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Edited Transcript of KPG.AX earnings conference call or presentation 11-Feb-21 11:00pm GMT

·53 min read

Half Year 2021 Kelly Partners Group Holdings Ltd Earnings Call NORTH SYDNEY Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of Kelly Partners Group Holdings Ltd earnings conference call or presentation Thursday, February 11, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brett Kelly Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO * Kenneth Ko ================================================================================ Conference Call Participants ================================================================================ * Brendan Harrington Harrington Partners Investment Management - Co-Founder * Scott Murdoch Morgans Financial Limited, Research Division - Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, and welcome to the First Half of 2021 Financial Results Conference Call for Kelly Partners Group Holdings. We will open for questions after the presentation. I'd like to introduce your host as Kenneth Ko, CFO of Kelly Partners; and Brett Kelly, CEO and Chairman of Kelly Partners. Brett, please go ahead now. Thank you. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [2] -------------------------------------------------------------------------------- Thanks, Erica, and good morning. We're pleased to present the first half '21 results. Hopefully, people on the call have been able to see the announcement and the presentation. I plan to speak briefly about the results pack and then take some questions. I'll do the first section, and then hand over to Ken for the second section. In the last 6 months, we published our Kelly Partners Group Holdings Owners' Principles, and we think that they are very helpful for anyone who yearns or wants to be a shareholder of the group. We aim over time to build a group of shareholders who understand the business intimately and share our values and long-term aspirations to build a meaningful organization. To very quickly run through those, our attitude is very much a partnership in everything we do, partnership with the operating partners in the underlying businesses; partnership with our people, our clients and communities that we operate in and our shareholders. We've been doing that for 15 years in June, and we just think that, that is the sort of attribute that most defines what we're on about. Number two, we invented, in 2006, a Partner-Owner-Driver model that we've rolled out in over 39 transactions now in all of our operating business on consistent documentation. And those operating Partner-Owner-Drivers do have the majority of their net worth invested in the business as do I, and we believe that creates really unusual alignment in a business that research demonstrates is likely to, over the long term, provide meaningful above metric returns to our partner shareholders. Number three, our long-term goal is to maximize the intrinsic value on a per share basis of our KPG shares. Number four, our intention is to grow by continuing to acquire accounting firms using our proprietary Partner-Owner-Driver model. In particular, you shouldn't expect any radical, often touted transformational acquisitions outside the accounting space. We intend to continue to refine our ability to acquire accounting firms and bring them into the group and make them even better at what they do, which we've got quite good at. Number five, we'll make decisions to maximize intrinsic value of our KPG shares, even when those decisions might result in unfavorable accounting treatments under accounting standards. Number six, we use debt prudently and structure our loans to be aggressively repaid. Seven, we measure our performance using earnings per share growth in our new earnings. Eight, we intend to sell them if we ever issue shares to acquire a business. I think this is very important. I get even from long-term shareholders consistently asked, would we issue shares to acquire a business? I don't intend to dilute you or me as a shareholder in issuing shares to make acquisitions. When we are buying accounting firms, typically the vendor is able to access the small business concessions so that they get their proceeds tax-free. And so if they do want to buy KPG shares as a listed company, they can turn around and use some of their proceeds to do that. In particular, we're not a roll-up. We are a Partner-Owner-Driver business. Number nine, it's not our intention to sell a business that we've acquired. We intend to own our businesses forever, is our typical holding period that I would expect. And number ten, we'll be completely transparent in our reporting to shareholders, treating you as genuine partners in our business, and we'll be fairly direct in our language. I think most people know me quite well now know that, that's the case. The reason I run through those is the more understanding, we think people who are shareholders have in our business, the more likely they are to be better able to accurately value the strong and growing cash flows of our business and to better understanding the defensive mode that we've been building for 15 years in June. Number three -- Slide #3, our growth and performance. Our business wasn't put together 5 minutes before an IPO. It's been consistently built with a consistent operating model for some time now with a 32% revenue CAGR, which is far in excess of the industry. And importantly, we've managed to double the business consistently. And that's because we have a consistent operating model. So quickly, to the summary on Page 5. And 96% of our revenues are accounting annuity-style revenues, as is our wealth and finance businesses, which means that this is a 99% annuity-style business. I think that pre-IPO, I was asked and did comment to people that I did feel that accounting firms were recession-proof. I do think that the results that we're presenting today demonstrate that this type of business is pandemic-proof. When our shares went to $0.60 in March last year, I did comment to a number of people that I thought a few things might change, but the desire of the government to continue to collect money probably wouldn't go away. And so we have found that even amidst all of the handouts that the government might undertake there has not, at any time, been any suggestion that they would stop collecting taxes. And so we feel that this is a business focused in an area that's likely to be able to do quite well for a long time. On Slide 6, I've often had the comment from investors, because we are a small, not particularly relevant company in a market sense, that they needed our story in 10 seconds. So if you don't have any time to look at anything other than Slide 6 today, essentially, Kelly Partners is a resilient business model delivering solid fundamentals with growing revenues, very strong EBITDA, industry-leading EBITDA margins, strong underlying NPATA growth that we expect to continue, high return on equity, low debt and falling, increasing operating cash flows and a real ability to convert cash very, very efficiently. And now the COVID response, which we've covered in other calls. Essentially, we've tidied up our team, got our costs very strongly under control, increased the liquidity in the business. And because of our focus since our inception in 2006 on annuity-style revenues, we're very much protected from the sort of strangeness and variations that you get in typical consulting-style revenues that we don't have any of, and we don't intend to have any of. On Page 8, the KPG strategy is summarized, and there's some results against those numbers. But fundamentally, we're trying to improve the earning power of our operating businesses. And you can see growing EBITDA margins. We expect that, that can continue. Our target in the coming years is 37.5%. Number two, further increasing our earnings through tuck-ins. Tuck-ins are low-risk situations for us where we have an existing business, existing management team, and we can take a business and integrate it with our business to grow their businesses, earnings and sustainability. And we see really no limit to how many of those we can do. The market that we're focused on, there's over 10,000 SME accounting firms. 