NZX
20/05/2016 09:45
ADDRESS
NOT PRICE SENSITIVE
REL: 0945 HRS NZX Limited
ADDRESS: NZX: Chairman & CEO Annual Meeting Addresses
Please see the below text from speeches being presented by NZX Chairman James
Miller and CEO Tim Bennett at the 13th Annual Meeting of shareholders of NZX
Limited being held this morning in Auckland.
Chairman's speech to NZX Annual Meeting 2016
I'm pleased now to address you - our shareholders - for my first time as
Chairman.
I'll start my speech with an analysis of how our markets are performing.
I'll then turn to NZX's own progress in 2015, and how we're tracking so far
this year against our targets.
Market activity in New Zealand remained strong in 2015 with the S&P/NZX 50
index up 13.6% in the year.
Growth was also demonstrated by the increase in the ratio of equity market
capitalisation to gross domestic product, from 42% to 45%.
NZX's debt market experienced a resurgence in 2015, with market
capitalisation up by 51% to $19.8 billion.
This was driven by the New Zealand Local Government Funding Agency listing
$5.6 billion of their existing bonds on the NZX debt market.
That listing came about following the Capital Market Development Taskforce in
2009, which had the objective to grow New Zealand's capital markets. So it's
fantastic that yet another milestone from that programme has been ticked off.
Growth has carried over into 2016. NZX's first quarter revenue and operating
metrics show a strong start to the year for our markets business, with a
12.5% increase in listing revenues, driven by new debt issuances, along with
a 20% increase in trading revenue, as a result of strong growth in trade
volumes and values.
We had a positive year in our dairy derivatives business with lots traded up
115% on the prior year. Admittedly this growth is from a small base, but we
are pleased with progress. Our goal is to build a world leading agricultural
derivatives market that allows participants to manage price risk in the
global export market.
In 2015 NZX retained all the market operator agreements that we currently
perform for the Electricity Authority. This was a significant achievement for
our energy team.
And we made great strides in the execution of our funds services strategy
with the acquisitions of SuperLife and Apteryx, now renamed NZX Wealth
Technologies - along with the launch of a broad range of exchange traded
funds.
It has not all been plain sailing, however.
We put a lot of effort into our proposal to the Reserve Bank regarding the
Reserve Bank's proposed divestment of its clearing and settlements system,
NZClear.
We were notified in March that our proposal for NZX to operate a single
clearing and settlement system for the New Zealand market was ultimately
unsuccessful, as the Reserve Bank decided to retain ownership of the
business.
We believe this was a disappointing outcome both for NZX and the market as a
whole.
But we respect the Reserve Bank's decision and NZX will continue to work in
other ways with the Reserve Bank, with industry participants, and other
stakeholders, to continue to improve the efficiency of our capital markets.
On a more positive note, we received 45 quality submissions from a cross
section of the market in response to our proposed changes to the corporate
governance guidelines for Main Board issuers. This included a well considered
submission from the New Zealand Shareholders' Association who we continue to
engage positively with.
The board recognises corporate governance standards are vital for listed
issuers, to help promote investor confidence and provide mechanisms to hold
those in control to account.
The outcome of this review is important from an NZ Inc perspective, because
we believe strong corporate governance ultimately leads to a lower cost of
capital for issuers, and higher stock valuations.
NZX has a leadership role to play here, and the market is looking to us to
address the fragmentation of existing corporate governance reporting, which
was highlighted as a concern.
NZX's own financial performance in 2015 was stable at an operational level.
Earnings before interest, tax, depreciation and amortisation were unchanged
from 2014 at $24.6 million.
Reported net profit after tax was up 82% to $23.9 million, reflecting the
significant value gained from the sale in June of our stake in the share
registry that NZX co-founded, Link Market Services.
Excluding the sale of Link, net profit after tax was down 8% to $12.1
million.
We delivered fully imputed dividend returns of 6 cents per share in respect
of the 2015 year, maintaining a stable dividend return for shareholders.
Shareholder returns is front of mind of the board and management team. In
talking to shareholders, I am conscious that a decline in the share price of
8.5% in the year ended 31 March 2015 has resulted in a negative 1.2% total
shareholder return, despite the attractive gross dividend yield which is
currently 8.3%. To provide some context for the longer term shareholders, the
TSR CAGR over five year period is a more respectable 7.7%.
The overhang of the Ralec litigation that NZX is involved in has weighed on
the stock. As potentially has a downturn in dairy prices, making conditions
challenging for our rural publications business. We are also aware that the
market is watching closely our ability to contain costs in order to deliver
operating leverage, and to successfully execute our funds management
strategy. Therefore the most important thing for us to do in the near term is
to continue to focus hard on delivery, so that the financial results and
share price appreciation follows. We are confident that the building blocks
that we have put in place will deliver results.
