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Edited Transcript of PAC.AX earnings conference call or presentation 1-Mar-20 10:00pm GMT

Half Year 2020 Pacific Current Group Ltd Earnings Call

MELBOURNE , VIC Mar 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Pacific Current Group Ltd earnings conference call or presentation Sunday, March 1, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley Leslie Killick

Pacific Current Group Limited - Interim CFO

* Paul Richard Greenwood

Pacific Current Group Limited - MD, CEO, Global CIO & Executive Director

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Conference Call Participants

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* Jim Craig;Bellwether Investments

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Presentation

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Operator [1]

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Good day, and welcome to the Pacific Current Group conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Pacific Current Group's CEO, Paul Greenwood. Please go ahead.

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Paul Richard Greenwood, Pacific Current Group Limited - MD, CEO, Global CIO & Executive Director [2]

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All right. Thank you very much. Well, welcome to the first half 2020 update call for Pacific Current Group. We are pleased to review the performance of the business for the 6 months ending 31 December 2019. I believe as we go through the results, you will see that we continue to make solid progress toward our vision of building a multi-boutique asset manager generating consistent and resilient earnings by partnering with world-class investment boutiques. In this presentation, we have endeavored to provide an increased level of transparency in our presentation to help shareholders understand our business better, particularly the composition of our revenues and details around our expense structure. So I'll start with some high level observations.

First off, it was a period of very strong growth in underlying earnings for the company. The growth in underlying profits not only reflected solid revenue growth but meaningfully lower operating expenses as well. This growth came from new investments like Proterra and Carlisle, and increased contributions from existing managers like Victory Park. We had no significant negative surprises versus our internal forecast during this period.

These results are consistent with the guidance we have previously given. And currently, we are tracking to the high end of that guidance even after considering the market's recent decline. Obviously, we can't tell the future, and there are always black swans out there as the coronavirus has shown us. But to the extent we have visibility into these businesses, we seem to be tracking well.

Speaking of market declines, I want to remind people that the reason we have more protection against market declines than most of our competitors stems from really 4 separate things: one is our broad diversification, we're not all concentrated in a particular asset class; two, our bias towards long-term contractual revenues that aren't mark-to-market every day; three, some of the underlying structures in our investments; and four, a bias to revenue sharing arrangements in our long-only equity firms, which spares us some of the impact of negative operating leverage when revenues decline.

Our balance sheet right now looks strong in terms of having minimal debt. We've retired some liabilities during the period. Cash balances are not high after our investment in Pennybacker, they're building up again as we speak. And as typical, our pipeline is -- looks strong to us internally. Though we are not close to any deal at the moment. Though, my sense is that, that could actually change soon. But right now we're not deep into any negotiations.

And before digging deeper into the numbers, I'd add some comments about the second half of the year. The first is that our revenue in the second half will be more management fee heavy than the first half. This stems from something we've discussed before, but it stems from Victory Park's incentive and carried interest fees being biased toward the first half of the fiscal year, and a receipt of GQG's management fees being biased towards the second half. I would also note that I do not expect any increase in underlying operating costs over what we saw in the first half -- during the second half of the year.

Additionally, I previously mentioned that I thought our results will be skewed toward the second half of the year. Because of the strength of the first half, I don't think that's necessarily true. Indeed, internally, our estimate for the second half haven't really changed that much since we provided guidance a few months ago, though the first half did exceed our internal estimates. I also want to underscore that in this current environment, we expect to reap the benefits of trying to reduce our exposure to equity markets. We think the recent market weakness will have very limited impact on our results because of our modest exposure to equity managers as well as the underlying structures of our investments. To add some quantification to this, and I think, I apologize, I may have done it in a prior call, but I think it's worth repeating. If we had a portfolio of bottom line investments in active equity managers, and each of those managers had 40% margins, and the market fell 20%, then our revenues would fall by 50% assuming no further change in expense structure.

However, because our portfolio is very different, we have modeled the impact of different levels of market declines, and a 20% market decline would directly cost us less than 10% of revenues and probably more like something in the 5% range. Obviously, there's potential secondary effects, fundraising and for institutional investment managers broadly and things like that. But when I'm talking about this, I'm referring to actual immediate impact on revenues. So we are highly insulated from market declines.

Moving on to Page 6 of the presentation, you'll see that PAC posted strong underlying earnings growth in the first half of the fiscal year. Net profit before tax was $15.9 million as compared to $9.1 million a year earlier. Underlying NPAT was $13.3 million versus $7.9 million in the first half. Later on in the presentation, I think it's Page 16, we break out the composition of revenue between management fees, performance fees, sales-related revenues and other income. You will note that 29 -- I'm sorry, 29% of our revenues came from performance fees during this period. These were predominantly from Victory Park and Carlisle, firms that manage strategies that tend to produce very consistent performance. As I already noted, you will see the performance fee contribution decline in the second half of the year. And as we move forward, I expect it to trend down because our new investments like Proterra and Pennybacker are ones where we participate in little or none of the performance fees they generate. As well as Carlisle where we expect the composition of the revenues we receive to gradually shift to becoming more management fee centric.