50% of those firms are reported to need a succession plan in the next 5 years. And that means that the pool that we're looking at is thousands and thousands of firms in any given market. There's many, many, many firms that are available for looking at. In our history, we've done deals in typically 3 out of 100 businesses, but we've looked at 39 deals across more than 1,000 businesses we've looked at. We do know the industry very well, and so we're particularly careful. 3a and b, grow our accounting subsidiaries; b, greater complementary businesses. We think the complementary businesses have really outsize potential over the next decade, and we're doing that organically in the main to continue to help our clients in areas that have asked us for assistance. And then four, repurchase shares from time to time. We do consider the stock not overvalued, not close to intrinsic value. And wherever we see that opportunity, we'll continue to buy back shares. But we will do that within the limited capital that we have, and we won't do anything that stops us being able to deliver on our stated growth objectives. And number five, we'll make an occasional large acquisition. That's an acquisition with more than $5 million of revenue in the accounting space. But to emphasize, we're definitely not pursuing the strategy of finding something transformational. We think that if we can grow at the sort of rates we have in our history for a long time that, that will be transformational enough. Our business model, clear mission and values, unyielding focus on the SME market in Sydney and Melbourne; Partner-Owner-Driver model that we invented and have really refined over numerous transactions across multiple sites, CBD and regional; a clear proprietary client system that is incredibly unique and means that we can bring clients to the business continually a clear brand across every office and a growing brand presence. I'm often asked, Brett, why must you use your brand on a given accounting firm that joins your group? The strongest reason is that the talent is the battle that we're trying to win, battle for the best talent in the market. And the talent wants to work with a brand that's known and respected. And that's the brand that we have been building. It means that our retention rate of our people is very, very high and our ability to recruit the best people in the market is also extremely high. And when we find firms that are out there under their own brand, single sites, their biggest struggle is finding the best people to be and to remain competitive. And number seven, growing the network in locations that we've identified continually for some years now. We have a unique acquisition capability that's been refined over many transactions and a clear service offering. Page 10, we have shared in the last 6 months. It's worth some reading. If people have questions, please be in touch. Just don't call us a roll-up. This was not a roll-up, never has been. A roll-up is where you buy 100% of an underlying business. This is an Owner-Driver -- Partner-Owner-Driver shared equity model that we invented and refining and perfecting over time. It is unique in our industry and has been pursued to great effect by Austbrokers in the insurance broker market and steadfast. It's very simple from day 1. We just aim to be the Austbrokers of the accounting industry. Page 11. This is a published 5-year plan, which we think we're on track to deliver basically to double revenues to $80 million by FY '24 and to substantially grow the NPATA. We're well more than halfway there, and we think we've got good momentum to deliver that. In the period, we tucked in another small firm to Oran Park. Oran Park's a very strongly growing part of Southwestern Sydney, with very much above-trend growth that we are enjoying in that area. And we've added Pittwater, which is north of Sydney, the type of location that we see more and more people working from for more time post-COVID. We do think that our network of firms outside the CBD is 15 years ahead of the market in the sense that people are going to work less from the CBD, less from big offices, closer to the home and prefer to. And we're incredibly well positioned with CBD quality fit-out technology and client bases in each of our offices outside CBD. Thirteen, we've added these new services. So the Kelly Partners investment office was founded in July 2018. In 2020, we've added a new [Cara ex] Ellerston Capital. I met Anoop when they invested in Kelly Partners, and Ellerston remained our largest shareholder. He's a great guy with 25 years investment experience. We intend to build a significant business in funds management over time. We're currently closing our second fund. We expect that, that fund will have between $15 million and $20 million in, I think, a 1.65% management fee and 20% of the performance fee close to 7 years. We think that will be a tremendous achievement for a firm that hasn't typically previously operated in a material respect in the funds management market. And we do believe that the confidence shown by our clients and network in this initiative bodes well for our ability over a decade to build a significant business in that space and deliver substantial value to shareholders. We also attracted Paul Butler, who's 52, more than 30 years in general insurance with some of the world's leading insurers. We've entered a 50-50 partnership with Austbrokers who have 700,000 SME clients. We expect to build a significant insurance business and to be able to build significant revenue growth through access to the clients of Austbrokers on a unique arrangement that we've structured with them. And then we've brought Mark Sherwood, who was the Global Head of very awesome title of Westpac Private Bank. He's now our Head of Alternative Investments. And what we're doing is intending to aggregate our almost 3,000 clients that qualify as wholesale investors on to a digital platform to be able to offer them the unique opportunities that we see through our network, so that we make those clients even more aware of the unique value that we can bring to them and build a substantial business typically focused on alternative sources of income for our clients. Page 14, we're very proud to be the only listed accounting firm and the only top 100 accounting firm in Australia to be B Corp certified. We believe that tomorrow's consumer or tomorrow's client is more focused on the conduct of organizations, and we are very pleased that values and behaviors of our organization, it's easily met the criteria for B Corp certification, which is not an easy thing to do. We also are pursuing a net zero carbon position just because we can, and we don't think it's a bad thing for a business like us to do. I'd like now to hand over to Kenneth Ko, who is our CFO. Now Ken has been with us for more than 5 years. He's a wonderful guy, and it was very pleasing to be able to step him up as an internally trained-up and generated