On the matter of Ralec litigation, Tim will talk about this in his speech,
but I'd just like to reiterate now that we are unable to discuss the details
of the case while it is before the court.
NZX gave guidance to the market at our full year results in February that we
expect full year EBITDA to be between $22.5 million and $26.5 million -
noting that this is subject to market conditions, particularly with respect
to IPOs, secondary capital raisings, and trading and clearing volumes, and
the final outcome of the Ralec litigation.
So - I'm pleased to report that we are on track to deliver the stated
guidance.
Now to some acknowledgements. I was honoured to take the reins as NZX's chair
from Andrew Harmos at our annual meeting last year.
Andrew spent 13 years on the board leading NZX and our capital markets
through a period of change and development.
I'd also like to acknowledge the Honourable Simon Power, who also stepped off
the board at our last annual meeting.
Both Andrew and Simon join a group of enthusiastic NZX alumni who are keen
champions for NZX and NZ Inc.
Your directors continue to work well together and my thanks go to the board
for their continued hard work and dedication.
On behalf of the board I'd like to acknowledge the FMA, who we continue to
maintain a positive and robust working relationship with.
The FMA's fourth annual General Obligations Review endorsed NZX's Regulation
work and the investment in capability that we have made. The report outlined
the proactive approach we are taking as a frontline regulator of the New
Zealand capital markets.
I'd also like to thank the New Zealand Markets Disciplinary Tribunal and the
Special Division for their work.
I'd like to thank Tim and all the NZX staff on behalf of the board for your
valuable contribution to our business.
And finally, I'd like to thank you, our shareholders, for your continued
loyalty to NZX. The board and management hugely value your support and we are
committed to delivering value on your behalf.
CEO's speech to NZX Annual Meeting 2016
Good morning everyone. Thank you very much for coming. This morning I will
cover three aspects of NZX's business. Firstly I'll give you an overview of
our revenues last year and the drivers of growth over the past three years,
secondly an overview of our cost base and again how that has changed over the
past three years and finally look more closely at the growth prospects for
two of our three business area Markets, and Fund Services.
Revenues
First, let me give you an overview of the businesses and how they have
evolved over the past year and over the three year period 2013-2015:
o Market Our Markets business comprises both Capital Markets and the
markets we operate on behalf of the Electricity Authority and Fonterra.
o The Capital Markets business has three component
-Cyclical. Initial and secondary listings revenues which are cyclical with
the overall capital markets. Revenues for this part of the business were
$5.6m in 2015 and 8% of total Group revenues. These were down 11% on last
year but have grown 17% CAGR over the three years
-Trading and Clearing: This was 15% of Group revenues last year, with
revenues up 17% CAGR over the past three years
-Annuity revenue These comprise the fees we charge issuers and market
participants on an annual basis, plus revenues from the sale of market data.
This is the largest part of Capital Markets revenues (comprising 31% of NZX's
total revenues) and grew 4% last year, and has grown 6% CAGR over the past
three years
o Market Operations. The final part of the markets business is the markets we
operate on behalf of Fonterra and the Electricity Authority. As you would
expect, these revenues have been relatively stable over the past three years
o Funds Services. This includes the SuperLife, Smartshares and NZX Wealth
Technologies businesses. This has grown from 4% of revenues when we had five
ETFs in 2012, to almost 15% of revenues last year - largely through
acquisition. This reflects the execution of our strategy of expanding into a
higher growth and high opportunity segment of the capital markets, and also
enables us to introduce new products and services to the New Zealand market
o Agri business. This includes publishing in New Zealand, data and analytics
in New Zealand and Australia, and the Clear Grain Exchange. Revenues were 7%
down last year and have declined 3.9% CAGR over the past three years, given
the growth of the other businesses, the Agri business now only comprises 17%
of revenues, versus 25% three years ago. In EBITDA terms the Agri business,
which even in a more normal part of the rural cycle is lower margin than our
other businesses, contributed only 4% of Group EBITDA last year
To summarise, we are starting to see a shift in our portfolio towards the New
Zealand markets, and more specifically the annuity businesses within them, as
our strategy for the business starts to play out. I will comment more on that
shortly, but first some comments on our cost base.
