, it’s trended down by $0.5 million during the year. In the releases we have estimated that the World Link effect will be about $1.8 million and the effect next year only of those other systems write offs will be about $1.4 million. However when you add back what we will have to provide for depreciation in terms of the OM CLICK system when it goes live and CAP, we think there’s probably roughly about a $2 million saving next year, but that will be subject to any new projects. I have to add the caveat that this $10 to $15 million range, as we have said before, is really dependent on there being no other major projects that we embark on during that period. APRL had a good result again. You’ll notice revenues were up to $54.8 million from $53.6. That’s after the full year effect of having lost IAG at the beginning of the year, but it does represent the acquisition of other registries such as Coles Myer and Babcock and Brown as a listed entity and all its associated funds. In December ASX entered into a joint venture with New Zealand Stock Exchange to form a new registry system or business in New Zealand. That business is called Link. It is based on using the Oscar system that is owned by APRL. Since December it has also acquired the other registry in New Zealand called BK Registries; it’s a much smaller registry than Computershare but nevertheless quite significant and we expect that to be competitive from day one. So, if you like ASX owns 50% of APRL which in turn owns 50% of Link, so if you do the numbers, we’ve got a 25% interest, a half of a half. Details of the APRL results are in our 4E as they usually are. Now the other thing I should mention about APRL is that there will be an impact on those 9 accounts from international accounting standards. From 1 July we are no longer required to amortise goodwill. Instead that amortisation of goodwill is replaced by an impairment test which simply looks at the value of the asset each year and if it’s maintained the same value then there’s no net effect. The purchase goodwill embedded within APRL itself is $3 million, so conceivably if that wasn’t in place last year. That $2 million would have been a $5 million reported result. In terms of capital management, the overall decision that we arrived at during the year is that capital above our operational needs will be returned to shareholders. As a result of that we did increase the dividend policy from 70% to 90% and further consideration is being given to a range of other issues associated with capital, which has led us to the conclusion at the present time, as Tony mentioned, that we don’t have surplus capital. We need to take into account some other ongoing obligations. Now it’s easy to say you’ve got $200 million, why don’t you give some of it back to shareholders? Well as I mentioned before, part of that was $71.5 million we got from the NGF. What I need to also emphasise is that ASX has had to put in $38.5 million of its own money into the clearing house, so the clearing house capital now is $110 million and that meets the minimum requirement of the stability standards of the Reserve Bank. Now, it’s conceivable that the ACH will, as it grows, require more capital and unless we change the arrangements, ASX would provide that capital. When you also then consider the amount of dividend that we are yet to pay and furthermore an amount for operational risk which we work through, it’s not a large amount. But nevertheless, given we’re due to have operational risk within a business, we do need to hold some capital, and then you consider what else we might need to reinvest in terms of the restructure. We also have had to look at what the balance sheet effects might be for IFRS, the international accounting standards, and by that I’ll just explain in a moment. But there’s two major effects of IFRS that haven’t yet been resolved that may cause a perception issue in terms of ASX’s balance sheet; and I emphasise it’s a perception issue only because there is no difference between the business on 30 June and 1 July. But one of the issues that all the exchanges around the world are trying to work out is what to do with novation. Now novation is the process where ASX steps into the middle of every trade and every contract that’s exchanged on the options market, so we become the buyer to every seller and the seller to every buyer. In theory, at the end of the day, brokers owe us an amount of money, and we owe brokers an amount of money - they net to zero. All of that information has been disclosed in the notes to the accounts and has always been disclosed in the notes to the accounts. One interpretation of the standards means that some of that may need to appear on both sides of the balance sheet. There is absolutely no P&L effect but there may be an amount that may appear on both sides of the balance sheet. We’re 10 not sure how that will be understood. The banks have a similar problem. You’ll notice there are a lot of unintended consequences with international accounting standards that people are just coming to grips with. The other aspect of international accounting standards that might impact, and I emphasise might, impact our accounts is where you have fixed