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Edited Transcript of PPT.AX earnings conference call or presentation 22-Aug-19 1:00am GMT

Full Year 2019 Perpetual Ltd Earnings Call

Sydney, New South Wales Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Perpetual Ltd earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Ehlich

Perpetual Limited - General Manager of IR & Corporate Finance

* Christopher Green

Perpetual Limited - CFO

* Robert William Adams

Perpetual Limited - MD, CEO & Director

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Conference Call Participants

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* Andrei Stadnik

Morgan Stanley, Research Division - VP

* Brendan Carrig

Macquarie Research - Research Analyst

* Edmund Anthony Biddulph Henning

CLSA Limited, Research Division - Research Analyst

* Kieren Chidgey

UBS Investment Bank, Research Division - Executive Director & Research Analyst

* Matthew Dunger

BofA Merrill Lynch, Research Division - Research Analyst

* Nigel Pittaway

Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

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Presentation

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Andrew Ehlich, Perpetual Limited - General Manager of IR & Corporate Finance [1]

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Good morning, ladies and gentlemen, and welcome to Perpetual's FY '19 results for the 12 months ended 30 June 2019. I'm Andrew Ehlich, Head of Investor Relations and Corporate Finance.

I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal people of the Eora Nation. I pay our respects to the elders past and present.

Presenting their maiden full year results today are Rob Adams, Perpetual's Chief Executive Officer and Managing Director; and Chris Green, Perpetual's Chief Financial Officer. There will be an opportunity to ask questions at the end of today's presentation. (Operator Instructions)

Over to you, Rob.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [2]

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Thanks, Andrew. Good morning, everyone. Thanks for coming along. So this morning, you'll hear from me, Rob Adams, and you'll hear from our CFO, Chris Green. I'll provide an overview of the last year, the operating environment, our pursuit of inorganic opportunities and how we are setting up the business for future growth. Let's take a look at our headline numbers for the full year, and then Chris will take you through the drivers, and we'll provide more detail on the financials of each of our 3 divisions.

Like other value style investment managers and, indeed, many of our peers in financial services, the 2019 financial year was a challenging one for Perpetual. We delivered total revenue of $514.1 million which is 4% down on the prior period. The decline in revenue was driven by lower average funds under management as a result of net outflows from Perpetual Investments as well as lower performance fees earned during the period. Our expenses were up 4% which is within our stated 2% to 4% range, representing additional investment into the business and the expenses associated with the evaluation of inorganic opportunities. Net profit after tax was $115.9 million, 17% lower than the prior corresponding period. And our Board has declared a dividend of $1.25 for the second half which brings the full year dividend to $2.50, down 9% on the prior year.

In February, I outlined Perpetual's strategic priorities across 3 core areas: leadership and capability; sustained quality growth; and brand and reputation. I've now been here for 11 months, and we have defined our strategic objectives to position the business for growth and to provide long-term value for our shareholders. To enable us to deliver on these objectives, we are implementing a new operating model which will drive efficiencies. It will ensure that we are more nimble and dynamic. It will enable us to take better advantage of opportunities as they arise. And it's expected that this new model will deliver cost savings of between $18 million to $23 million on an annualized basis within 2 years. Both Chris and I will talk more to this later on in the presentation.

In the past year, global investment markets have been volatile, and regulatory change is impacting all participants who are now adjusting to a post-Hayne world. Asset management firms globally are trading at low valuations, and the Australian advice industry is going through a period of unprecedented change. Despite the various challenges and headwinds, Perpetual's brand remains strong, it remains trusted, and it remains irreplaceable. These qualities, combined with our balance sheet strength, means our business is well positioned to capitalize during this period of change.

As I said we would at the half, we have been actively pursuing inorganic growth opportunities across all parts of our business. Some of these opportunities progressed due to due diligence before we withdrew. We remain diligent in our evaluation of these opportunities, disciplined in our decision-making, and unashamedly, we set a very high bar. Our drive to create quality, sustainable growth will continue.

