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Edited Transcript of EQT.AX earnings conference call or presentation 20-Aug-19 11:30pm GMT

Full Year 2019 EQT Holdings Ltd Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of EQT Holdings Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Joseph O’Brien

EQT Holdings Limited - MD & Director

* Philip Dean Gentry

EQT Holdings Limited - CFO & COO

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the EQT full year results conference call. (Operator Instructions) I would now like to hand the conference over to Mr. Mick O'Brien, Managing Director of EQT. Please go ahead.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [2]

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Good morning, everyone. It's Mick O'Brien here, and I'm with Phil Gentry, our Chief Financial Officer and Chief Operations Officer. We're talking to you this morning about EQT Holdings' annual results for the financial year 2019. And we're going to run through results and talk about strategy and our outlook, and then we'll take questions at the end of the session.

So Equity Trustees had a very good year in the financial year 2019, and that's despite quite a challenging environment in financial services generally. And our result has primarily been driven by organic growth. So that's very positive. We have a solid pipeline of opportunities, and there is a lot of work in progress as we enter into FY '20.

You'll see throughout this presentation, talk a lot about the fact we have been investing in the business over the last 6 months and in particular with people but also in technology, and we intend to continue to do that as we build for long term. And I really want to emphasize that we feel that we've delivered results to our clients, also to our employees and the community, not just the shareholders. So the result really does deliver to all stakeholders in the company.

If I just run through our results at sort of a high level. Net profit was up 12.7% to $22.2 million. So you real double-digit growth in profit, primarily driven by the revenue being up 4.6%. So it's a consistent increase in revenue that we've seen in recent years, quite material levels. We've continued to manage the expenses tightly and in a disciplined fashion, so expenses were up 2.4% through the course of the year, and that's despite the investment that we are making in people.

Basic earnings per share, up 11.7% to $1.086. The Board have chosen to increase the dividend, so to $0.46 for the half year, bringing the total up to $0.90 for the full year. So that's a 9.8% increase on the prior year. And these results are really coming from all parts of the business, as I'll point out as we go through presentation.

A look at some of the key measures. You can see on this slide our 4 key measures that we're looking at. The first is total revenue. You've seen a nice progression over last couple of years and the 4.5% increase in FY '19. So it's really a consistent result over the last couple of years, and the change in F '16 to FY '17 really was a repricing one-off event that we did at that point.

We'll move out to the net profit before tax. You see a very consistent growth over the course of the last 3 years, taking it up to the $31.3 million net profit before tax, which is a 9% increase over FY '18.

Earnings per share, down on the left-hand side there, is consistently increasing. That growth rate over the last 3 years has averaged 17% per annum. So it's a really strong growth right over the course of the last 3 years and continued in the FY '19 year at 11.6%. And you can see the progression of dividends. So being able to convert those earnings to results and rewards for shareholders in the way of increased dividends through the course of the year.

If I just turn towards the slide talking about funds under management, advice administration and supervision, which is really one of the key drivers of revenue in the business. And you can see our 2 business lines here: Trustee and Wealth Services on the left-hand side and Corporate Trustee Services on the right-hand side. And our total FUM is just down slightly at $84.9 billion. You can see it's increased pretty materially on the TWS side.

That's mainly being driven by superannuation, but there's also increases in mostly other lines of business in our private client business. And Corporate Trustee Services is down a little bit, and that's on the back of FY '18, which was really an enormous increase in funds. And we'll talk more about the movement in client funds in Corporate Trustee Services.

If I look at the 2 business lines again from a net profit before tax perspective, and you can see on the left-hand side Trustee Wealth Services, a 10.4% increase from $16.4 million to $18.1 million so really pleased with that increase. And then on the right-hand side, Corporate Trustee Services, we increased from $12.5 million to $12.9 million. So a 3.2% increase. So despite that movement in FUM you saw on the previous slide, we still managed to increase the profit in that part of the business.