CFO for the group. Now I know Kenny is a little nervous to talk about these slides. So I'm going to sit back now, put my feet up and enjoy your first presentation, Kenny. -------------------------------------------------------------------------------- Kenneth Ko, [3] -------------------------------------------------------------------------------- Thank you, Brett, for the introduction, and hello to fellow shareholders and investors. I will now go through the financial section of the presentation, Section 2, starting on Slide 16 on the highlights -- financial highlights of the business. I'm just going to talk about the key numbers here. Revenue is up 5.8% from $23.5 million to $24.8 million for the half. This is mainly driven by acquisition growth from the 2 acquisitions we completed in FY '20 being Melbourne and Glenbrook. Our EBITDA is up 19.3% from $6.9 million to $8.3 million. And that is a combination of our revenue growth as well as our reduced operating expenses at both the operating business level and the parent entity level. Our group EBITDA margin is now 33.3%, up 12.7% from 29.6% from the prior year. This really shows the efficiencies we've achieved during the half year. Our operating businesses, as we went through in the previous slides, we're achieving 36.6% EBITDA margin, which is exceptional compared to industry average margins of 19%. And we will look at that in a later slide that we talk about there. In terms of underlying NPATA, which is one of the most important numbers that we measure ourselves against, our underlying NPATA grew 55% from $1.8 million to $2.8 million and our earnings per share from $0.0401 per share to $0.0624 per share, demonstrating huge improvements we've made on bottom line. Cash from operations grew 33.9%, and we're converting our cash at 92.9%. Again, this shows how strongly our cash-generating abilities are in our businesses and our ability to pay market dividends, which we started to do last month. And also, just want to highlight the ordinary dividends per share. Again, we've increased that 10%, and we've done so, as we said we'd do, since the IPO to grow that 10% per annum. And finally, just want to highlight in the table, the return on equity and return on investment -- invested capital measures of 44.5% and 28% -- 28.1%. You can see both measures are strong, and it just shows the return we're able to generate on our equity and invested capital being debt and equity. On to Slide 17. This is a summary of our income statement. We've covered a lot of these just now in the last slide, and it just shows the strength in our P&L. We said in our 5-year plan that this year is to accelerate through growing our NPATA, and this is exactly what we've done. You can see statutory NPAT for the group grown -- has grown 59.2%. Statutory NPAT for the parent [at least] has grown 127%. And obviously, most importantly, as I said before, the underlying NPATA to shareholders would have grown 55% to $2.8 million. I just want to highlight here that you see that the statutory NPAT numbers are higher than the underlying NPATA numbers. And that is mainly because of the one-off income items we received during the half year that we've deducted out of the stat numbers to arrive at the underlying performance of business. And that is -- on to Slide 18. That is the reconciliation that we've provided from the statutory NPAT to the underlying NPATA number. You'll see that we've basically deducted the one-off government grants in relation to COVID-19 that we received of $500,000. We've taken that out to present the underlying numbers. And we really believe that is the right thing to do to take that out from our underlying numbers. On to Slide 19. This shows our operating business margin. As I said before, our operating businesses are running very profitably at 36.6% EBITDA margin compared to the prior year. In the prior year and in FY '20, our margins were only 32.5%. So we basically improved and expanded our margins by 4.1% through improved operating efficiency. During the COVID-19 period, we basically undertook a thorough and comprehensive review of our costs, and we better positioned the businesses to be more competitive, more sustainable and more valuable for our shareholders. Again, further slide, I highlight that the industry average is at 19%, and we're operating at 36.6%, being 17.6% above the industry average. So we're operating significantly more efficient than the industry average. On to Slide 20, on our balance sheet. Our balance sheet remains very strong. We measure ourselves using lock up, meaning WIP and debtors. And as of 31st of December, our lock up is at 55.4 days. That is in line with the 54.1 days at 30th of June and 9 days less than the prior period of 64 days. Basically, through reducing lock up dates, we also unlocked cash into the business. And as you can see in the graph there, you can see that $0.6 million of cash has been unlocked since the prior period into the business. This reflects our tight management of our receivables and our cash flow being so great is a direct result of this. On the table -- balance sheet summary table on the bottom right, you see that our net assets would have grown our net assets from $22.9 million to $24.7 million. And that is, if you look at the borrowings line, a result of us reducing our debt and repaying our debt, which we will cover in the next 2 slides. On to Slide 21. Our cash flow -- as I've said before, our cash from operations have increased $2.4 million or 42% compared to the prior period, and that is mainly a result of our improved profits for the half. Conversion of our cash is at 92.9%, and that's comparable to our prior periods where we convert basically 90% to 100% of our profit into cash. This just shows the strong cash generative abilities of our business. And as I said before, that is the reason why we're able to pay monthly dividends as we have started in January last month. Slide 22. Gearing and liquidity. Similar to 30th of June 2020, our cash and headroom remains ample at $13.2 million, and that equates to $33 million in revenue that we can acquire with our base equity applying for extra debt. On the right there, the table there shows the comparison of the gross and net debt against 30th of June 2020. You can see that we've basically repaid the gross debt by $1.6 million, and our net debt has decreased $2.1 million. Again, shows you how strong our cash has been and the ability for us to apply some of our cash against debt repayments. Our group gearing at the -- just the comment box at the bottom right, has reduced to 0.76 of EBITDA from 0.94 at 30th of June, and our net debt per partner has decreased substantially by 22.9% to $267,000 per partner. Page 23. This is just a reconciliation on the profit attributable to the parent versus the noncontrolling interest. We often get asked the question why the parent net profit attributable to the parent in the financials doesn't always equate to 51% of the net profit. And the reason basically is tax and any additional costs borne by the parent. We have reconciled that. You'll see that at the bottom of the table, but the actual split, it's 52% and 48%. And it doesn't always line up 51% to 49% because our ownership interest varies in our underlying businesses from 50.05% to 58% (sic) [58.25%]. And on to the last slide in Slide 24. This is a summary of our dividends that we've paid since the IPO. As I've said before, we've grown our ordinary dividends by 10% per annum, and we're looking to do so exactly the same this year in FY '21. We expect to pay out $0.0532 per share ordinary dividend. And as I said before, we have started paying monthly dividends from January '21. We believe that, that is an excellent return to our shareholders, and we believe in the value of our dividend. That's it for me, Brett. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [4] -------------------------------------------------------------------------------- Thanks, Kenny. So turning to Page 26. We think that there's a strong outlook for the business for a range of reasons. We've never had more demand from accounting firms to join the group. The quality of the firms looking to join the group is as high as it's ever been, and our ability to add dramatic value to firms has never been better. The centralized team that we've built is a specialized active management team of only really 1 type of asset, that's an accounting firm. And we can prove to firms that if we get involved, we can generally double their profitability. We can reduce their working capital by 2/3, and we can make them competitive in a way for talent and give them a succession plan that they can't achieve themselves. We think that at the heart of what we're doing, there's really unlimited demand for that proposition in the market, and there is no one else in the market that has our track record in delivering those results. The benefit of being a public company is that firms now can look at our data and feel very comfortable that they're dealing with a reputable group that isn't just saying things, but is, in fact, able to prove the results that they are delivering for the people that are within the group and that have joined the group. Revenue growth on Page 27 since IPO is 54%. We expect with the pipeline that we have that we will deliver, on Page 28, our plan, our 5-year plan. And importantly, we just look after private business owners. 95% of our revenues are in Sydney. We are a very concentrated business, meaning that the [8,500] client groups that we look after, being in that private business owner category, we have an unusually strong market position in what we believe is the best market to provide accounting and tax services to. We also believe that given the extra money that's been thrown around by governments in all Western countries, but certainly in Australia, it is unlikely that tax rates will fall in the next 20 years. It is very likely that surveillance for people and the aggression from the tax office will increase. And we believe that the demand for excellent accounting and tax services will also grow because of government's increasing need to raise taxes. High net worth family owning groups will need to access excellent advice. So our 5-year revenue growth plan is on Page 29. I would direct you to the middle column where this year, we're working to accelerate our NPATA growth. And in particular, we've broken out there across the years to show that we need to do a little bit of organic growth and a little bit of acquisition growth each year. None of those numbers are higher than any numbers that we've achieved in previous years. And so we believe that these goals are moderate and very achievable, but that they will make us a relevant listed organization that becomes even more competitive over time and that can continually grow out to become a very significant business in time -- emphasis on in time. We're not in a rush. Page 30. Our complementary businesses continue to progress. We see that there -- that these are small organically grown businesses, but we also believe that there's huge opportunity here ultimately to grow material businesses. We think if we get any 1 of these businesses right, that each of these divisions could ultimately be as large an earnings contributor as the accounting businesses are today. But again, it took us 15 years to build the business that we have. It will take time to build these businesses. But if we continue to look out for our clients, and they continue to have high trust for us, it is very likely that we can continually build out services that are recurring income in nature, that our needs not want and are likely to be very good performers over all phases of any economic cycle. And with that, I want to thank Ken and the team for all of the work that they put together. I direct shareholders or anyone interested that's on the call to read today's announcement. And in particular, with the set of accounts that we're producing, there's no flashy photos. There's no exciting marketing gump. But there is, I think, very transparent and clear information that helps you if you're serious about understanding the business and valuing its intrinsic value. There really is everything there that an intelligent investor to use the words of Ben Graham, one of my heroes would use, to make a fair assessment of the value and the growing competitive mode of this business. With that, I'd love to take any questions if anyone has any. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, Brett. The question-answer session has now commenced. (Operator Instructions) Our first question is from Scott Murdoch. -------------------------------------------------------------------------------- Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Brett and Ken, just a couple, if that's all right. Firstly, you called out billable hours or revenue that you wrote off to support your clients during COVID. Just a bit of an update, if you can, on the intention now around that fee relief and returning, I guess, to the organic growth that you typically expect in the business? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [3] -------------------------------------------------------------------------------- Scott, so in the 6 months, we saw clients -- we have terrific clients, but we saw people under pressure, not always financial, just the pressure of looking after their clients and their teams in challenging circumstances. And so it was our directive and intention to make sure that even where we did extra work for clients, that we weren't sending a bunch of random extra bills. We've always worked on a fixed fee basis. And so our clients have come to very much trust us and engage us. And so we just haven't gone out and sort of taken the opportunity to gratuitously bill clients for extra work. So we invested about $2 million, $2.1 million in the clients over the period, the 6-month period that we might otherwise have billed. But we feel good that the clients feel very good about the business and are referring new clients and are likely to stay with us. People tend to remember, in our business, how you treated them when they were under pressure. And I think our firm has behaved in a way that will set up the business for continued long-term growth. -------------------------------------------------------------------------------- Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Okay. I think you mentioned very briefly the new initiative or partnership with Austbrokers. Just interested in progress of initiatives under that partnership like referral agreements, anything that, I guess, can help broaden your presence with the new partnership? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. So Scotty, what we've done there is Paul is now sitting on nearly $2 million worth of opportunities that we hope to convert some of from his life as a corporate broker. We are looking at the data working with Austbrokers to match the data of their client set with their specific best offers for those clients. And that will roll out in the next 6 months, making those offers. We expect some take-up during that period. But over a 12-month period, we think we'll have some revenue from it. And we've proposed and are working on with Austbrokers a model of a referral arrangement with their nearly 1,000 brokers where if they send us some clients, the individual brokers, then we'll send them some value. We think that, that -- while we expect to work on it over time, we think that can become a very significant business. If we could get even 0.5% conversion rate on the Austbrokers client base, that would be 3,500 clients, nearly 50% of the clients that we have today, and the cost of acquisition will be very low. So we like the large asymmetrical sort of opportunity there. It's cost us in terms of capital to put that deal together nothing. All the legals were done in-house with our team and negotiated by me. The conception of the plan was pulled together by our team. So we're really in there for no capital. We now need to invest in having Paul and the team. It's a 51-49 with him. So we're dollar-per-dollar on any investment. But we don't expect that business to cost us anything in the first year, and we do expect that it will make a full profit. So this is a part of a strategy to pursue very large upside opportunities without having to outlay any capital to pursue them. -------------------------------------------------------------------------------- Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- Okay. Around acquisitions, I guess you answered my typical questions around the pipeline. But just with respect to the pipeline being stronger and better quality, outside your core market area in Sydney, which you described in your address, outside that area, is the pipeline expanding? Are you looking elsewhere outside your core area? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [7] -------------------------------------------------------------------------------- Yes. So Scotty, we are very much focused on Sydney, and second to Sydney, Melbourne. But my odd strategy, I think, has proved to be quite helpful during COVID where I would prefer to be 95% invested with [Coatis] than 95% invested with Dan Andrews. So are not looking to be in Perth or South Australia or Queensland or frankly, outside the 2 states that we are. And I have a preference to double down on where we are in New South Wales because of our ability to actually do that quite easily and at better margins without the risk of COVID at the moment. So we don't see the clients -- clients have their head office really in Sydney, Melbourne or Brisbane. And where the head office is where we need to be. And we think we can own the market in Sydney for private business owners accounting and don't need to at the moment. We haven't even got close to exhausting the opportunity here. So we are getting inquiries, but I can't get on a plane and go anywhere, but I'm not willing to make a large investment or really much investment at all when I can't meet the person face to face. So that said, we've got between $15 million and $20 million worth of acquisitions in the pipeline. And I'm confident that we can deliver on those. Our management team's in blackout today after this call. You can work out what that means. And I'm pursuing firms every day, but we're extremely selective, unless somebody really appreciates the difference that we can make to them regardless of people that I would like to be in business with, not just take a check from. And we don't feel any need to do a deal for the sake of it. -------------------------------------------------------------------------------- Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Okay. And just one last one for me. I noticed you've put up the revenue per FTE metric in your presentation. Just interested. It's obviously something you track closely. Is there a target or an aspiration around that certain metric you track? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [9] -------------------------------------------------------------------------------- So typically, traditionally, Scotty, I was looking for 220 -- $220,000 per FTE. We're not -- while we track it, I can't say that we're focused on it. We have many flexible arrangements, part-time people, full-time people. So whether they are meeting their individual billing targets, which we do track with a huge degree of focus, then that number will look after itself. I'm not quite sure where we might be able to get that. But I am all about every dollar of additional revenue needs to occur at the right margin, and that's [margin] of 30% and ideally 37.5%. That should continue to deliver sort of ROEs of 45%-plus for a long time. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- We have our next question now from [Anthony Shay] from IL Capital. -------------------------------------------------------------------------------- Unidentified Analyst, [11] -------------------------------------------------------------------------------- Congratulations on a fantastic result. I just have more questions. Two on the revenue side, so on the cost side. Firstly, just with acquisition again. Can we just get your more high-level view on what's to come, whether it's tuck-ins that you're talking about, whether it's marquee-type things? But also just to go with that, what makes your pipeline different from somebody else's? I know you talked in the past about being continuously in the market and talking to people over 5 or 10 years. So can you just give us some color on that? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [12] -------------------------------------------------------------------------------- So Anthony, it's important to know that on the acquisition piece, I started Pricewaterhouse in 1993 as an undergrad. And I worked in business advisory services, which looked out to private business owners and had a corporate advisory function. I then went to a corporate advisory group. My background is understanding cash flows and valuation and M&A. I brought that skill set to the group in 2006. I've looked to buy firms and bought 2 firms within the first 12 months of the existence of our business, which is 15 years ago in June. And subsequently, we've done 39 transactions. That makes us very different. The business is led by an accountant who is a chartered account, has been in the industry for 27 years. I love accounting firms, understand them deeply from undergrad all the way through to partner in formats from $5 million of revenues, up to what PW was in those days, which is a little very large. So I think that, in and of itself, is very unique. We built a system from day 1 as to how to think about accounting firms and what the problems are that are experienced by accounting firms. And then we built a solution best both to solve those problems. And what we've done subsequently is continually improve, but continually prove that we can solve those problems. Very key to what we do is our centralized management, where we have experts in HR recruitment, IT, risk, legal, operations that by aggregating the low-value activities of firms, we can dramatically improve the financial performance of the businesses. So I don't believe you should buy a business that you can't dramatically improve its profits and make it more competitive by building out its service offering, its ability to continually recruit talented people and manage its succession for the next 100 years. So that is, in my view, something completely unique within this business. And I think we've proved that for a long time now over many, many transactions. As a result, I've been continuously e-mailing accountants in the industry for nearly 15 years. I have people call me and say, I've received your e-mails, Brett, for the last 8 years, 