At the statutory level, PAC posted a loss during the 6 months primarily due to the recognition of some impairments, most notably Seizert and Victory Park. PAC also had roughly $1 million of expenses related to the previously disclosed rejected acquisition offer.

I'll briefly elaborate on the 2 impairments during the period, the first 2 significant ones: the first was for Seizert and the second was Victory Park. As has been previously noted with Seizert, it's a business that has been facing the typical strong headwinds that U.S. equity managers face, though they continue to manage the business quite well. Victory Park is actually making solid progress as a business that contributed more -- far more in the first half of this fiscal year than they did a year earlier. Moreover, they have already received about AUD 200 million in commitments in this calendar year. The reason we took an impairment in Victory Park is because the initial growth plans didn't materialize as to the extent expected. So we felt it's appropriate to adopt a significantly more conservative approach to our forecast until the realized growth more closely matches what we have forecasted. Also, it's worth noting that in a quirk of accounting fate, we actually invest in 2 separate entities at Victory Park: one represents economics at the management company level; and one represents carried interest, so performance fees that we're entitled to. While the management fee piece was written down, the value of the carried interest vehicle actually increased in value, roughly about 30% of the decrement at the management company level. Though accounting standards do not allow us to write-up the value for investments that we equity account.

Then moving on, as previously disclosed, we deployed more than $65 million into new investments during the period. Proterra and Pennybacker were the biggest, and we made an incremental investment in Roc. We feel very good about how these businesses are progressing. We're also making progress on our new debt facility, that we have pursued this a little more deliberately because we don't want it too far ahead of our needs. I would like to emphasize there is no lack of credit availability. Indeed, we have been inundated with lenders who have offered us far more than we might be comfortable with and at rates that are actually pretty reasonable. Nonbank lenders are eager to provide term loans, while banks are more willing to provide credit lines. And we are biased toward a credit line facility in the absence of an immediately actionable investment. I think at long last, we have selected the likely bank we will go with, we have exchanged information and are working through their diligence request.

Moving on to Page 7, just to highlight our pipeline. As I mentioned, our pipeline looks strong. We've been really pushing hard over the last few months to increase the deal flow. That's why I'm cautiously optimistic something will become very live in the near future. However, we are, as I mentioned, we're not close to anything right now.

Page 9 highlights performance for the year. What I'd say is calendar year 2019 was a good performance year for most of our portfolio companies. Our long-only equity managers had generally strong performance, particularly those that suffered last year like Blackcrane and EAM. Our private capital managers did very well. Though managers with commodity exposures, specifically Aether and Proterra had some negative marks on their portfolios during the period.

Moving on to 10 -- Page 10, I touched on Victory Park and Seizert earlier, so I'll just note the other following developments. GQG and Carlisle continue to grow faster than what we expected. We will be closing down AlphaShares after its loss of its sole client. This will have no impact -- economic impact from us or on us during the period. And there have been some developments on the Nereus front that leads us to believe we will shortly make some progress here. I'm hopeful to have a lot more discussed by the end of the fiscal year on that front.

And then if you go to Page 11, on the -- you'll see in the FUM summary that growth was widespread across the portfolio in the first half. We expect similarly broad growth across the portfolio 2020.

And Page 13. I know I sound like a broken record here, but we have -- we've been making great progress toward reducing our exposure to public equity strategies. And so for the first time, a minority of our revenues came from public equity strategies. As one of the graphs there indicates, our exposure is actually far less than what that implies because of some of the underlying structures in those investments.

And so with that, I will turn it over to Ashley Killick to review the financials in greater future.

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Ashley Leslie Killick, Pacific Current Group Limited - Interim CFO [3]

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Thanks, Paul. I'll try and keep this short and swift. So I've really just encapsulated on Slide 15, the 5 key points that I think need to be brought out to understand the results. First being FUM. As Paul alluded to before or stated before, we've redeployed the balance of our investable cash figure that was outstanding at the 30th of June by acquiring Proterra and Pennybacker for roughly about USD 40 million and also increasing our investments in Roc, IFP and CAMG. So the redeployment of that cash has seen, obviously, new investments being in place, and therefore an increase in the amount of FUM that we have in our investees. But stripping out those boutiques that we've bought and sold during the year, we still had significant growth in the underlying FUM figures to the tune of $9.1 million. Of that $9.1 million, nearly 2/3 of it came from inflows, with strong growth in Aether, with the close of ARA V as well as Carlisle and GQG. The balance is attributable to the strong market performance that Paul mentioned previously. But all in all, FUM growth, nearly 16% through the period.

Equity was flat. There were some significant changes. Through that, while the number didn't -- headline number didn't really change enormously, we had impairments of $31.8 million, which -- that would've caused our equity to fall, but it was offset in part by fair value gains through profit and loss of $12.4 million, fair value gains through other comprehensive income of $5.9 million as well as the underlying profit result of about $13 million. So all in all, our equity balance stayed reasonably constant.