And really the acquisitions and appointments that we've talked about in the past have been delivering results for us. So our U.K. and Irish business has got an expanding footprint, which I'll talk about a little bit later, but we're starting to see good traction in that area. And through the course of the period, we had acquired Zurich Australian Superannuation Property Limited, which is a superannuation trustee company and was trustee for the Zurich Master Superannuation Fund, which is a $1 billion superannuation fund. That's being fully integrated into our business now.

Talk about organic growth in the business, just a couple of things I want to point out. Firstly, our strategy to be Australia's leading trustee hasn't changed other than to lift that ambition to be the leading trustee of all companies. So it's a very clear strategy where our specialists and all the lines of business we operate in are trustee lines of business.

The industry environment continues to support our independent trustee model. The regulators, the government are all wanting to see improvement in governance of superannuation funds and of managed investment schemes. And that really does all go well for the future for us putting forward independent trustee services. The Royal Commission's findings added further support to that. In that Royal Commission, there was a lot of discussion around independence, conflict management and the proper expertise to managed funds and government funds. And that really is something that Equity Trustees brings to the table for other providers.

The organic growth is also being driven by us expanding into new market segments. So I mentioned before that we expanded 18 months ago into the U.K. We've got a direct license in Ireland, which I'll talk further about. So that's opening us up to new markets. We're putting more emphasis into the corporate trust market where we've got a small but growing business and more emphasis into areas such as indigenous communities and the active living philanthropy space.

Another key aspect of our organic growth is just continuing to focus on internal cross-sell. This business has multigenerational clients, sometimes going back over 4 generations, and that's always been a very important part of what we do because we are talking about intergenerational transfer of wealth so very key how we go about cross-selling. And we are winning new contracts in the U.K. and Irish markets.

I believe we are poised for continuing that growth path. We've been investing heavily in our people and also in technology to support that growth. We've made a number of key appointments to the holdings company Board as well as the subsidiary superannuation Board, very targeted and selected technology investment that's aimed at delivering better service to clients primarily. And we continue to emphasize how we manage this business, the governance of it, and the risk management aspects of it is critical to the success of the business.

I mentioned before the acquisition of the Zurich Australian Superannuation Property Limited. I guess I'll just make the point, any acquisitions we do are really in our core space of trusteeship. Philip will cover shortly the strength in the balance sheet and the flexibility that gives us to pursue opportunities. And through the course of the year, we obtained a direct license in Ireland from the Central Bank of Ireland to provide fund governance services in the Irish market, which is really, I guess, the market we were most focused on in -- when we're moving over to U.K. and Europe.

People will have heard me talk before about our focus on all of our stakeholders, and this slide really captures all of them in one picture. So improving client satisfaction is our #1 target; lifting our employee engagement, and that's been a big focus over the last 3 years; growing shareholder value; and deepening our community impact. And let me just walk through each one of those and tell you how we've progressed.

Let's start on client satisfaction. We've been surveying our client satisfaction for the last 3 years. The focus in the last 12 months has been on training, on setting service standards, on more frequent and improved communication to clients and beneficiaries and also just the interactional service that we have with particular special types of clients that we have to look after. This will be a longer-term journey for us, but I'm really delighted with the results in 2019.

We've lifted our Net Promoter Score, which is the likelihood that clients would recommend us to other people, from 14 up to -- sorry, up to 17 that's moved to, and the net loyalty score from 15 to 17 as well. And that's the score that measures whether clients would buy other services or products.

And you can see on the Net Promoter Score, it's hard to get an industry average of what that is. But in financial services, we would estimate it at around about 5. So we're well above that, as you would expect for a trustee company that needs to look after its clients and beneficiaries. So the focus there really is on continuing to invest in digital capability and also in the training and -- of our people to deliver service.

If I move on to lifting employee engagement, and this has been really a strong focus over the last 3 years because we needed to get that right before improving the client experience. And you can see, employee engagement on the left-hand side is increased from 67% to 70% over the course of the year. We're now above the financial services norm and just below the high-performing norm in the industry, and we've set our targets on that.