10 years, 12 years, 14 years. I really appreciate you writing to me. You sent me a gift or a bottle, a box of chocolates or whatever after we met. I saw you speaking at a conference. I've seen you here. So people know we exist. They know that we are somebody worth speaking to, if they're serious about looking after the baby that they built. People that have built these firms have spent more time with the firms often than they have with their babies. It's very personal. They want somebody who will be a great steward of the thing that they built, look out for their clients and their people. We just think that's deep, and it's unduplicatable. And when we get in front of people, they can feel that they know that. And that's why we're very successful at bringing on really the very best people. Now we've never been a sort of size for its own sake organization. I'm not looking to buy every accounting firm on any particular street. I'm looking to build in each of the places we play the best possible private business accounting firm that any owner of any business could run into that delivers really world-class and best-in-class service and technical outcomes for the clients, and that they feel very cared for and that they want to deal with us multigenerationally across the needs that they have. I'm confident that we're doing that, that we're a very small and insignificant business today. But if we track ourselves against Austbrokers since inception, we're doing pretty well. And I intend to build over time with our theme of business that is significant. So that's sort of how we do it. We've only done 2 of those transactions through brokers. People come to us direct, they send me a little text message or respond on one of my e-mails or send me a LinkedIn message. That means we're operating often with somebody who really values what we can do for them and the way that we'll treat them and the long-term value that we can bring to them and their family. This is not simply a transaction that we're undertaking with people. This is an effort to make them, their clients and their people and their families generally better off for a long time. -------------------------------------------------------------------------------- Unidentified Analyst, [13] -------------------------------------------------------------------------------- Fantastic. I've also -- I've looked through the documents that you list this morning. A little bit of different wording around how you're going to grow. You've got some new partners, employing new partners. Other people call them rather acquires. Could you just make some comments around that? Also, what you do to make sure if people leave that they don't take their clients with them? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [14] -------------------------------------------------------------------------------- Yes. So importantly, Anthony, culturally, our partners, when they join, they know -- firstly, of our 52 partners, I think 46 of them have been grown through the businesses now. So they signed the right agreements upfront. They sign up for the right values upfront. They know that the clients that Kelly Partners values are not individual people's clients. And the clients know that as well. We use our particular system with the clients that has multi-service lines into the clients so that the clients are really genuinely dealing with the firm, not an individual. The employee and partnership agreements are extremely detailed and very clear as well as tough around what the expectations are and what the behaviors are. There is also a situation where we do know the law and are prepared to protect the business, and we have some expertise and background that a typical person that might be trying that adventure on for the first time doesn't understand. So we're deep in the business. We sort of know how to do that piece. Partners are people that come through the firm, become an operating partner. They buy equity. It's a goodwill partnership. New acquires are talented people in the market that we want to bring into the firm. We grow through both of those sources. We also go through tuck-ins, which is where we buy a firm in an existing market. We bring that in and tuck that into an existing business. And the other way we can grow is through marquee acquisitions, which is a new business in a new location that we don't currently operate in. And finally, our complementary services where we have wealth, finance, insurance, [collected in an] investment office and alternative assets where we're growing out those other businesses through providing excellent services to our existing clients. So we see that we've got multiple paths to grow. And we've done all of them before. The new adventure really is growing out the complementary businesses. And if we get those half right, they'll be very significant businesses over time. -------------------------------------------------------------------------------- Unidentified Analyst, [15] -------------------------------------------------------------------------------- All right. Fantastic. Maybe on with the cost side now. I think one of the big standouts is how much you guys have cut out in the cost section. You've taken out in last year is $2.6 million and reinvestment into the head co. And you've -- it's brought [down 150,000]. And you're looking to try and keep that relatively close to 0 as you can with the caveat in the report this year, different wording again. If it's -- if there are attractive opportunities, you'd like to invest in those. Could you just give us -- just make some comments around that? What does that mean? What's an example of something like that? What's the return on capital, that type of stuff? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [16] -------------------------------------------------------------------------------- Yes. So Anthony, what we did was we were founded in 2006, and then we got the GFC. So we got pretty good at working through a changing environment. We saw COVID as a great opportunity to go back to our roots as the lowest cost operator in our environment, but also the highest quality, most professional organization in our sector. And that basically, anything that wasn't nailed to the floor or it wasn't essential to reinforcing the competitive position of the business and growing the business, we simply had cover under the nature of the crisis to be able to reduce costs on literally every single line of the P&L in all of our businesses. Ken and I undertook a review of every single business, every single line. And the nature of a 15-year-old business in June is that over time, a lot of the things that you're asked to do often through acquisitions, pick up the sponsorship of this or pick up a second person doing that or pick up a bit of software, you don't -- it turns out that the vendor thinks you need that ultimately, over time, don't really use. Vendors themselves tend to get comfortable and put the prices up over time. We were able to go through in March and say, paying is a crisis. We're going to change everything. So there's great freedom in a crisis to change and go back to your roots as very much a low-cost operator. And we've certainly taken that to the bank, and we intend to maintain that culture going forward. We think that COVID has sort of provided a bit of an attitudinal reset across the economy, which is helpful, which is great now. Where we would invest? So for example, at the moment, we've got a very strong pipeline. We think we should add another person to our IT team so that we can roll out more than 1 acquisition at a time