increases in leases. You actually have to front into that, create an asset and adjust retained earnings or your capital at the beginning. Now we’re not sure that that will apply but we are just working through that process. We have to reach conclusions on both of those items by December when we report for the half year. We are not alone in this. We’ve had a lot of dialogue with other exchanges around the world that have clearing houses and they are all grappling with the same issue. When you throw all of those things together, we feel that we don’t have excess capital at the moment and Tony’s announced what the Board’s view of that is at the present time. In terms of ASX’s own effects on the P&L account, as a result of international accounting standards, APRL goodwill will disappear. We will no longer be required to amortise goodwill so half the goodwill that we get from APRL as a result of APRL’s own purchased goodwill and the rest of our own acquisition goodwill for both Orient and APRL - that comes to a total of $3 million coincidentally. So, our P&L account should, provided our assets aren’t impaired, increase by $3 million as a result of the elimination of goodwill amortisation. On the other hand we will be required to expense a fair value amount for share based payments, so the long term incentives or the long-term share plans that organisations have are now going to have to be expensed in the P&L account, and our estimate of the current value of the existing plans is somewhere between $1 to $1.5 million. So on the one hand there’ll be a $3 million increase, on the other hand there’ll probably be a $1.5 million decrease. All of that is set out in Note 8 to the statutory accounts which accompany the 4E which you should have access to today. And with that I’d like to hand back to Tony. TONY D’ALOISIO: Thanks John. I’ll be brief on the outlook and then we’ll go into questions. I think what this slide simply updates you on, as we’ve said, are our growth initiatives announced on 25 May, what we’re going to progress and some of the other initiatives including the supervision review. What we’re saying is we’ve spent the last six months or so getting our plans into line and we’re now really moving in the next two to three years to execution, to try and grow the core business, better manage our expenses along the lines that we’ve outlined. And certainly we want to look at initiatives around differentiated markets, around clearing opportunities, the index review and the supervision review. 11 So that completes the formal part of the presentations. We’re now going to move to questions. Can I ask to join me Colin Scully, Group Executive Markets and the Deputy CEO, John Hayes of course, the Group Executive Shared Services and CFO, Angus Richards Group Executive Strategy, and Eric Mayne the new Group Executive for Market Supervision. We do have interstate participants so we’ll take as many questions as we can in the next 20 to 25 minutes. So, we’ll perhaps start with questions here and then alternate somewhere. QUESTION: It’s Ryan Fisher here from Goldman Sachs JBWere. Just a question actually on one of the final things you mentioned, Tony, and perhaps directing this at either Colin or Angus, the things you mentioned in terms of revenue generating initiatives sound completely sensible of course which is DMA, derivatives, clearing opportunities, liquidity, that sort of thing, but I was wondering if you could just give us an idea of some of the tangible things you have in mind to do that? COLIN SCULLY: Perhaps I’ll just make some observations about the business-as-usual initiatives and pass to Angus on some of the more strategic things which we’re exploring in partnership. So within the business as usual, we’re looking at specific initiatives to promote and develop the listing environment. These are already happening. We have promotional activities, we have educational activities, we’re out working and developing things like the bio-tech sector, investment companies, LMIs and a lot of support initiatives just for the listing process and that’s starting to have some results. In the case of options there’s a specific focus to try and lift the activity in the options market through institutional usage. Here again we have a range of activities supporting institutional activities in the market. We’re doing some training, we’ve got a risk assist program, we have two people out talking with the institutions and there’s some encouraging signs in that regard. Some of you who have been around for a while will remember the early days, the early 90s. The institutional activity was about 70% of the agency business. That’s well down now and we would like to lift that and that will have a big effect. And then the last one was DMA. We know DMA is a phenomenon around the world – there’s four real drivers of that if you like that we’re exploring. One is pricing, one is access - the automated processing filters (AOP filters) into the market to streamline access, the fixed interface and then just the business rules. We’re exploring that with the market at the moment. ANGUS RICHARDS: If you look at markets around the world, you generally observe that derivative markets