On the right-hand side is the score on enablement, and we stay at 76%. So that's good that we've been able to maintain that level because it is above the high-performing norm in the market. And our focus in the last year has been again on training, empowering our people to take control of their own training requirements and supporting in that, collaboration between our teams and clarity of our work structures and processes and decision-making and their governance of the organization.

If I move on to shareholder value, where you saw the earnings per share results and dividend results before. I'll just mention one more thing on this slide that dividend increasing from $0.82 to $0.90 puts the payout ratio at 82.9%. So we're right in the middle of our payout range. That ratio has been falling in recent years, which I think is a healthy sign.

We'll move on to the next slide and talk about deepening community impact. Equity Trustees has a unique position and ability to make an enormous impact on the community. Every year, we grant significant amounts of funds to charities that are doing incredible work.

You can see on the left-hand side the granting in the financial year 2019 was $124 million. Now our regular granting that's coming from the bulk of the trust was $78.8 million. So that's a nice increase on our previous year, and that's really what we are trying to grow. Now this particular result was impacted by a single $30 million grant that came at a vesting of a Testamentary Trust. We can't obviously control that, but it's a fantastic that was going to the South Australian art gallery. So it's a fantastic result. And this is a big focus to make the most of every dollar we are granting into the charitable and for-purpose sector. And on the right-hand side there, you can see where those grants have been made.

And we introduced -- this year I just mentioned a volunteering program for all of our employees. I'm pleased to say in the first year, we've had more than 450 hours of volunteer effort put into great pursuits in the charitable sector.

So I'll just stop there, and I'm going to hand out to Philip now to take you through the financials in some detail.

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Philip Dean Gentry, EQT Holdings Limited - CFO & COO [3]

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Thank you, Mick. Let me take you through the numbers in more detail, as Mick said, and starting firstly with the profit and loss.

You can see on this slide the solid revenue growth, up 4.6% year-on-year, and below that, the pretty good expense growth of just 2.4% notwithstanding a fair bit of investment going on. And then you'll see the consequence of that as a healthy increase in profit and also an increase in the net profit before tax margin from 32.5% to 33.9%. And collectively, that's seen a solid increase in both NPAT earnings per share and the dividend across the year, as you can see in those numbers.

So the NPAT's just turning a little more to the half-on-half performance, which you can see on the next slide. And here, you can see that the second half on first half was relatively flat, and there's a couple of reasons for that. Firstly, there is a certain amount of seasonality in the business where the first half, in TWS in particular, is typically a little bit stronger because most of the TWS' tax revenue falls in that first half of the financial year, and also a reasonable amount of the income commission on charitable trust, which is an annual fee, if you like, also falls into that first half. So collectively, you can see there's about $1 million NPAT between those -- that seasonality, and also a nonrecurring item that occurred in the first half that was relatively small as well. Of course, the other driver of that half-on-half performance is the increasing investment in the business, which has bumped up that second half expenses. And consequently, that's why those numbers fall pretty much as they do.

So turning now on to the revenue growth, we move on to that next slide. On this slide, we try and break out the headline growth from the organic growth. And you can see if we make adjustments on the left-hand side for acquisitions, the client exit and mandate losses in CTS from one other client that we've talked about previously, the actual underlying organic growth is about 3.6%, which is pretty reasonable. And the market NPAT on average across the year despite some volatility has actually been pretty limited.

Moving on to take a look at cash flow. It's a very strong cash flow-generating business, as you can see here. Pretax operating cash flow up 12% on the prior corresponding period to $35.5 million. And fairly straightforward where that cash has gone, principally dividends to shareholders. You can see $8 million repayment of borrowings, some income tax, and really negligible bad debts.

Let me now turn to just explaining the business unit performance in a little more detail, and starting firstly with TWS. You can see here in this slide, if we move from left to right, that the underlying momentum in TWS is pretty good. Firstly, at the core trustee services, Estate Management, Testamentary Trust, and Perpetual Charitable Trusts, you can see that FUMAS increasing on most areas pretty healthily. Likewise, in some of our more emerging services, indigenous trusts, living donors and compensation trusts, good momentum building there as well. Now on the right-hand side, the superannuation trustee office, funds under supervision has had a healthy increase principally by the acquisition of the Zurich Australian Superannuation business.

