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Edited Transcript of EQT.AX earnings conference call or presentation 17-Feb-21 10:30pm GMT

·28 min read

Half Year 2021 EQT Holdings Ltd Earnings Call Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of EQT Holdings Ltd earnings conference call or presentation Wednesday, February 17, 2021 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael Joseph O’Brien EQT Holdings Limited - MD & Director * Philip Dean Gentry EQT Holdings Limited - CFO & COO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Equity Trustees Half Year Results Conference Call. (Operator Instructions) There will be a presentation followed by a question-and-answer session. (Operator Instructions) I would like to now hand the conference over to Mr. Mick O'Brien, Managing Director. Please go ahead. -------------------------------------------------------------------------------- Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [2] -------------------------------------------------------------------------------- And good morning, everyone, and welcome to this presentation of EQT Holdings Limited Half Year Results to (technical difficulty) December 2020. I'm the Managing Director of EQT Holdings Limited, and I'm joined here with Phil Gentry, our Chief Financial Officer and Chief Operating Officer. This is the agenda that we're going to walk through today, and I'm going to give you an overview of the results. And then Philip will take you through the financials, and then I'll come back and talk about our strategy update and an outlook. Yes, so -- and we'll take questions at the end of the presentation. So let me first give you an overview for the first half of 2021. So as this slide says, strong funds growth continues. Let me take you through the salient points of these results. The most noticeable aspect is the strong growth in funds that we have under management, administration and supervision. They are up 27% on the previous half to $128 billion. This is a really strong underpinning of future revenue. Our results are always impacted by equity market levels and particularly, Australian equity market levels. And of course, through all of this half, the Australian equity market remained below the pre-pandemic levels for the whole of the period. There's no question, the industry fundamentals in Australian financial services are very favorable to our business model. So a big focus on independence and management of conflicts and specialization in the value chain has been a benefit to the company. And given the growth of the business, we've continued to invest in expertise in our people so that we can capitalize on the opportunities that the industry is giving us. So it's been a difficult year, a difficult period in some respects for all companies. But I feel, through this period, that Equity Trustees has been continuing to fill its key purpose of trust, which is caring for people and ensuring their wealth is well managed and enriching the broader community. So let me just walk you through some of the highlights of the performance. I'm really pleased with these results given the difficulty of the 6-month period, with all of our people locked down, and also just in volatility of the equity markets. Our revenue was up 3.7% on the previous half, and that was down 1.3% on the first half of 2020, where equity markets were at elevated levels. The statutory net profit after tax was $9.8 million, up 27% on the previous half and down 14.5% on the first half of '20. If you look at the underlying net profit after tax, and this is important, it was $10.7 million. That's adjusted for a one-off cost of $1.7 million that we expended on M&A project costs and a $0.8 million tax provision recovery that we made effectively (technical difficulty) to the market last year and making a provision for a long-staying tax manner. That's -- underlying net profit after tax was up 8.7% on the previous half and only down 6.5% on the first half of 2020. Now the Board have decided to pay a fully franked interim dividend of $0.44. That's an increase of $0.01 on the last half's dividend. Statutory earnings per share were 47.2%, up a similar level to the net profit after tax. The underlying earnings per share was $0.512, up 7.8% on the previous half and down 7.6% on the first half of 2020. And the balance sheet remains in a really strong position, with low gearing and strong liquidity in the business. Now this slide shows the growth in funds under management, administration and supervision, one of the key drivers of our revenue, and you can see there's 27% growth to $128 billion that we are now supervising on behalf of investors and beneficiaries and clients. Over the course of the last 18 months, these funds have grown by over 50%, so some $43 billion, and that is effectively organic new business growth because there hasn't been much market movement through that period. The most notable appointments that have added to that is the appointment to -- as a Superannuation Trustee to the AMP Life Superannuation business, which is now part of the Resolution group that came in from July 1, 2020 and also taking on the appointment of the HUB24 Superannuation Fund, and that appointment took effect from the 1st of August 2020. And we're seeing good momentum in our corporate trust area of the business. If I may now turn to some of the key slides in relation to the revenue and the net profit after tax and earnings and so on. You can see in the total revenue there in the second half of '20, there's obviously a fall as the equity markets fell, I