are growing at 15% plus compound rates, whereas equities are running in single digits, maybe 7% to 10%. So clearly it behoves us to look at whether there are opportunities on the derivatives side. Again looking at markets around the world, a good 70% of that derivatives market growth is currently over the 12 counter, it’s not going through an organised market at all. However there are indications particularly with the coming implementation of the Basel II capital recommendations for banks that there will be a trend towards more standardisation of derivatives contracts and that presents opportunities to bring more transactions from the over-the-counter environment into an organised market operated by an exchange. So that is why we look at the derivatives space and say clearly there are opportunities there. We acknowledge of course that interest rate derivatives are a big chunk of that market and that is clearly handled by the Sydney Futures Exchange currently - the On Exchange component is. But there are other opportunities both in some of the over-the-counter equities derivatives, in currencies, credit derivatives and the like that may be opportunities for ASX to move into and that’s an exercise we are currently conducting to re-look at that space and search out further opportunities. Associated with that of course - maybe not just the trading of such products in an organised market - but offering clearing services for products that may even continue to trade over the counter. But again these are things that have to be driven by customer demand. We’re not going to go in with a supply side initiative that doesn’t have a reasonable opportunity of success through observed demands of customers. QUESTION: Arjan van Veen, Credit Suisse. Two questions if I may, firstly on APRL. Could you give maybe an indication of the ideal timeframe which you hope to finish that review and whether you are considering both full divestment or full ownership as the options you’re considering. And secondly on the capital management, could you John maybe give an indication in terms of if you have any sort of target working capital requirements that you may have, and secondly as well whether you’re looking into any form of gearing as your ongoing capital management work? TONY D’ALOISIO: On the first question on APRL, we are in the process of completing our strategic options and they include clearly looking at the strategy of retention. What’s involved in growing that business and our investment in it are issues of whether we keep the lot or sell our 50% and buy the other 50% and so on. So we are looking at all options. It is as I said in the previous briefing. It’s our biggest investment if you like so in a sense as a new CEO we’re being more cautious and going more slowly than perhaps the other things, but we had hoped to have completed it for these announcements, we haven’t. We have said we are near concluding it so I’m hopeful in the immediate term I’ll be able to say some more to the market, but for the moment I’ve nothing further to add on that. 13 JOHN HAYES: I mentioned operational risk. We went through an extensive exercise and looked at the operational risk embedded in the business and I think the amount of capital we’ve come up there is somewhere in the vicinity of $18 to $20 million. That’s obviously in addition to any working capital requirements that we need. Because we are such a highly cash flow positive business working capital doesn’t really require a lot of significant cash if you like to be held while the markets are at least good. Having said that, we did look at gearing and whether it was appropriate for us to have a level of gearing at the moment, and we decided we didn’t believe that we needed to gear right at the present time. One of the things I touched on before was the international accounting standards and the perception, what I should have perhaps explained in terms of the balance sheet, is that if we have to record those novated contracts on the balance sheet, it will appear on both sides of the balance sheet and by default we will already have an implicit or perceived level of gearing and we’re not quite sure just how that is going to be understood by the market. The other part of gearing which is somewhat hidden and gets a little bit technical, but if you look at all the leases that we currently have in place and take a present value of those, this is what a rating agency would do. A rating agency would look at the present value of those leases and would say that that is debt and should already appear on your balance sheet. Now I hasten to add the operations ASX have not changed in any way shape or form, but there are these issues that still need to be worked through. So we believe it’s prudent not to actually have a level of debt right at the present time. QUESTION: Just a question in relation to expenses this time, John. You mentioned that there were a couple of million dollars of one offs in the staff expense line, first and second half, and I just clarify that the expense reduction target which is $15 million to $20 million, that that reduction target is off the headline expenses for the 05 year including all one offs? JOHN HAYES: I