So what does that mean for TWS as a whole? Just showing you that bridge again with pretty modest equity out market, impact, in fact, slightly negative, the organic growth was pretty healthy for TWS. And you can see the breakdown of the FUMAS on the right-hand side and, in particular, the increase in the superannuation FUMAS.

Similarly, turning to Corporate Trustee Services, the highlights there. This chart on the left's a little more complicated. Again, adjusting for the compliance services manager exit and the clients mandate losses, those 2 things we've talked about previously. There were some other fund closures and exits. In the normal course of business, obviously, some funds just fail. Fund managers decide they're not worth pursuing. And so there was a number of those. But you can see the new funds from new clients and new funds with existing clients together the organic growth have been quite strong.

On the right-hand side of that chart, you can also see the circa 30% increase in revenue from the relatively new business we have in debt capital and loan markets division. So good momentum building there from a low base. And on the right-hand -- far ride-hand side, you can see some of the new clients that the CTS business has now taken onboard.

And again, as before, just showing you the revenue breakdown, getting to that underlying revenue. If we adjust for acquisitions and the client exit and mandate losses, you can see the underlying organic growth, still reasonably healthy in the CTS business. On the right-hand side, you can see the breakdown of the asset categories for the funds under supervision and a pretty diversified mix there. As you can see, global equity is the largest component.

Now moving on to the balance sheet. You can see again a very strong balance sheet, net assets of $263 million. You can see over the period of 12 months we've reduced debt down to some 40% to around $12 million. Our gearing ratio continues to be very low. We've got plenty of surplus borrowing capacity and the flexibility to take advantage of growth opportunities. We still have a contingent liability in relation to the tax dispute with the ATO and that we hope will be resolved at some stage in the next 6 months. But obviously, that's taking some time to come to fruition, but we remain confident of our position.

And touching on the capital position again. We continue to have a strong capital position on the balance sheet. ASIC has recently granted approval for the transfer of the former OneVue RE clients to Equity Trustees Limited. That will release around $2 million to $3 million of capital, and we hope to complete that process by the end of the calendar year.

Dividend policy is to pay out 70% to 90% of reported NPAT. And as Mick said, the dividend payout ratio for this year was 82.9% so pretty much in the middle of our range.

And then -- so in summary, we've had sound revenue growth. Our operating margins have been enhanced. Good expense management leading to a significant increase in NPAT, earnings per share of dividends with a strong balance sheet and the capacity to support our growth plans and good improvement across all T4 measures delivering for all stakeholders.

I'll now pass back to Mick to update investors on our strategy.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [4]

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Fabulous. Thanks, Philip.

So I'll just talk to you about our strategy and where the company is heading. So effectively, our strategy has been holding us in great stead, and so we don't intend to change it. We've slightly increased the ambition to be Australia's leading trustee company. But we -- I just want to emphasize, we're a specialist trustee company. So all the lines of business that we operate in, we put our complete focus on being a trustee. Of course, our ambitions globally are emerging. We haven't got that in that headline statement yet, but over time, I'm sure we will put it there.

If I just talk about the industry dynamics that we're operating in. So really, the business is underpinned by an industry that's really got a pretty healthy set of characteristics. For our private client side, the aging of the population, the more complex needs that people have and the increased wealth really underpins the core of our private client business. Our CTS business and our superannuation business is really underpinned by the growth in superannuation flow into the market. That's a mandated growth. It goes at a rate much quicker than the increase in GDP. So our key businesses are really underpinned by strong growth rates.

There's no question the Australian financial services industry is undergoing a massive transformation. I guess it's similar to the transformation that probably happened 20 years ago when all of the wealth businesses were acquired by the banks and other parties, and now we're seeing a disaggregation of that. That is presenting various winners and losers in the market. But the reality is the divestments that are going on and the changes that organizations are making is really a positive to our business because people are looking for specialists to provide particular types of services, and our independent specialist trustee model really is finding favor.