more easily without working our best people in an unsustainable way. And so we're not particularly focused on quarter-to-quarter or 6 months to 6 months results. We know our pipeline. We can't necessarily tell you that. And we'll just invest in the team, as we always have ahead of the curve. When I started, I wrote a 1-pager saying we build systems to get us to $50 million of revenue. That was absolutely ridiculous in 2006. Everyone thought it was completely crazy. But hey, as it turns out, we're nearly at that number. And we've never had the turnaround and change our systems as a result of that sort of investors' mentality, just investing just in front of the curve and making sure that we never had to turn around and rebuild the business. And so we're just flagging that we're going to continue to maintain that mentality. But we think at the size we are now, the 6.5% service fee that we get from the firms, is enough money to actually be able to carry the right team. -------------------------------------------------------------------------------- Unidentified Analyst, [17] -------------------------------------------------------------------------------- All right, amazing. And again, in the report, there's a line here talking about $107,000 or $108,000 from a legal dispute. Could you tell us what that's all about? Maybe some background on that. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [18] -------------------------------------------------------------------------------- Yes. We bought a firm, Anthony. And as it turned out, the young lad -- not-too-young lad went up the road after the conclusion of his 12 months and decided that he should start his firm up again. He was in his early 60s, and you would have considered that to be an unusual type of behavior in the history of all of the transactions we've done. We haven't actually seen someone do that before. So we just enforced our agreements, and I believe we'd need to check that it's confidential under the terms of the settlement that we made with him, but he did end up paying us back a very large amount of money for his misbehaving. And we're confident that, that was another example of us having adequate documentation. There was nothing terrible about the situation other than we're very much about if you say you're going to do something, you do it. You don't get to run and take a bunch of clients with you. And if you do, then what we did through the legal process simply a bunch of letters that are mediation, would make us make him pay us back, which he did. So we've been restored to the position we should have been in. And we feel good about the fact that, again, we had adequate documentation of, in fact, what we'd agreed. -------------------------------------------------------------------------------- Unidentified Analyst, [19] -------------------------------------------------------------------------------- Right. That answers my question on lateral highs as well very well. And a final one for you. In your -- I think it's the earners menu or one of the documents. It says that you currently own 50% -- a little over 50% of the business, but long term, you are looking to reduce down to 30%. Just want to get your thoughts on that. I know you've been selling a little bit in the market, too, not really significant amounts, but just trying to an idea of what you're thinking there. I'm sure there's a lot of people who are wondering why you're selling. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [20] -------------------------------------------------------------------------------- Yes. So Anthony, from time to time, I think I bought a bunch of shares from time to time and then end up with some in my name and some in [my super firm] and a bunch in my Trust. And so if I'm moving things around, which I was during COVID, buying property, selling properties, I might need a few dollars here and there. So I sell a few shares and fund my life. But I intend to keep control of the group. My hero's Warren Buffett. I wanted to build a holdco and intend to do it for a very long time. I just get asked very consistently, will you own all the shares forever or will you sell some? So what I've done there transparently is give myself some optionality. I don't believe the share price even moderately reflects the value of the business. And because of my mindset, I intend to hang around long enough to prove that, which is kind of forever. I was reading on Buffett recently, and he took his first mortgage at the age of 54 to buy his wife a house in California. And on reflection, he recently sold the second one of those properties. And he was asked why he took that mortgage and really just paid off. He said interest rates were low, and he couldn't bear to sell more shares. Those shares, we sold the property. The property's worth $20 million. The shares are worth $1.1 billion. So look, I have a long-term value mentality, and I intend to a, hold the shares; and b, keep control of the group forever. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- We have one more question from Brendan Harrington from Harrington Partners. -------------------------------------------------------------------------------- Brendan Harrington, Harrington Partners Investment Management - Co-Founder [22] -------------------------------------------------------------------------------- Well, Brett, Ken, yes, nice great results. Really impressed, and it's refreshing, the type of commentary you guys are putting out. I guess my only question, the other gents have covered most of them and were really good. I was just thinking, you noted that it is a battle for talent and you're really building that brand. And I'm sort of thinking the initial generation that comes in on the economic rationale to sell the business to you? That's one. Once we sort of get into that generational shift, how are you incentivizing the subsequent younger talent? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [23] -------------------------------------------------------------------------------- Great question, Brendan. So a bit -- we'll say a bit more about this in the next 6 months. But when we buy out the retiring partners, there are typically younger partners in the business who keep 49% of the equity. So we own 51%. The operating partners own 49%. And if you look at the margins, it's why the margins are so important. Our margins are almost double the average. Now where [Ivers] report that the average margins are 19%. In my due diligence on hundreds of firms, when you public company account for those firms, post partner profits are somewhere between 12% and 15%. And so if we can roll out 36.6 at the operating business level and the cash conversion is 100%, our lock up at 55 days. The average in the industry is 120-plus. When I go to a firm, they've got 120 days lock up, and then they've got a separate list of debtors, which they say, oh well, they're the special ones. When you add it all up, it's well over 120 days, often around 200 days. And so if you look at the margin and then you understand virtually 100% cash conversions, we are paying our partners 50% of their projected profits every single month. So they get a lot more cash in their pocket than they've ever seen before. And if a young guy is in the firm and thought that he could make more money on his own, there's just -- I haven't seen a small firm generating a, the growth and ultimately, the growth in their equity value; or b, the actual month-to-month cash flow that we can generate for a partner. So look, money does talk with respect to talented people, and I'm confident that our