think we would say that expense target should be off an adjusted expense line for the current year. In other words you probably need to reduce it by $2 million before we look at what are target savings are going to be. QUESTION: Steven Kench from Macquarie Equities. Just two questions, firstly on the extended pricing review to be completed by December. Will you be in a position at that point to actually indicate what initiatives you might actually implement and put some numbers around that as of 1 July 2006? TONY D’ALOISIO: The answer to it is yes. I mean part of rolling the SVR and the listing fees, in other words not having two bites and confuse the market, we felt in weighing it all up that it was going to be better to roll it together, look at these pricing 14 points, the complexity of simplifying the pricing points and then looking more closely at whether pricing should better reflect the product range we have and differential pricing for different products, announce that to the market, indicate what our intentions are and then you would have the period from January to July to get systems in place and processes in place so the market is much clearer. In addition to the initial ITS costs that participants would pick up, we didn’t want a period of 12 months where there was going to be confusion. Confusion for you, the analysts and confusion for the market. We thought it was clearer and simpler to be straight on. So it was a decision that we didn’t take lightly, we gave it a lot of thought, we know that there are pluses and minuses with it, that our judgement is that this is the better way to go at this point in time. QUESTION: Were there any actual underlying issues in terms of why this has been extended? Is it the quantum of work there and complexities around it? TONY D’ALOISIO: No it’s what I’ve said, it’s just what I’ve just said now, there is no other kind of new issue that emerged, it was really saying is it better to move anything now and then at the time when you are saying to the market you’ve got a pricing review and other changes, given where we are, given what we’ve achieved, given our expense structure, and it’s one of those judgements you make. It wasn’t the easiest of judgements we made as a group executive and we had different views, but once we articulated it all and looked at it, we thought that was the better way to go for us and for the market. QUESTION: Just a second follow on question regarding DMA for Colin, just in terms of one of the key issues you’ve pointed out in terms of pricing, what’s your feel for pricing sensitivity of DMA volumes and secondly just what have you see actually this calendar year in terms of the increase of growth in DMA activity? COLIN SCULLY: We estimate that it’s grown from very modest beginnings up to 5% to 6% to 7% of turnover. There is a sensitivity, or we’re told there is a sensitivity to pricing and that’s one of the considerations that we’re taking into that price review to see whether or not we need to have different arrangements for different activities in the market. QUESTION: Andrew Perks from Merrill Lynch. I just had a quick question on the SVR. You’ve given away $16 million to your participants this year and perhaps you may think that’s a bit generous. What do you think would be an acceptable level to share some of the benefits? TONY D’ALOISIO: 15 Would you like to get a shareholder in the room and a market participant and ask them the same question? I’m not going to express a view on that. I just don’t think that that’s appropriate. It is a genuine review; we do want to look at these issues in a genuine way and not pre-empt them. I mean clearly from the point of view of the supplier of services, you look at your cost structure and you’re always thinking about whether you need to lift prices. From the point of view of participants you want to keep your prices low. I mean we want a system that’s fair to them and to us but we think it’s time to review the whole of the structure and not to make piecemeal changes at this point. QUESTION: Does that mean when you announced the review at the end of December and then you implemented it at the start of July, is that six month period, will that give you time to discuss with all the market participants and do you see any changes in that period? TONY D’ALOISIO: No, I think at the end of the day pricing decisions are supplier driven, I mean you take into account your customer and everything else, but you’ve got to make a call and you’ve got to tell the market and we would do that. The greater reason for the lead time is the system changes and to deliver on the pricing simplification. That if you – we have a very complex system and what you don’t want to do is make changes - introduce them and then you haven’t got the systems in place. So we do see a need to give the market time to adjust, get its systems, so we also capture at the time we may make pricing changes, we capture the benefits and the market captures the efficiency benefits around a more simplified pricing structure. So that’s what’s driving it. QUESTION: Ryan Fisher. Another question on the expense base. The press has bandied around all sorts of numbers, which I’m sure the veracity