The global opportunities for us is strong. Many of the things that are happening here in Australia are also happening overseas. The regulatory trend towards increased independence has already been happening in Europe, and those markets there are more advanced in the funds management space than here in Australia. And so we see very positive trends on that side. And there is great opportunity for us to cross-sell to our Corporate Trustee Services global client base into those markets.

Now this is an important slide. I just want to talk about the people in the business. I do think this is what sets Equity Trustees apart from its competitors. We've been investing heavily at the Board level, bringing Tim Hammon on through the course of the year to the holding company Board, and then 2 new appointments into Equity Trustees Superannuation, Tony Lally as the Chair and Sue Everingham joined us in February, strengthening that Board so that it has the ability to get across the full portfolio of funds that we have.

We brought on Owen Brailsford as our Chief Risk Officer in February. He's just been an excellent appointment for the firm in terms of giving us that increased focus on risk. We always had that, but we don't rest on our laurels and want to continue to build the capability there.

On the asset management side, I've talked before that in October of last year, we brought on 2 experienced leaders, Darren Thompson and Chris Haynes, to head our asset management and our Australian equity funds management capability so that we can deliver excellent investment results to clients.

On the right-hand side, Corporate Trustee Services. Our focus has been on recruitment in the U.K. and in Ireland to support and have a business ready for growth and also to open the Irish office there. And in Trustee and Wealth Services, on the private client side, we brought on new expertise into the philanthropy team, into indigenous trusts and compensation trusts. So all these specialty areas that we are trying to build, we've been bringing people onboard. And on the superannuation side, we've made investment in some very senior experienced people in different areas of that business because we need to do that as you see the past growth that we've had in the last couple of years and what the pipeline of opportunity that is presented to us needs. So it's an investment in people of around the $2 million level, and we'll continue to do that while we see the opportunities in front of us.

If I move on to the technology side. In the financial year '19, we are focused on our approaches basically to acquire specialty technology and integrate that into our platforms with a big focus on Salesforce and XPLAN, so well-known platforms used in the market. We've completed the digitization of our Will Bank, 50,000 wills in that bank, which enables us to interrogate and then market to that Will Bank. We've been piloting robotic process automation and getting some really good results from that, and we continue to expect to do more of that in the next number of years.

The other area we will be focusing on in the next number of years is cybersecurity. We need to remain very vigilant in that area, and we'll continue to do that. And the other big focus will be on self-service online portals. And that's both for our private clients but also for our B2B partners in CTS and in the superannuation area and also our distribution partners in Trustee Wealth Services.

If I move on to the risk culture on Slide 33. I feel we've always had an excellent risk culture in this business. It is at the heart and one of our core capabilities. But we continue to invest in it, and we've had a very effective governance approach with our -- the holding company's Risk Committee and also the superannuation subsidiary's Risk Committee.

And we did an exercise obviously that most organizations have done when they saw APRA's report in the CBA and the learnings from that. And we feel that we're well positioned. I mean to some extent, sometimes a smaller company that is highly specialized has an ability to do things that perhaps might be a little bit more difficult in more complex organizations. And I think that's the case when we do our reviews of how we stacked up against those types of reports.

We strengthened the licensed entities in the U.K. and Ireland through the course of the year. And we've been continuing to work on our Line 1 and Line 2 risk management capability to ensure we've got the right resources in the right spaces in that area.

Next point. Risk and compliance measures are built into our KPIs and clearly built into our remuneration practices. I think our remuneration arrangements are first class and leading in terms of how we consider risk in rewarding our people. And finally, our relationship with the key regulators is really one of no surprises. We are working very hard on relationships at the highest level but also down through the various organizations, such as APRA and ASIC.

If I move on to Trustee Wealth Services and where our focus is going forward. If I just start on the top left-hand block there, estate planning. That really is a lead service for Equity Trustees. Many of our clients come to us firstly by using that service. We're looking to leverage the will bank that we have there and continue to refresh it given that we now have it digitized and focusing on strategic partners who are basically our distribution partners.