think, something like 35% through that period. But we made a really strong rebound, basically on the back of that FUM growth that I mentioned before as well as just some of the equity market movement in the second half of the calendar year. Net profit after tax, as I mentioned before, showing really, really solid growth in the previous half, but obviously down on where we were in the first half of '20. Now the dividends, you can see there, that $0.44 has been declared, a $0.01 increase on $0.43. If I go back to the previous 2 years, in 2009 -- the FY '19 year, it was a total of $0.90. In the FY '20 year, it was a total of $0.90 despite the market downfalls at the end of that year. And now the Board have chosen $0.44, reflecting the outlook for the business and some of the growth that we've seen in the last 6 months. And then in the bottom right-hand box, you can see earnings per share, which is effectively in line fairly much with net profit after tax. If we move on to the next slide, I just want to touch on this for a minute. The company is delivering for all of its stakeholders. It's -- we're very conscious of our obligations to our clients, to beneficiaries, to our employees, to the community and of course, to shareholders. I think this framework of focusing on all of our stakeholders has held the company in great stead over the last couple of years and has helped us navigate the last number of years, where there's been enormous focus in the financial services industry regarding corporate behavior. And I think it's been critical for us to be focused on all of the stakeholders. So let me just quickly walk through each of these. And I'll start with T1 because client satisfaction is really the most important thing for this company to deliver. It's continued to be a strong focus. You can see great results when we did the last survey. We're about to go out and talk to our clients again. It's been an incredible period over the 6 months, in not being able to physically go and see any of our clients, but we put an enormous (technical difficulty) communication and ensuring that their interests through the equity market downturn were absolutely protected and were treated equitably. So we hope to get a great result when we go to survey again, but this will remain an absolute key focus for the company in terms of focusing on client satisfaction. If I move up onto employee engagement. It's been quite a journey over the last 4 years, and it was originally our focus of this leadership team to ensure that we had the best people because, effectively, this is a people business that we're running. And the culture and the values of the organization are essential for our clients to maintain trust. You can see we're at the industry level on employee engagement. I must say, we took these results in June, so it's at the height of the Melbourne lockdown. And of course, the industry results don't reflect that, and we're above the industry level on the enablement. So our focus here is on training, employee benefits, just the appropriate level of resourcing in the areas of the business that have peaks and troughs in their workload and the work structure and processes that we have. Moving on to the next slide. Obviously, growing shareholder value is essential. I think what you see here is a very resilient earnings pattern through the challenges of COVID and of course, a reliable dividend stream coming out of those earnings. So our earnings really are able to be generating -- generate through cash earnings, and that gives us the ability to pay these dividends in a consistent, reliable manner. Now I'll move on finally to the community impact. You can see there, on the left-hand side, the amount of philanthropic granting that we give to charities and other for-purpose organizations through the course of the year. And you can see the nice increase that's been occurring as we've been growing that business, particularly the underlying part of it there that's coming from our trust in the blue bar. We pivoted our philanthropy efforts through the course of the year because there was incredible need in the community. And we were able to execute really quickly, focus that granting on the most immediate areas of need in the community through the bushfire issue -- problems that Australia had and then through the COVID problems that occurred not that far after. I'm really proud of the work the company has done in establishing 2 dedicated trusts to help people recover from the bushfires, one for rebuilding the communities and one for the families of fallen volunteers. The company, with the assistance of the Business Council of Australia, raised over $10 million into those 2 trusts. And most of the money allocated to community rebuilding has been delivered to the community or at least allocated and ready to deliver benefits to the community. And we put in more than 1,200 hours of pro bono work to establish those trusts and manage them. So I'm going to stop there. I'm going to hand over to Philip to take you through the financial results. -------------------------------------------------------------------------------- Philip Dean Gentry, EQT Holdings Limited - CFO & COO [3] -------------------------------------------------------------------------------- Thank you, Mick, and good morning, everyone. So firstly, let me start with a summary of the profit and loss statement. On this particular slide, you can see that total revenue at $48.3 million is pretty solid half-on-half revenue growth, reflecting the improvement in markets and also some good organic growth. And I'll talk