Next: Management Commentary
To our shareholders,
On behalf of our staff, I am pleased to report on the progress we have made over the past year.
There is little doubt that 2016 was a pivotal year for NZX. A great deal was achieved to establish a foundation for future earnings growth across the Group and operate a more integrated set of businesses going forward.
In January 2017, I took over as Interim CEO. I look forward to making a broader contribution to the New Zealand economy above and beyond my role as Head of Markets.
While I am pleased to report on our progress, I want to acknowledge the context in which our financial results were achieved. In 2016, a significant amount of cost and resource went into the Ralec litigation, our transition to the Financial Markets Conduct Act (FMCA), and the repositioning of our Agri business, putting downward pressure on earnings. These distractions are now behind us and our business is well positioned for future earnings growth.
Our clear focus for 2017 is on driving profitable growth from our existing businesses, serving our customers, and delivering for our shareholders.
Below is a summary of our performance by business. I hope you find our results encouraging.
Year in review
It was a good year for our markets business, which produced sound financial results with revenues up 6.0% to $52.9 million, while operating costs were down 4.5%, delivering 9.5% growth in segment earnings. This result was underpinned by:
- The impressive growth of NZX's listed debt market, with debt market capitalisation up 29.7%, and the number of listed debt products up 20.2% on the prior year;
- The number of equity trades, up 19.8% on 2015 as overseas investors turned to New Zealand in search of lower volatility and higher yields;
- The performance of the S&P/NZX 50 Index, which fared well despite ongoing global economic uncertainties, up 8.8% as at 31 December 2016;
- The popularity of NZX’s Dairy Derivatives Market, with participation (measured by the number of active trading accounts) up 67.0% on 2015; and
- The launch and subsequent take up of NZ Milk Price Futures and Options, with early trading in these products exceeding expectations.
Technology remained a priority for the executive team as we worked alongside market participants to improve infrastructure as we prepare to deliver an upgrade to our clearing system in 2017.
In addition to this, the executive team have a renewed focus on improving operational efficiencies in 2017. This is to ensure our teams are efficiently supporting the foundations we have put in place for future earnings growth across the Group.
NZX Markets Revenue
Our policy team earned a great deal of positive feedback from the broader market as we actively engaged with stakeholders as part of NZX’s corporate governance review. This feedback extended to our regulation team who continued to work diligently to ensure the operation of fair, orderly and transparent markets. Both teams continue to pro-actively address market trends, changes in technology and law, and developments in international best practice to ensure we are operating markets with a strong reputation for integrity.
Our Funds Services business maintained good growth momentum during 2016. This was evident in:
- Funds Under Management (FUM) growth in SuperLife’s KiwiSaver business up 21.1% on the prior year, while total SuperLife FUM increased 15.8%;
- SuperLife winning four new group corporate superannuation mandates;
- Growth in direct retail sales of Smartshares Exchange Traded Funds (ETFs) products, with total external FUM up 10.7% on 2015;
- SuperLife and Smartshares completing their FMCA compliance transition. While this impacted segment earnings, these were one-off costs associated with a significant regulatory change; and
- NZX Wealth Technologies securing two major new clients. These were Hobson Wealth (formerly Macquarie Equities New Zealand) and Craigs Investment Partners, who will use the platform for their KiwiSaver, superannuation and self-select products. Both clients are expected to transition onto the platform in the first half of 2017, bringing approximately $2.5 billion in Funds Under Administration.
Total Funds Under Management in SuperLife schemes
The SuperLife and Smartshares teams will now focus tightly on marketing and generating earnings growth, after spending much of 2015 on product development, and 2016 on integration and compliance. We are confident our Funds Services business will grow significantly in 2017 as it moves out of investment mode, and builds on its strategic investments made in passive funds management over the past two years.
Market conditions were difficult for NZX Agri, which provided challenges for the publishing component of this business in 2016. The performance of this business is summarised below:
- Low commodity prices for dairy products impacted farmer returns resulting in a 20.8% reduction in paid advertising page equivalents, which directly correlated to a 20.1% reduction in publishing revenues;
- Low advertising returns were also driven by NZX's decision to exit the magazine publishing and Clear Grain Exchange businesses, instead focusing on parts of the Agri business that have broader links to the markets we operate in; and
- While publishing revenue declined, total data revenues grew 11.5% in 2016, driven by a 36.0% increase in the New Zealand based AgriHQ and iFarm revenue.
We believe steps taken to reshape NZX Agri in 2016, with a stronger focus on data and analytics, have put this business on a firmer financial footing, and position it better for the long-term, especially as the outlook for the dairy sector appears to be improving.
To lead our streamlined Agri business, we have appointed Jeremy Anderson, effective 1 March 2017. Jeremy joins NZX with broad experience from across New Zealand and Australia’s agricultural sectors, and we look forward to welcoming him to the Group and growing this business.
Overall Group performance
A summary of NZX's Group financial performance is below. More information is provided in the Management Commentary.
- Revenues increased 6.0% to $77.5 million
- Operating expenses increased 13.3%, driven by a mix of deliberate investments in NZX's Funds Services business, and onetime FMCA regulatory and CEO transition costs
- Earnings Before Interest, Tax, Depreciation and Amortisation (EDITDA) of $22.5 million came within the previously guided range
- Reported 2015 Net Profit included an $11.8 million gain on sale of the Group's 50% investment in Link Market Services (NZ). 2016 net earnings were 23.9% down on the prior year excluding this gain
NZX plays a critical role in supporting the development of New Zealand’s capital markets. To be an effective player at the heart of this network our team must proactively engage to address the needs of our customers.
In 2017, our team remains focused on meeting the needs of market participants, and seeking new ways to engage and deliver. The team at NZX are committed to continuing to build a collaborative culture at the core of New Zealand’s markets ecosystem. This is an NZX that engages, which seeks feedback, and delivers in a timely and professional manner. This is a market that needs to work for everyone.
I believe that if we can achieve this, then we can achieve our underlying goal of improving returns for our shareholders.
I would like to acknowledge the support I have received from the Board and executive team as Interim CEO and the positive working relationship that has resulted.
It is a privilege to lead our team through this period – a group of very capable, dedicated and talented individuals. Thank you for your hard work.
A final word of thanks to our shareholders. I am passionate about four things – customers, quality, delivery and staff – and making the right decisions in these areas will ensure better returns for you.
We have some fantastic opportunities in front of us to grow NZX. I look forward to leading our business and working with everyone involved.