And I think the changes in the financial services that are happening means that the advice industry is focusing more on its core and utilizing specialists where it doesn't have that expertise. So again, that is leading to good opportunities for us. Our advice business focuses on cross-selling other services, such as estate planning and philanthropy and also estate management services where we can.

In the estate management area, we have been focusing on technology enablement to speed up service and improve communication to beneficiaries and improve their whole experience, again hoping to position us in a way that we can cross-sell advice and estate planning and other services to those beneficiaries.

In the philanthropy side of the business, it's been a busy year. As you saw before in the amount of grants that have been made, the volume has been enormous. Our focus there has been on really making the biggest impact we can for the dollars that we are granting, and we feel that has the biggest impact on the community. It positions us as a leading philanthropy provider. So those who are interested in active philanthropy, while they're still alive, can see the capability that we bring to assisting them in what they want to achieve.

I've talked before about funds management and the strengthening of the team, and we'll continue to do that in the coming year. And in trust management, our focus just been really in our specialty areas, such as compensatory trusts and indigenous trusts, where we've been growing and continuing to work on improving the service delivery to beneficiaries of trusts.

Page 35. Let's talk briefly about how we can assist in empowering the indigenous communities in Australia. We provide trustee services to these communities, investment management services. And also, we grant philanthropic funds to a wide variety of programs. Through the course of the year, we established Aboriginal and Torres Strait Islander Advisory Committee, and I'm pleased to say brought on 3 eminently qualified people to help us in that.

So when we do business, we want to make sure we do it the right way. That means bringing people in with expertise. Again, this is an area where we want to make the greatest impact we can to the communities. I'm pleased to say through the course of the year, we were appointed to 2 new accounts, both of them in the Pilbara area, which is an area we hadn't had business in before and very delighted to be able to assist the communities in those areas.

Talk just briefly about superannuation. This has obviously been a hotspot in the financial services market over the course of the year and expected to be a hotspot for the next number of years. Now the government has plans as to how it seeks to improve efficiency in the system and improve member outcomes. Trustees are key in that. Our approach is really to leverage the strength of our business model, which is to provide independent trustee services to other originators and providers where trusteeship is not core to what they do.

So the prevalence of a vertical integration and potential conflicts that exist in the system, mainly appetite for looking at outsourcing trusteeship, is really quite strong. We've got a really good pipeline of opportunities we've been working on and we'll continue to work on over the course of the next 6 months. And our focus, we really want to lead the market in how we look at improving benefits to members. And that is absolutely a key role of the trustee. We have been investing ahead of the curve in people and the digital platforms as we anticipate growth in this area.

If I talk about Corporate Trustee Services on the next page. We continue to see new funds managers coming to Australia and start-ups in Australia, and we've been very successful in securing many of them. They go across the different asset classes. I would say we don't see as much happening in the large-cap Australian equity space at the moment, but we see it in all other asset classes. We're increasingly seeing opportunities to provide responsible entity services to structured investment arrangements that the large superannuation funds have. As they become larger, their needs become more sophisticated, and we're seeing good demand there.

We've fully integrated the OneVue Responsible Entity business now into our Corporate Trustee Services business. And we're increasingly focusing on larger-scale opportunities, again, as funds managers and promoters look for simpler specialist outsourced models just as they're doing in the superannuation side.

Philip mentioned how we've been going on structured finance offerings. So this is securitizations and debt offers and real estate trusts. And I feel that we have a growing reputation in that area, and we're looking to continue to build that in FY '20. And we're really quite encouraged by the results.

I'll just stop on this last point. We have had significant new clients come to us and putting vehicle structures that are listed investment trusts. So there's been a switch of course in the last 12 months in the market to funds managers putting their products out in listed vehicles, be they companies or trusts, but increasingly, people are moving towards trusts for the structure. We've had 3 successful raisings: Neuberger Berman raising, Regal raising and the Partners Group. And we see quite a demand for listed investment trusts in the future as funds managers look to access the self-managed superfund market and also put in place a structure that provides liquidity in asset classes where sometimes the liquidity is not 100% at all points in time.