is questionable. What percentage of your cost base would you estimate comes from your regulatory and supervisory side of your business as opposed to the commercial side? TONY D’ALOISIO: That’s a good question because we haven’t worked it out ourselves in the sense that there’s always cross-charging and service charges and we certainly have it as one of the things we’re doing with the supervision review, so rather than continue guessing at it and complicating it further for everyone, we’d probably wait for the outcome of that review and be more precise to the market. I think as you would expect with an organisation where you really run, we’re not large, you have the allocation of costs we’ve really got to look at those a lot more closely than we’ve had to in the past and that’s part of the further work we’re doing. QUESTION: 16 David Humphreys of Morgan Stanley. In terms of the ASX Perpetual decision, what are the critical considerations that are weighing on your mind in coming to that decision? TONY D’ALOISIO: I think what I said earlier is the case, in any situation where you’ve got a large investment you look at its performance, you look at where you are in the market in terms of whether that’s a business long term you want to be in and why and why not and then I think you’d all be aware of what the sort of considerations are we’d be looking at that are strategic, from a strategic point of view. As I said, I’m sorry that we haven’t concluded it but as soon as we do we’ll let you know. QUESTION: Mike Younger form Citigroup. Just with regard to the DMA trading again, a couple of small points. One, would you suggest that given your current fee structure when you look to the US and UK, reportedly DMA trading is as high as 40% of volumes in those regions, would you suggest that perhaps it might only be 5% or 7% in Australia because of the current pricing structure and I’ll leave the second bit until after that. TONY D’ALOISIO: I think it’s too early to speculate. What we know is that that sort of trading is highly mobile, which would support the notion that you’re talking about, however in the spirit of doing a total review, we have to make sure we have an arrangement which is fair to all of the users of the market and we’re not just penalising one particular sector versus another. I think they’re the challenging exercises that we have to put in place. Another observation is if for example we put in place an arrangement which advantaged one particular sort of activity and for whatever reason because they’re mobile they move out, what are the implications on the structure in an overall sense. I mean it’s a very complex issue. What’s emerging, and the market participants are telling us this, is that there’s a need to perhaps have a differential approach and that’s some of the challenges that we’re working through. QUESTION: And just with regards to the strategic review, there hasn’t been any mention made of that, is there any slippage in the timing of that which I think the last commentary was it should be due out later this year? TONY D’ALOISIO: No, there’s no slippage, it was just that I’m sort of getting a reputation of a lot of reviews and just to report on another one, but no that’s still on track and if you look at the way that we’ve approached it in terms of getting the basics of the business, the P&L drivers review, getting the supervision review going, this very much now getting the new leadership team in place and not only at group 17 executive level but at general manager level, this does now free up some resources at the strategy level to look at that and to really spend the next few months leading up to the end of the year on that. Now whether you come up with any grand plan or whatever, I mean you’ve got to go through that process. We’re in an interesting time in terms of an exchange, interesting times in terms of what’s happening internationally with exchanges and you would expect that our focus would be now much more outward to have a look at what’s happening there and what the lessons are for us here. QUESTION: Just finally on DMA, do you view it as the ASX’s job to price differentiate on a DMA trade versus a non-DMA trade? COLIN SCULLY: Well again I think I go back to my earlier answer. I mean what we’re about is putting efficient systems in place, running efficient markets so that we’re not picking individual winners of one type or another, we’re bringing investment opportunities for all of the participants and all of the types of trading and what’s better for the market overall, that’s the way we will be orienting our activities. QUESTION: John Hegarty from ABN Amro. Just looking at your EBIT margin, you’ve already got an EBIT margin of 51% and you’ve already announced a lot of cost cutting as well. What sort of level of EBIT margin do you think you’d get, obviously looking forward to FY08 when the cost cuts come into effect really, and what sort of level do you think would be acceptable to market participants and how will that affect your pricing discussions with them? JOHN HAYES: That’s a good question but you might recall the margins are made up of a lot of contributors to revenue, not just market participants and of