At the half, I talked about the strength of the Perpetual brand and that we've planned to be bolder in leveraging it. During the second half, we did just that, launching the new positioning for our brand, "trust is earned". This has resonated with our clients and our people, and we will continue -- and will continue to be our primary positioning statement.

Looking back over the financial year, impacted by the operating environment but also by Perpetual-specific events, we experienced mixed performance across our 3 divisions, demonstrating the benefits of our diversified model. You'll see on the left-hand side of this chart the operating profit contribution from each area: Perpetual Investments contributed 47%; Corporate Trust, 28%; and Perpetual Private, 25%.

As I mentioned at the half, to grow, we have to change. And importantly, we have been investing in the business to accelerate our growth agenda. In Perpetual Investments, we raised more than $540 million of new capital via successful listing of the Perpetual Credit Income Trust. And we had a capital raise with the Perpetual Equity Investment Company, or PEIC as it's known. In Perpetual Private, we implemented a new integrated professional services model to facilitate deeper client engagement and an improved client experience. This holistic approach enables clients to gain access to a team of specialists. Within Perpetual Corporate Trust, the investment in our third engine, the data and analytics solutions business, was bolstered by the acquisition of insights and benchmarking business, RFi Analytics. You'll hear more about these investments as we talk to each division.

Our refreshed brand positioning highlights the importance of trust in all that we do. We've prospered over decades, in fact, over 130 years, because we never take our clients for granted. We've achieved a significant uplift in our client advocacy or Net Promoter Score, which is up 5 points to 39 on our already high score. Given the negative environment that we're operating in, it was really pleasing to see this uplift, which is clear evidence of the strength and the depth of our client relationships. Our employee engagement score remains strong at 73% during a year of quite a bit of change at Perpetual, keeping us well above the industry average and placing Perpetual in the top quartile of Australian and New Zealand corporations.

Moving along, let's now look at the drivers of each of our businesses. Over the last financial year, Perpetual Investments reported a net profit before tax of $79.9 million, down 29% over the prior year. As mentioned, the business was impacted by a relative investment performance and net outflows primarily from the institutional channel. You can see from this chart, the All Ords had a volatile year, a tale of two halves. And despite finishing higher, overall growth was half what it was last year. Our PI business continues to be one of Australia's highly regarded investment managers. However, over the year, our value style remained out of favor. We are, of course, disappointed in the outflows that we experienced particularly from the institutional channel, which also reflects a shift from many of the large super funds, to managing investments in-house and their changing asset allocation.

As can be seen from the first chart on this slide, growth stocks have outperformed value stocks significantly over the last 7 years. When we look at the numbers over a longer period, more than 20 years in the case of the second chart, hence, covering a number of economic cycles, there are 2 key observations. Firstly, the valuations do normalize after peak periods. And secondly, that Perpetual's value stock bounces back when P/E has returned to more typical long-term levels. This chart also highlights how long the current cycle has been and that valuations now exceed the highs seen in the tech bubble. It is the longest period in history where growth and momentum have won out over value. This prolonged cycle has impacted our relative performance versus peers for our Aussie equities funds, as can be seen in the next chart.

According to the recent quartile rankings from the Mercer wholesale survey, short- to medium-term performance across our equity funds has been poor. 55% of Perpetual's funds were in the first or second quartile over 3 years and 33% over 5 years. Importantly, long-term performance remained strong with 92% of our funds in the first or second quartile over 10 years. Our investors, whether individuals, advisers or institutions, expect us to be true to label in the way that we invest, and we remain fully committed to our value approach. Whilst I can't predict the markets, most recent economic signals support a belief that we now are in the late stages of what has been a very long cycle. Lower economic -- lower global economic growth, record low interest rates and, as at last week, an inverted yield curve all supporting this view. It is in these conditions we would expect our value style to return to outperformance of indices and of peers.

As you can see towards the bottom of the slide, our credit and fixed income team has delivered strong results for our investors with all their flagship funds in first or second quartiles over 3, 5, 7 and 10 years. We have world-class investment expertise and strong distribution capability, which is why we have been so successful in this asset class.