more about that shortly. There is a couple of significant items that Mick has alluded to and I would like to just explain in terms of the profit and loss statement. Expenses on the face value are up, it's about 8.5%. But when one excludes the $1.7 million of M&A project expenses that didn't complete, then profit -- then the expenses are actually quite contained. And likewise, the net profit before tax, half-on-half, down 7.3%, but adding back the $1.7 million, essentially up 5% half-on-half. You can see the statutory net profit after tax there of $9.8 million and then below that, the underlying net profit after tax. And this adjusts for those 2 items, the $1.7 million of M&A project expenses as well as the $0.85 million write-back of a tax provision following settlement of the tax matter that we've talked about previously in our early results. We're very pleased to have that put behind us and to have reached an agreed settlement position with the ATO. So in summary, there's an increase in NPAT, EPS and dividend half-on-half, though down on the pcp principally due to the market impacts. Let me give you a little more color and insight around revenue now. On the next slide, you can see that the headline revenue growth half-on-half of 3.7% is actually quite a bit stronger when one takes out some of the other one-offs that have affected revenue. On the left-hand side of this chart, you can see the impact on interest rates on our cash funds. So quite a significant impact as interest rates came down and returns on our cash funds obviously reduced. We also have one large estate that completed during the half, and that had a pretty significant impact on earnings. And there were a small number of significant mandate exits in CTS. On the plus side, you can see the equity market impact across both the MSCI and the ASX 200, is on balance has been of assistance, but there's some pretty strong organic growth as well, particularly driven by TWS Superannuation. And how does this translate into cash flow? On the next slide here, you can see again pretty consistent high-quality cash generation. There are some increases in ORFR borrowings. These are operational risk financial requirement facilities and then matched by cash on the other side of the balance sheet. And I'll talk more about those shortly. The cash generated has principally been used for tax payments, dividends. And you can see a repayment of our corporate debt facility of $4 million during the year. Now looking at each of the business units in a little more detail. Firstly, the TWS business. This slide, you can see that headline revenue is up 5% (technical difficulty) again principally driven by good organic (technical difficulty) FUMAS, again largely due to Superannuation, the increase has been quite dramatic driven by HUB24 and the AMP deals that we've mentioned (technical difficulty) Looking more closely at the private client business (technical difficulty) Here, the impact of that (technical difficulty) of this management performance from our investment management business have adverse markets -- have impacted performance relative to the (technical difficulty) of the TWS private client business. On the right-hand side here, you can see compensation trust, in particular, growing quite strongly. Now let's turn to Superannuation and look a bit more closely at that business. On this side, you can see the impact here of the AMP Life and HUB24 appointments in this first half FY '21 and now managing over 700,000 members in this business... (technical difficulty) -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Pardon me, this is the operator. We have temporarily lost connection with the speaker. The conference will continue shortly. -------------------------------------------------------------------------------- Philip Dean Gentry, EQT Holdings Limited - CFO & COO [5] -------------------------------------------------------------------------------- Apologies, everyone. We're not quite sure what happened there, but we'll resume the call. So we're up to slide -- I think we've just completed Slide 19 regarding the Superannuation business, and I'll now touch on the CTS business. On this slide, you can see that the CTS had 3 large mandate exits, about $3.1 million, so relatively material. But offsetting this is a very strong pipeline, one of the strongest we've seen for some time. There's 30 to 40 new funds in various stages of establishment, which we expect to occur in the next 6 to 9 months. You can see also there a number of the clients we've put on in the last half. And on the right-hand side, you can see global equities continues to dominate the funds under supervision and the importance of the MSCI performance in this business. Let's now turn to the U.K. and Ireland. Here, you can see momentum also continuing, the number of clients and funds continuing to be healthy. Total FUMAS is actually down slightly due to one of the clients losing a couple of mandates. The pipeline remains strong, and we expect further progress in the period ahead. Having said that, the lockdown on both Ireland and the U.K. is causing some delays in the establishment of funds. They're taking a bit longer than they would otherwise as you might expect. But otherwise, the activity remains in good shape. Let's now turn to the Corporate Trust and Securitisation division. Here, you can see this business also continues to have positive momentum, continuing to grow the debt capital markets and loan markets client base. And we're investing in people and technology to support the growth in this business. Let's