partners, young and old, can't make more money nor have a better lifestyle because of our centralization to only have to look after their clients and their people. They don't have to do anything else. So I'm sitting with a guy on Monday, I saw 3 firms same day in the same town, and all of them are struggling around lifestyle. They are not going to be able to achieve succession internally at the quality that they would want. Those people, if they do an internal transaction, will have to be vendor financed. So they won't be able to get their cash out. They worry the young guy will mess the firm up. The young guy worries that if he buys them with the old boy, the old boy won't get out of the way and help and let him improve the firm. So he'll never really be the owner. We think our model is very compelling. And that because they own 49% of the firm, they fully share in the economics, and the economics are awesome. You come to me as a young guy. You invest $250,000. You may put up 20%. We might 100% finance you. So you're in for $50,000, and you've got an ROE of somewhere between 35% and 55%. If a young guy can find a better situation than that in a firm that has traditionally got a 32% CAGR, in our industry, which is not known to be innovative, energetic, forward-looking or frankly, fun to work in, then all power to that person. But a rigorous examination of a like-for-like situation, there is no better place for a young talented person to exercise their profession than within one of our firms. -------------------------------------------------------------------------------- Brendan Harrington, Harrington Partners Investment Management - Co-Founder [24] -------------------------------------------------------------------------------- Yes. Nice. As I said, a powerful model. And I guess in terms of past entire generation, it seems that the economic incentive was on top the priority list. But as you said, that quality of life obviously becoming an increasingly important element. And I guess... -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [25] -------------------------------------------------------------------------------- It's important, Brendan, to understand like what is happening now. I typically find an older practitioner, and it's 95%, the firms are owned by men. Those men worked in a way 6 days a week that today, their wives, a modern wife, wouldn't allow. They were not able to be present, right? So they just weren't able to be present to, frankly, the marriage to a great degree or the children. Younger men are saying, well, hang on, I actually want to speak to my wife. I want to see in children. The younger women, they actually have children and don't want to work 80-hour weeks. The big 4 firms still really grind their people. I think there's a lot of evidence of that in the sort of press coverage you've seen over the last 6 months, but that's known in the industry generally. The second tier have a model that's just not competitive. We can offer a lifestyle. You work close to your home. You have parking. You've got first-class people, first-class technology, wonderful clients really some of the best clients in Australia. Certainly in Sydney. And you can outearn any comparable situation knowing that you've got real lifestyle balance and a firm that you can be very proud of in terms of the value -- values in the way that we behave. The big 4 have an issue that they are the global enablers of multinational tax planning, would be the general way to put it. Most young people don't want to be involved in that racket. And they're much more attuned to their values and how they want your firm to behave. So we know that we can out-punt the big 4. Second-tier firms are running in the same way that they did when I started in the industry in 1993. They're not particularly exciting, energetic, innovative places to play. And so while we talk about the battle for talent, we have an 8% turnover of our people, and we can -- our recruitment days are less than 20 days, meaning that we can replace any role within 20 days. So we thought very hard about the operating model of the business. And I guess I've been at it for 28 years nearly. And I really, reflectively with my team, understand these businesses and market and I think how to compete in a unique way. -------------------------------------------------------------------------------- Brendan Harrington, Harrington Partners Investment Management - Co-Founder [26] -------------------------------------------------------------------------------- Yes. That's brilliant, and thanks for elaborating on that. Keep up and good work. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [27] -------------------------------------------------------------------------------- Thanks, Brian. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- We do have another question from [Anthony Shay] from IL Capital again. -------------------------------------------------------------------------------- Unidentified Analyst, [29] -------------------------------------------------------------------------------- Sorry, just a quick one, Brett. You mentioned that you think the stock is still cheap. Just trying to kind of get an idea of the -- how you arrived at that and maybe your thinking in kind of valuation, the math behind the valuation? -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [30] -------------------------------------------------------------------------------- Yes. So you buy a terrific book called, The Warren Buffett Way. I think it's probably the best book ever written on investing. And then you go to the back page. As you pull out the appendix, you put in [XL], a [2-stage] dividend discount model to make an assessment as to how you think we will grow and then you're trying to play some sort of discount factor. I think the risk-free rate is very low. I think a business that is leveraged to a government's willingness to continually tax their people and make the system more complex, not less, probably has -- and has a strong an operating model as ours probably has a quite low intrinsic risk around it. And I think we have some ability to grow. And so if you sort of back solve by putting our last 5 years' numbers in that are public and then applying some sort of growth rates to what you think the future might be, you don't get $2. You get a number considerably higher than that. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) There appear to be no more questions at this time. So in that case, we will conclude the question-and-answer session. Handing back over to you now, Brett. Thank you. -------------------------------------------------------------------------------- Brett Kelly, Kelly Partners Group Holdings Limited - Founder, Executive Chairman & CEO [32] -------------------------------------------------------------------------------- Thanks so much, Erica, and everyone for joining today. We had a really good turnout on the call. I'd like to set expectations as to we'll continue to do what we've been doing for a very long time, never anxious to sort of do anything rash or exciting. But we do think consistent performance as we've delivered for nearly 15 years will turn out over the next 15 years to be quite exciting. And we really appreciate everyone turning up and being interested in the business. As I love to say, have a great day. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Thank you, Kenneth and Brett. That now concludes the First Half of 2021 Financial Results Conference Call for Kelly Partners. On behalf of Express Virtual Meetings, we'd like to thank you for attending and have a lovely day.