Costs
Our cost base has grown over the past three years, a fact that does not
escape you, our shareholders, nor the analysts that cover us. To provide a
breakdown:
o Our costs have grown on an annualised basis by $14.5m over the past three
years (2012 to 2015), an increase of 12% CAGR
o Of that $14.5m increase
-$2m relates to the cost of the Ralec litigation which we expect to draw to a
close this year and as a consequence will drop out of the cost base
-$5.5m relates to the expense base of businesses acquired in 2015
-Of the remaining $7m of the increase:
$2m reflects the resources required to support the Market Operations
Busines Energy and Fonterra
$2.5m reflects the cost of launching and operating 18 new ETFs $2.5m as a
result of strengthening the teams in Regulation, Market Operations and
Markets
o We are of course conscious of the growth of the cost base and in the two
more mature businesses - Markets and Agri - costs were in fact down last year
- Almost 1% down in Markets
- 6% down in Agri
- Corporate costs were down 12%
With the obvious implication that the business is beginning to show the
operating leverage that we need to achieve.
A brief comment on the Ralec litigation. As James said we are unable to
comment on this specifically as the trial is ongoing in the High Court in
Wellington. However I would note that:
o NZX's total legal costs by the end of the trial will likely be in the order
of $9-10m
o This of course excludes a significant amount of time and effort by some
members of the NZX team in running the litigation
o Needless to say, it would have been in both parties interests to settle
this commercial dispute before the trial
o And I would reiterate that as we noted in our 2015 Annual Report (Note 25),
which provides more detail on the dispute, based on our assessment of the
circumstances and the information available, NZX does not believe it is
probable that a loss will be incurred as a result of the counterclaim and
accordingly no provision has been recognised
Business Outlook
New Zealand's capital markets have performed strongly over the past 12
months. The S&P/NZX 50 increased by 13.6% during 2015 compared to a decline
in the S&P/ASX 200 of 2%. Trade volume was up by 12% and trade value was up
by 19%, a trend that has continued into 2016 with year-to-date trade volumes
up 47% and trade values up 46%.
To a large extent this growth has been driven by offshore investment. Forsyth
Barr estimates that foreign ownership of the New Zealand market is now 46%,
more than 11% above the 10-year average.
With such a strong performance, it is unfortunate the structure of KiwiSaver
has not better allowed New Zealanders to take full advantage of the growth in
market value over the past few years. Treasury noted in September last year,
New Zealanders' KiwiSaver investments are overweight towards income rather
than growth assets; some 44% are in growth assets versus a model optimal
portfolio of 56%. In total, only approximately 8-9% of KiwiSaver funds under
management is invested in NZ equities.
NZX continues to focus on growing our capital markets in four areas; more
products, more efficient infrastructure, a broader retail investor base, and
continuing to improve our oversight of the markets.
o Product Increasing the range of 'products on the shelf':
o We launched the NXT market last year as an alternative for smaller high
growth companies and we are pleased with the number of companies that have
already listed, and the pipeline we see over the next 12 to 18 months. As we
have commented on a number of occasions, the success of NXT will be judged in
three to five years. As part of the SuperLife acquisition, we also launched
an additional 18 ETFs, bringing the total number of ETFs to 23
o Last year saw the listing of LGFA's $5.5b debt. This year, we are
continuing to see an increase in debt listings with eight so far this year,
and a corresponding increase in debt trading activity, up 60.9% YTD April
over the same period last year
o The next stage of development for the dairy derivatives market, which is
the leading global dairy commodity franchise, is the launch of fresh milk
futures next week which will provide New Zealand farmers with an opportunity
to hedge their price risk - something that their competitors in European and
US markets have had for some time
o Infrastructure: We continue to focus on reducing the cost of infrastructure
within the New Zealand capital markets.
The acquisition of NZX Wealth Technologies (formerly Apteryx) provides an
opportunity to increase efficiency and reduce costs for advisors and smaller
fund managers. Going forward, we are also exploring ways to leverage this
infrastructure and technology that we have within the funds services business
to provide easier access for wholesale fund managers to capture inflows from
smaller retail investors and KiwiSaver investors.
And we are exploring new technologies, including distributed ledger, which
may contribute to a lower cost, more efficient market infrastructure for the
New Zealand market going forward.
o Retail: While the government share offer programme did significantly
increase retail participation in the New Zealand market, retail investment,
both direct and indirect, in the New Zealand equity market remains low. The
FMA released a survey on Wednesday which indicated direct ownership is 21% in
New Zealand versus 33% in Australia. We have submitted on the review of the
financial advisor legislation, and we are hopeful changes that have been
suggested in the options paper, including robo-advice, will be implemented to
encourage the development of smaller fund managers and provide easier access
for New Zealanders to directly invest in the equity market.
o Regulation: Our markets continue to evolve and we are conscious of the need
to continue to upgrade our regulatory capability in order to meet the changes
in the market. We published last month our regulatory agenda for 2016 which
sets out our programme of work with a particular focus on market rules and
guidance, trading practices and market engagement. We have upgraded our
policy capability and look forward to leading more of the policy debate
around the advisor regime, which I just mentioned, as well as potential
changes to the KiwiSaver and the funds management industry more generally.