course the converse of the EBIT margin is your cost to income ratio. We do have a target as Tony mentioned of keeping it below 50%, I think in terms of how much further that can go is really depending not just on what activity that we undertake in terms of our cost restructure, but also what happens to pricing, but also what happens to market volumes going forward. Given that there won’t be any increase in listing fees, we’ve just completed the third year of substantial increases, you’d expect that rate of increase in the margin to slow up. Not to say that it can’t get better but I don’t think we’d be targeting 25% or 30% or something like that. QUESTION: Chris Williams from UBS. On the hot topic of the day, DMA trading, can you actually explain how you’re calculating 5% to 7% of current market volume? TONY D’ALOISIO: No we can’t Chris. It’s a combination – 18 QUESTION: It’s quite possible that it’s actually 20% to 30%? TONY D’ALOISIO: No, no, I don’t think that. What we have is it’s a combination of anecdotal input from the participants, I mean some have set up their own gateway for particular clients to use as an access point for the market, so you get a sense of that. We know who is using it and it’s in that space but it’s not 20% to 30%, that’s our best judgement at the moment. What we have said to the participants and I think we’ve said it to this audience, is we need to have a better understanding of not only DMA activity and new developments in the market but usage of the market all round and that’s why we’re working and consulting closely with the market to get that understanding and put in place an arrangement which suits all activities in the market, not just one. QUESTION: Sorry, just another quick question. On the first slide you had a cross against the underlying cost base inflation of 3.3%. Does that imply that over the next three years as you seek to reduce your cost base by $15 to $20 million pre inflation that you’ll be disappointed if the underlying inflation is 3.3%? TONY D’ALOISIO: No, 3.3% in the cross was really our increases in expenses from last year and it had a cross against it because obviously it’s a business where you’re seeking to flatten and lower your cost basis as best you can all the time and so in that sense we’re not satisfied with the 3.3% increase in our cost structure on prior year. That was all I was intending to show from that. QUESTION: So underlying inflation, what’s your guestimate for that for the next three years? JOHN HAYES: Somewhere in the range of 2% to 4%. Take your pick. QUESTION: Martin Hickling, Concord Capital. Just a question for John on the FTEs, I think in the half year they were 560 and fell to 492 at the full year and just a reconciliation of that with the – I think you’ve mentioned 61 redundancies but a number of those were still in the September quarter, so just can we get a reconciliation? ANSWER: The missing factor there Martin is vacant positions at the present time that are currently under recruitment and I think that number is somewhere around 18 to 20. 19 We have still the normal turnover rate which actually didn’t increase over that period and so what you’re seeing is a reconciliation between the redundancies, the vacant positions that we’re still filling. 17 of all, they have occurred. No that’s before that, so 17 will come off the 492 but will go back up a little bit as we employ more people. QUESTION: Shane Fitzgerald from JP Morgan. In regards to this pricing review, it sounds like everything’s up for grabs, some things might be eliminated, some introduced, increases, decreases, whatever’s going on. Based on the current level of activity in the market today, after these fee reductions and changes and whatever you do, would you be expecting to increase, decrease or unchanged revenues as a results? TONY D’ALOISIO: Don’t know, I don’t know. QUESTION: What’s your hope? TONY D’ALOISIO: I’m not saying. I mean what would be your hope? I mean these things are complicated, they’re market driven, we can’t – we’re not setting out with a percentage or percentage increase in mind, we’re very conscious that we need to run the business and price is an important leverage in the way you work. I mean the most important, so we’ll be looking at where there is scope to increase we will be looking at where there is scope that we may need to make reductions to be more competitive. What we will commit to is that we will explain to you clearly what the difference is at the time, in other words we don’t want a situation where we then have – we introduce a new pricing structure and then the market is trying to work out whether that was an increase or not in what areas. What we’re committing to is to go through the process, show the changes, then say what we think the impact will be from those changes so that you can see the benefits that flow from simplifying prices and efficiencies we want to drive and then the impacts of the price changes, that’s our objective to do for the end of this calendar year and then progressively talk to the market from then on. Okay, thank you all for coming this morning. I hope that we gave you an indicator of where we are and we’ll see you at the next half year. *** 20