I'll talk about the U.K. and Ireland. We see great opportunities to fund governance in those markets. Our U.K. business is starting to win both U.S. and U.K. managers coming onboard. We're gearing up at the moment for increased scale in that business. So again, we've been investing a little ahead of the curve as we expect funds managers to come onboard.

The Ireland expansion is well underway. We were previously passporting fund governance services into Ireland, but now we have a direct license that we achieved through the Central Bank of Ireland. And we opened our office there in February 2019, and we have fully staffed there and up and running.

That's important because the Irish collective investment vehicle market is of the order of $3 trillion. And it is, with Luxembourg, the preferred location for global funds managers to domicile their vehicles basically for European distribution or for Asian distribution. And again, just repeating what our strategy is here, is to leverage our client base in CTS, which has a large number of funds managers that are in the U.S. with their distribution efforts that they want to do through the rest of the world where they need a collective investment vehicle structure. And Ireland is often the preferred choice of U.S. funds managers to do that.

So if I just summarize the results. It's been a consistent set of results. You saw the numbers before. We've got a substantial lift in net profit after tax and revenue, earnings per share and the dividend all higher, strong cash flow, as Philip pointed to you. The result is built on fundamental organic growth. And margins have increased despite the volatile markets. The acquisitions we've made and the partnerships we have, have been delivering. It's been really disciplined expense management, and we feel we're delivering for all of our stakeholders.

We're well positioned for growth. The momentum is solid. We've got a committed, engaged workforce. That is our #1 asset of this company. The fundamentals in the industry are really positive for us. We're trying to leverage our core strengths as a specialist trustee, and that's increasingly resonating in the market.

I mentioned we are investing in our people and our technology, and we'll continue to do that. That investment is there to support growth and the pipeline of opportunities, and we expect that earnings growth to be weighted into the second half of the FY '20 year. Market volatility will obviously continue to influence our outcomes. We can't do much about that, but we feel we have an encouraging outlook for the remainder of FY '20 and beyond.

So I thank people for their attention this morning, and we're happy to -- I'll stop there and happy to take any questions that anyone has. Thank you.

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Questions and Answers

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [1]

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We've got one question that's come through, and that relates to our investment in people. And the question is are we catching up on past underinvestment and how significant do we think that investment will be.

Look, the answer is no, we're not catching up on past underinvestment. We've continued to put the people onboard as the business has grown. But we've mentioned a couple of times here that there's a solid pipeline. You can't wait for the business to come on and then bring the people on because it takes time. But so we need to be a little ahead of that curve all the time. That's what we're doing. I'm pleased to say I think we've increasingly being viewed as an employer of choice. So when we go to market, we've been, I feel, quite successful in getting the expertise that we need. And this really is a business where the expertise and the experience is what is needed to bring business onboard.

The next question is can we provide some color on the reasons for the compliance services manager loss in CTS. Was it due to price or some other issue?

That's a good question. That point was a particular client that we had in Corporate Trustee Services. It wasn't utilizing all our services. So we weren't legally the responsible entity for that client. So to some extent, they never fully bought into having a complete outsourced model with us and just I guess to some extent, to leave themselves the option once they got to a certain scale to take it themselves in-house. So they're always set up on that basis, and that's really the way -- once they got to that sort of scale, decided to move. So it wasn't due to price. It wasn't due to any other sort of service issues with that client. It's really them sort of setting themselves up originally in a different way. But they were unique in our client base. All of our other clients, we are trustee or responsible entity for their managed investment schemes.

The next question is, you mentioned a note in there about a potential tax office liability. Can you just give us a little bit more flavor on how that's progressing? Philip?