now turn to the balance sheet. On this slide, you can see the balance sheet remains quite strong. You can see also we have split out both the asset -- on the asset and liability side of the balance sheet, the ORFR facilities, and the cash represented by these, they effectively equate. And these are loans that we've put in place to help facilitate our Superannuation activities. The interest cost is effectively neutral to EQT and they're limited recourse in nature. We have plenty of surplus borrowing capacity and the flexibility to take advantage of future opportunities as and when they might arise. More broadly, from a capital standpoint, we have now realized $2 million or $3 million of capital from the transfer of OneVue RE clients to Equity Trustees, and the further $5 million of capital is expected to be realized in the half we're now in. Our dividend policy payout ratio remains at 70% to 90% of reported NPAT, and we've got plenty of capital to fund our organic growth in the periods ahead. In summary, we've had strong FUMAS growth in the challenging environment, solid half-on-half revenue growth, underlying EPS and NPAT marginally down on pcp, reflecting diverse markets, but materially improved half-on-half. Continuing to invest to create a foundation for more sustainable growth, the balance sheet is strong and has the capacity to support our growth plans. Let me now hand back to Mick O'Brien to update you on the strategy and outlook. -------------------------------------------------------------------------------- Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [6] -------------------------------------------------------------------------------- Thank you, Phil. So a quick update on the strategy and outlook. The purpose of this company is to safeguard people's wealth and support the broader community. So that hasn't changed. It's a really clear purpose. So as Australia's leading fiduciary, we care and improve people's lives by effectively looking after their interest as beneficiaries of trusts, as members of superannuation schemes or as investors of our managed investment schemes. So in total, we're looking after close on $130 billion. That's a lot of the Australian financial services market, and you can see that we manage over 3,000 private estates and trusts and as is mentioned before, authorized grants and distributions of over $90 million to charitable causes through the course of the last year. Now trust is in high demand. The financial services industry has gone through a difficult time over the last couple of years with the Royal Commission, quite a lot of action and enforcement action by regulators and class actions by investors. Thankfully, Equity Trustees has not been involved in any of that. Now part of that is our focus as a fiduciary, it's the people in the business and it's our governance practices. The industry -- these industry trends have provided a great opportunity for Equity Trustees. Our expertise can't be replicated overnight. The key parts of this business, our people, the brand and reputation are difficult to replicate. People can replicate balance sheets and possibly licenses, but it really is an investment that we make in our people as well as our technology that's enabled us to grow the business as we have. I should say we had made early investment in key parts of the business. We couldn't have achieved the growth that you see in those funds without having done that. And we're continuing to invest in technology, focused on improving productivity, the service delivery and just the general quality of our technology. If I move on to risk management. You can see on the left-hand side there, we survey all of our employees around risk management, our risk culture. It is so important to this business. You can see we've had an increase in the proportion of positive responses around all of the questions we asked about risk, from 81% to 83%. Both of those numbers are good. It's good to see it going in the right direction. And this is at a time when all of our people for this period were working remotely, and we lost no -- really had no interruption in service and operations through that period. The other thing I'll just comment on here is our relationship with the regulators. We obviously take a very proactive approach to the relationship with all the regulators, but particularly our 2 main ones being APRA and ASIC, and that's an important part of our whole governance approach. Now we continue the investing in governance and capability, and I just want to call out the appointment of our new Chair, Carol Schwartz AO, who was appointed to the Chair for Jeff Kennett's retirement at the AGM. And I can say that Carol has really hit the ground running and has a great passion and excitement for the business. So really looking forward to her continued chairmanship of the company -- chairing of the company. We've continued to invest in people, and I mentioned that before and Philip mentioned it. It's been primarily in the Superannuation Trustee Office, also in the Corporate Trust part of the business, and that's particularly in our Sydney team, where that business is -- that part of the business is growing quickly, particularly in the loan and debt and securitization areas, but as well as the real asset side of the business. We've been able to facilitate a safe return to the office for our staff, although still obviously working on a 50-50 basis in many of the locations, although in the U.K. and Ireland, we are working completely remotely, but we have managed to maintain our service levels through that period. And