I'd like to now share a little a bit more about our credit and fixed income team with you. Understandably, there's a lot of focus on Australian equities when people think about Perpetual. However, there are some really strong stories in our business, and our credit and fixed income team is a great example of that. There are 4 key points to make on this slide. First, we have a strong and stable team. Secondly, that team continues to generate exceptional performance. And that exceptional performance and the strong stable team then has led to strong net flows. And you'll see our flows are amongst the strongest in this sector within the industry, excluding cash, so it's credit and fixed income funds and mandates. So applying a contemporary approach to distribution, these things work together and generate growth.

Our commitment to bring new strategies to market saw the ASX listing of the Perpetual Credit Income Trust, which is a diversified and actively managed portfolio of credit and fixed income assets. And we had to close that raising early due to such strong investor demand. We raised the maximum $440 million, including oversubscriptions. The success of that listing and our strong net flows from the retail channel demonstrate demand for more contemporary products from us and the desire to access our investment expertise and the potential of our distribution platform. My clear goal for Perpetual is to have more strong stories like this over time.

Moving on to Perpetual Private. During a really difficult time for the Australian advice sector, Perpetual Private, or PP as we call it, showed the strength and resilience of its business this financial year with 5% growth in average funds under advice, with both positive equity markets and positive net flows continuing. Activity levels in the advice industry softened due to the Royal Commission, and flows were impacted. However, it's pleasing to note that for the sixth consecutive year, Perpetual Private has delivered positive flows. The business experienced continued growth within its proprietary opportunity funds with funds under management rising to $6.7 billion, up from $6.4 billion in the prior year. Market-related revenue margin was 85 basis points this year compared to 89 basis points in the previous year. This small decline was due to changes in the portfolio mix and some legacy book repricing.

Our deep trustee heritage and financial advice client relationships across multiple generations are key strengths of the Perpetual Private business. In addition, we are one of Australia's largest managers of philanthropic funds. At the end of FY '19, funds under advice to charitable trusts, including endowment funds, private and public ancillary funds, have grown to $2.9 billion. During the 2019 financial year, we continued to strengthen our proposition with high-net-worth clients including the established wealthy, business owners, medical specialists, native title and not-for-profit groups.

The strength of Fordham as a key referral source was further demonstrated by new client growth within the high-net-worth segment. Different to some of our key competitors, we have solid referrals, we have new client growth, positive flows and growth in our adviser numbers. High-net-worth advisers and their clients are looking for a trusted brand and a quality advice model now more than ever, and Perpetual Private ticks all the right boxes.

Let's now take a closer look at Perpetual Corporate Trust. PCT had another strong year with both Debt Market Services and Managed Fund Services contributing positively to the business' growth.

In FY '19, Managed Fund Services revenue was $51.3 million, $5.5 million or 12% higher than the prior year. This was primarily due to continued market activity within its core commercial property and managed investment funds segments, coupled with higher asset prices. As stated at the half, we expected our MFS business to benefit from increased trend of asset managers outsourcing the role of responsible entity, and that has indeed been the case. We were involved in a number of significant transactions in the second half including Atlas, Atrium and Metrics' capital. Our knowledge and expertise in this space continues to deliver client outcomes and provide growth in revenue.

Revenue within our Debt Market Services business was solid, which at $61.6 million is $4.1 million or 7% higher than the prior financial year. This included the acquisition of RFi Analytics in the data and analytics solutions business. The increase was due primarily to positive net issuance led by growth in the nonbank sector. This trend continues to build as the nonbank sector takes market share from the majors and due to the result of growth in securitization funds and funds under administration for us. There were a number of significant transactions in the second half for the DMS business, including ME Bank, ANZ and Liberty.

PCT remained -- sorry, I beg your pardon. PCT maintained its market leadership position in FY '19 and has not shed a Debt Market Services top 20 trustee client for more than 10 years. PCT's industry-leading NPS score of 53 is testament to the strength of our relationships.