Such changes will benefit the growth of our capital markets and all New
Zealanders.
Fund services
Our Fund Services business, which comprises of SuperLife, Smartshares and NZX
Wealth Technologies has become a significant part of our business, comprising
almost 15% of our revenues in 2015.
Our expansion into the fund management business delivers three benefit
o A broader range of tradable products traded on NZX for retail and
institutional investors
o Accelerates the growth of passive funds management in New Zealand, a gap in
the market, which is shown to be a high-growth sector in other parts of the
world
o Provides you, our shareholders, with an exposure to the growing funds
management sector which we expect will grow in double digits for many years
to come
With the acquisition NZX Wealth Technologies, we now have three offerings in
high growth sectors of the market all of which have a compelling proposition
for their target customer
o SuperLife KiwiSaver: Our KiwiSaver product has one of the broadest range of
investment options available in the New Zealand market with more than 40
funds to choose from including our 23 Smartshares ETFs. It is low-cost,
convenient and flexible, with investors able to change their fund allocation
when they want, free of fees. Last year, Consumer ranked SuperLife third out
of all KiwiSaver providers for customer service. And we are starting to see
the results with 28.4% growth in FuM the 12 months to April 30
o Smartshare Retail and wholesale investors can invest directly in our
Smartshares products, which as I mentioned before now has a range of 23 funds
covering New Zealand, Australian and global equities, and recently launched
New Zealand and global bond funds.
While there has been some market commentary of the fee levels of these
products relative to ETFs offshore, these comparisons don't take into account
the foreign exchange, brokerage and custodial costs associated with offshore
investing from New Zealand, nor the advantage of the PIE structure. When the
'all in' cost versus the alternatives are taken into account, along with the
PIE structure, Smartshares provides a convenient and cost effective option
for most NZ investors.
We're starting to see momentum growing for ETFs in New Zealand with FuM up
10.5% YTD through the end of April - excluding the growth in units from
SuperLife - with the highest growth in the Global Bond and NZ Property ETFs.
o NZX Wealth Technologie New Zealanders have more than $110b invested in
domestic and foreign equities, unit trusts, other managed funds, KiwiSaver
and bond and cash management trusts. Administering these funds and advising
these investors is more complex; driven by increased compliance, including
anti-money laundering, different tax regimes, foreign currencies and the
demand from investors for real-time reporting.
A large amount of this administration is undertaken by what are known in the
industry as wealth platforms. The two major platforms in New Zealand, Aegis,
and FNZ, combined have around $20b of assets under administration.
The NZX Wealth Technologies team, who have extensive experience in developing
and operating wealth platforms, are building what NZX considers is quite
simply a better product which supports a full range of investment options and
the flexibility for advisors to use preferred fund managers, brokers or
banks. While the business is currently cashflow negative with $1.3b of FuA,
we are confident that the number will increase beyond $2b by early 2017,
generating positive cash flows and more importantly establishing the business
as the leading provider in the New Zealand market.
Agri Business
Our agri business accounts for less than 20% of our revenues, and as you will
have noted, has been affected by the downturn in commodity prices in both New
Zealand and Australia. While we continue to focus on maintaining the margins
within the agri businesses, they contribute less than 4% of Group EBITDA.
Growth Prospects
So finally, what might NZX look like in three years time? Based on the
performance of the business we have experienced over the past three years
(bearing in mind we did not own all of them over the period), we would expect
that:
o The Markets business will continue to dominate our revenues - around 60%.
But importantly, the majority of these revenues come from annuity revenues
streams, but potentially less exposure to IPOs and secondary raising and more
exposure to trading and clearing as we expand the product offering
o Funds Services - from 15% to 25% of revenues
o Consequently, less exposure to agricultural businesses
In summary, we have a terrific team in place and have made the required
investment to grow the business. The pace of cost growth, focused in the
funds services business, is slowing and our exposure to higher growth
segments of the capital markets is growing with momentum evident in the
SuperLife, Smartshares and Wealth Technologies businesses.
The business is in great shape and we have strong prospects ahead. Thanks for
your support.
For further information please contact:
Kate McLaughlin
Head of Communications
T: 09 309 3654
M: 027 533 4529
E: [email protected]
About NZX Limited
NZX builds and operates capital, risk and commodity markets and the
infrastructure required to support them. We provide high quality information,
data and tools to support business decision making. We aim to make a
meaningful difference to wealth creation for our shareholders and the
individuals, businesses and economies in the countries in which we operate.
To learn more about NZX please visit: www.nzxgroup.com
End CA:00282722 For:NZX Type:ADDRESS Time:2016-05-20 09:45:13