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Philip Dean Gentry, EQT Holdings Limited - CFO & COO [2]

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Sure. Thanks, Mick. This is obviously a process that's taking some time. There's a reasonably detailed contingent liability note in the accounts for those that want to look at the full detail. But in essence, we're disputing an amount with the ATO. We are seeking rectification of a particular historic contract through the courts, which if achieved, will substantially strengthen our case. And we remain pretty confident that the outflow won't occur. Although if it does, it's somewhere between 0 and $2.8 million. So it's a material number, but we're confident of our position.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [3]

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Thanks, Philip. The next question is have you rightsized the business. Or is there further cost investment expected in FY '20?

Look, the business is positioned appropriately for our current scale and the services and products that we're putting to market and the clients that we have onboard. So do we expect further investment in FY '20? I think the answer to that is perhaps a little because if some of the appointments that we're looking at come through, they have scale with them, and we need to scale up in some areas. Now of course, we're trying to do a lot with technology, so we can get some leverage in those situations. But the reality is there will be some further investment in FY '20. And perhaps as we get around and talk individually to shareholders, I think one thing that we'll try and draw out is how much investment has already been done and what that looks like as a run rate going into FY '20.

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Philip Dean Gentry, EQT Holdings Limited - CFO & COO [4]

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Yes. Mick, just to add to that. There's obviously quite a bit of the investment has been in recent months, particularly in the second half of FY '19. So there's obviously a full year effect of that in FY '20 even if there was no additional investment. Though as Mick says, depending on the levels of activity, some further investment is certainly possible.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [5]

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Next question is, "Hi, gents. You have made a number of hires in the super trustee office during FY '19. Relative to the pipeline, are you happy with the scale of the cost base?"

Look, I think the answer to that is yes. One of the reasons why you have to do an investment ahead of the curve is that a lot of the work in bringing on appointments is in due diligence that you need to do on the fund that you're taking responsibility for and also providing the outgoing retiring trustee doing due diligence on ourselves as to whether we're capable of taking the fund on. So the investment we've made in that area has basically been to do a lot of that work ahead of actually taking on appointments.

The next question is regarding employees in Corporate Trustee Services. Are you happy with the current scale to chase some of the larger-scale opportunities as per Slide 37?

Look, yes, that's a good question. Traditionally, if you look at our Corporate Trustee Services business, it has been built up with funds managers starting funds with us, and then we've grown with them over time. They brought new funds on. They've got funds flowing into their funds that they've set up. But what we're seeing now is funds managers who may have already a responsible entity within their business wanting to change their structure into outsource, and that's a different appointment that you take on in those situations because you already have a significant number of funds potentially and scale of FUM in those funds. And you're taking on constitutions, disclosure documents, arrangements with providers that you didn't set up in the first place. So you need to get across that. But I think we've got the resource to do that as those opportunities come up.

The next question is of the fund manager failures in FY '19, can you give a feel for the mix of established versus start-up in mature funds, i.e., those on minimum fees.

I don't have exactly that detail at my fingertips right now. But look...

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Philip Dean Gentry, EQT Holdings Limited - CFO & COO [6]

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(inaudible) Look, I think the answer to that question, maybe the majority of those that failed would have been more in the small start-up category. But there was obviously a minority that were more material in size and scope that also chose to exit the market effectively.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [7]

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Thank you, Philip. Philip, I'll let you take the next question.

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Philip Dean Gentry, EQT Holdings Limited - CFO & COO [8]

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Sure. The question is the paydown of debt was strong in FY '19. What's the view for debt into FY '20?

It's a good question. Look, there isn't a predetermined view at this stage. It will just -- it will be a function of the opportunities that present themselves and how the year unfolds. I think the key point is that we've got plenty of flexibility. I don't particularly see any change in the cash generation ability of the business either. So there's scope to reduce debt if the cash allows, and there's also scope to take advantage of opportunities should they present themselves.

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Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [9]

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Thanks, Philip. I think we may have got to the end of the questions. And we're on the 45-minute mark, which is probably a nice time to stop. Philip and I will be on the road over the course of next week talking to shareholders and others interested in the company. We look forward to doing that. We appreciate everyone's support, and enjoy the rest of your day. Thank you very, very much.

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Operator [10]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.