importantly, we are responding to the regulatory developments. There is an enormous regulatory agenda that is being worked through at the moment. I will just mention 3, being the design and distribution obligations, which impacts most of our business; the member outcome assessment tests that are going on at the moment; and also annual member meetings will be coming up for Superannuation members next month. And we're well placed in all those major regulatory developments to deliver what we need to do. I'll just touch on technology. It continues to be a focus given the growth, particularly in the Superannuation business, but then also Corporate Trustee Services. So we're investing in new client portals to enable clients to self-serve and our service providers also to be -- operate with us in a seamless fashion. Big investment in cybersecurity. Obviously, that's right across the industry. And I can say that we are putting the appropriate level of investment to protect our digital assets. If I move on to just talk about the future for TWS private clients, the focus there really is on improved client engagement, cross-selling across the life cycle. This is a very long-term business, so going through estate planning, to managing people's estates and then managing trusts on a long-term basis. We launched our third annual giving review to the philanthropic sector around Christmas. That's had great reaction from that whole sector, and it really highlights the work that we do in that area. We will be increasingly segmenting our client base in our -- as we go forward. I think, as you can imagine in our business, it's 130 years old and we have trusts that are that old, that it was important to segment the service that we're providing throughout the whole of the business. And we're reengineering processes. The focus is on payments, particularly also trading within funds and trusts and also client setup. If I move on to Superannuation. Well, really, the message there, we continue to do more of the same. We've got the leading position in providing independent trustee services to superannuation funds. The business has grown to a significant scale, almost $30 billion there on the back of the last 2 appointments. We've managed to secure great people to the Board of that subsidiary as well as into our management team. We're now looking after more than 700,000 members within the superannuation funds, and we feel we're very well-positioned to continue offering those services to the superannuation market. Empowering indigenous communities. We look after about 10 indigenous trusts for different communities around Australia. We have expanded now to 4 states and territories with the appointment of 2 smaller trusts in the Northern Territory and in Queensland, so that's really positive. Most of this business is over in Western Australia. We established a second round of our reconciliation plan, being to innovate our reconciliation plan, that's been endorsed by Reconciliation Australia. And it does guide our work in this area, and we've continued to direct philanthropic funds to a wide variety of areas in this area where there is so much need. If I move on to the Corporate Trustee Services focus, and we lead the market in providing Responsible Entity services to funds managers. There's been a number of (technical difficulty) through the course of the last 6 months, but we have a strong pipeline of funds that we're working on at the moment, particularly it was previously a listed investment trust, but we have quite a number of clients establishing dual registry trust, where they have unlisted and listed options for investors. That will continue to be a trend. We're building solutions for superannuation funds, underlying building block trusts for superannuation funds. So the Responsible Entity service part of Corporate Trustee Services is continuing to grow. And a lot of focus is going into the structured finance offerings, so particularly in the debt offer area, where we've had a number of large note issues that have come to market and one in the market at the moment. And I think the results there are really encouraging. We're building momentum as a serious player in that market. And Philip mentioned how the U.K. and Irish business is building. Sure, they have been held a little back by Brexit, which is now settling, and also COVID and working completely remotely. Hopefully, with the vaccine and other management of the pandemic, that those markets can return to normal, but we feel we're in a strong position there. So finally, it's a positive outlook. We see ongoing growth in funds (technical difficulty) resilient (technical difficulty) industry are a positive to us. Obviously, results are still subject to equity market volatility as they -- and will always be. We continue to invest in technology, and we see a positive outlook for FY '21. And we're happy to take questions, and we might jump straight in... (technical difficulty) -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Pardon me, this is the operator. We have temporarily lost connection with the speaker. Please continue to hold. -------------------------------------------------------------------------------- Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [8] -------------------------------------------------------------------------------- Good morning. Apologies again. We've run about a dozen of these seminars over the last 5 years and never had the lines drop out, but we've had it drop twice this morning, so apologies for that. Philip was about to answer a question around the balance sheet and the ORFR adjustments in that balance sheet. Go on. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Philip Dean Gentry, EQT Holdings Limited - CFO & COO [1] -------------------------------------------------------------------------------- Sure. Thanks, Mick. So just to provide the context for this question. In relation to ORFR, APRA requires all super funds to have about 25 basis points of ORFR either in the fund or on the balance sheet of the trustee. And in our case, for some of our funds, the ORFR is linked to us by the organization promoted behind the super fund. And we capitalize the trustee with those funds, and it's held as cash on our super trustee's balance sheet. So in effect, on our balance sheet, you will see there our borrowings of ORFR facilities of $23.3 million. And on the other side of the balance sheet, you'll see our ORFR cash of $23.3 million. The net interest cost to EQT is neutral, and they're also limited recourse and obviously fully backed by cash. So from a pure gearing standpoint and a corporate flexibility standpoint, they can effectively be adjusted for -- or stripped out, if you like. -------------------------------------------------------------------------------- Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [2] -------------------------------------------------------------------------------- Thank you, Philip. The next question is are government-mandated lockdowns in Victoria and other locations worldwide having any discernible effect on the company's operations and contact with clients? Well, they have had an effect, obviously, because we've been working remotely through all of 2020, the calendar year. And our U.K. and Irish colleagues continue to work in that fashion. Having said that, I think we've been able to maintain client service standards. We have adjusted some of our risk controls as a result and feel that we're in a comfortable position. It is very nice to be returning to some sort of normality, and we would love to be seeing our clients in -- face to face when we can (technical difficulty) I think has also come with a market downturn that happened through March and April of last calendar year, and markets in Australian equities aren't recovered to those levels yet. So that will continue to impact results. But we feel very comfortable of our ability to manage in the remote configuration, but looking forward to some return to normality. The next question is could you talk about expense line in the second half of '21? Has the business added staff to support the AMP, HUB books that have come in? What's the outlook for costs and hiring? Phil, do you want to comment there? -------------------------------------------------------------------------------- Philip Dean Gentry, EQT Holdings Limited - CFO & COO [3] -------------------------------------------------------------------------------- Sure. Yes, look, there have been a modest number of staff added to support the AMP and HUB24. They're both large clients. Having said that, they have both been implemented smoothly and then both operating in line with expectation. So they're in pretty good shape. In terms of the expense line, other than that, it's relatively contained once you back out those $1.7 million of M&A costs. And looking forward, we saw the recent pipeline of activity there, some of that may require further investment. We'll have to see how that goes. -------------------------------------------------------------------------------- Michael Joseph O’Brien, EQT Holdings Limited - MD & Director [4] -------------------------------------------------------------------------------- The next question is could you talk (technical difficulty) into the second half of '21? Has it been impacted by the pandemic? And could you talk where the opportunities for growth lies? The pipeline line remains really solid. It's particularly so in our Corporate Trustee Services area and providing Responsible Entity services for fund managers. The funds management industry is very dynamic. New managers are entering the Australian market from offshore and others being established here and looking at different types of investment strategy. So that sort of innovation in the market is positive for us because almost the norm now for a new manager starting is to use an independent Responsible Entity like ourselves. We still see good opportunities in the Superannuation area. There is a lot of corporate activity continuing in that area. And when new owners take ownership of Superannuation businesses, they do question the models that they utilize, and our model is always one that's considered. So I think it's in those couple of areas. And I'll just also just add in the Corporate Trust side, in looking after trust arrangements for real assets and also for loans and debt arrangements, we continue to build the business there and feel we're seeing a lot of opportunities. I think that brings to an end all of the questions. Apologies, again, for the line dropping out twice. As I said, we've run this a dozen times or so, not any issues, but hopefully, we've got through that all. But obviously, we hope we'll be getting around to see many investors through the course of the next week and very much look forward to doing that. So thank you for your attendance this morning. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect. -------------------------------------------------------------------------------- Philip Dean Gentry, EQT Holdings Limited - CFO & COO [6] -------------------------------------------------------------------------------- Thank you.