Net profit before tax underlying was $15.9 million, albeit at statutory loss of approximately $13.3 million.

On Page 22, we've put the reconciliation between statutory results and underlying results and primarily the major reconciling items are the impairments and the fair value adjustments that we've discussed so far.

On Page 23 is a restated profit and loss, so you can see what the underlying result looks like. We've tried to present it in a slightly different way in that we deconsolidate the results to the prime line is really the corporate admin group and the subsidiaries for the boutique result of $15.9 million. Net profit before tax or underlying net profit before tax flowed straight through to earnings per share, albeit it fell slightly, the growth fell slightly. There was a rise in the effective tax rate stemming primarily from the restructuring of tax in FY '18. The outside equity interest figure was steady through time. But the number of shares that were on issue rose as a result of the capital raising in December slightly. So as a result of that, the growth in EPS was not as strong as the growth in net profit before tax.

And then finally, dividends per share, the Board have announced that we'll issue a dividend of $0.10 per share that will be paid in early April, which was kind of consistent with the dividend that was proposed in FY '18 -- FY '19, sorry.

Going to Page 16, as Paul mentioned before, we've tried to provide some transparency into the underlying cost structure of the group as well as where our -- where it stems from. We spoke about deconsolidating these results. So we're trying to pullout the statutory results, the results of Aether, Seizert and Strategic Capital Investments (sic) [Strategic Capital Investors]. So investors can see the underlying cost structure of corporate admin and where our revenue comes from.

And we spoke about performance fees and management fees, seasonality. But the other thing to note on this page was what we alluded to at the end of fiscal '19, which was the reduction in commissions stemming to the distribution of sales function. And you can see that's come through in this year or this half year, and so sales functions ran at a slight loss of $0.4 million. While we shouldn't back into FY '19 and FY '18, you will see it produced results of $0.9 million in FY '19 and $0.7 million in FY '18.

And then finally, our investment income and expense, Paul mentioned, we repaid the notes -- Seizert notes which has seen a reduction in our interest expense. And now we effectively have no interest-bearing debt on the balance sheet. But the redeployment of our investable cash into Pennybacker and Proterra has obviously seen the size of our cash balance fall and therefore, the interest income has reduced as a result.

So with that, I'll pass back to Paul to take it forward from here.

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Paul Richard Greenwood, Pacific Current Group Limited - MD, CEO, Global CIO & Executive Director [4]

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All right. Thanks, Ashley. I guess moderator, we're happy to take some questions. And before -- I guess before we do that, I would like to say thank you, our shareholders and -- for their patience and their support. And we are excited to address any questions you have, and we'll be on a road show next week. And happy to elaborate more on these things as well if we don't touch on it now. So anyways, with that, let's take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And we'll take our first question from Jim Craig, Bellwether Investments.

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Jim Craig;Bellwether Investments, [2]

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Thank you for the description of the half year. I'm particularly interested in your Victory Park impairment. I understand from what you said that the investment hasn't met the initial expectations, but you're now seeing some strong results or green shoots. Do you think it will get back to your initial expectations? And what are your thoughts sort of going forward with that investment?

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Paul Richard Greenwood, Pacific Current Group Limited - MD, CEO, Global CIO & Executive Director [3]

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Yes. Thanks for the question, Jim. Good question. Yes, absolutely. I think Victory Park is -- I think what we'll see throughout this calendar year is a firm that grows steadily. We always want businesses to get in that place where they have an enormous amount of momentum. GQG is probably an overstatement. But -- and they're not quite there yet, but they are moving in the right direction. So we would certainly expect it over time that they become worth far in excess of our initial investment for sure. That is our expectation.

And I say that with -- it's not just wishful thinking on our behalf -- our distribution team works closer to Victory Park to -- on the fundraising side. So we do have sort of intimate knowledge as to what their pipeline looks like. And so we are optimistic. I think that they'll continue to grow. And then I don't want to get -- I don't want to -- for reasons that I suggested already is, I don't want to give over promise here but I remain quite optimistic. And as evidenced by the fact that we've -- last 7 or 8 months, they probably have landed USD 0.5 billion of new business, I certainly expect that to continue.

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Operator [4]

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(Operator Instructions) Mr. Greenwood, there appears to be no additional questions at this time. I'll turn things back over to you for any additional or closing remarks.

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Paul Richard Greenwood, Pacific Current Group Limited - MD, CEO, Global CIO & Executive Director [5]

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Okay. Well, I'm surprised Nick McGarrigle didn't chime in with questions. He usually has one. But -- so thanks for joining us on this call today. And thanks for hearing the rehash of the period. I would encourage people that have questions to feel free to reach out to me or Ashley. And we -- as I mentioned, we're optimistic about the second half of the year and look forward to continuing to grow the business. So with that, thanks, and we'll talk later.

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Operator [6]

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And this concludes today's call. Thank you for your participation. You may now disconnect.