We continue to evolve our digital product offering to meet clients' ever-changing needs due to the regulatory and funding environment. Our data and analytics solutions business was established with this client focus in mind, so let's take a closer look at them. The acquisition of RFi Analytics is aligned to our strategy and further enhances our expertise in data management and the provision of RegTech solutions to the industry. We have an unmatched product and service offering utilizing data from the $2.4 trillion mortgage industry and adding smart tools to aid with regulatory reporting and to provide quality data insights. This privileged dataset has enabled us to secure significant mandates with Westpac, Beyond Bank and Athena, to name a few. So that's new key clients from -- amongst the major banks, challenger banks and the fintech sector. The data and analytics solutions business is growing and is now strengthening its own revenue streams, which I expect to become material over time.

Chris Green, our CFO, will now take you through a more detailed review of the financials before I return to share our strategic forward-looking priorities. Thank you.

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Christopher Green, Perpetual Limited - CFO [3]

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Thanks, Rob, and good morning, everyone.

Our results, as Rob said, reflect challenging additions for the industry as well as decisions taken by management to prepare the company for growth in the future. The results were mixed across our 3 business units. For clarity, when I go through these metrics, I'll be comparing full year '19 to the corresponding prior year unless I say otherwise.

In summary, operating revenues of $514.1 million, down 4%; total expenses of $351.9 million were 4% higher, within our stated guidance; and net profit after tax was $115.9 million, down 17%. There were no significant items reported this year. And the effective tax rate of 28.5% was higher than last year. As you may recall, last year, we benefited from a one-off reversal which had a favorable impact on that period. The final dividend of $1.25 takes the full year dividend to $2.50 per share, representing a payout ratio of 100%, at the top end of our guidance to pay 80% to 100% of NPAT on an annualized basis. Return on equity of 17.5% was down from 21.6%.

Now I'll talk in revenue in more detail. The 4% decrease was due largely to lower revenue in Perpetual Investments off the back of lower FUM and performance fees; relatively flat revenue in Perpetual Private which saw less activity post Royal Commission. This is all offset by continued growth in Perpetual Corporate Trust.

As we noted at the half, this is the first year unrealized gains and losses on our listed investments are being reported through the P&L. More favorable markets this half meant that a large portion of that $10 million of unrealized losses reported in the first half were recouped, resulting in $3.4 million of unrealized loss for the full year. This was partially offset by higher interest and distributions which contributed to the $1.8 million increase in other income.

The increase in expenses reflects higher general and administrative costs which includes a range of BAU costs and growth initiatives across the business, which I'll step you through in more detail on the next slide; increased depreciation and amortization charges, reflecting our continued investment in technology as well as 6 months of amortization charges connected with the acquisition of the RFi Analytics business in PCT; a $1.3 million increase in equity rem costs. Again, you'll recall, in FY '18, equity rem was lower due to reversals from KMP departures. And this was offset by a 9.1 reduction in staff -- $9.1 million reduction in staff costs due to lower variable incentive outcomes across the group.

Now let's give you a bit more color on our expense profile this year and some of the growth initiatives in which we've been investing. You should note the grouping of these expenses is a little different to how we've previously presented the numbers. As discussed earlier, despite a modest increase in equity rem and increased head count due in part to the RFi Analytics acquisition and in part due to CPI increases, total staff costs were lower, primarily due to that lower variable rem number. Our higher technology cost across the group includes new software licenses to support existing and new business and infrastructure upgrades including the replacement of core legacy platforms in PCT. We spent approximately $5.2 million on organic growth initiatives across the business including the launch cost of the Credit Income Trust as well as listing costs of PEIC's second capital raising. We spent money on increased marketing, on the trustees' earned positioning and cost to establish professional services model in PP and the on-boarding of new advisers. We also spent approximately $4.7 million on inorganic growth opportunities. A small portion of this includes the completion cost of RFi Analytics, with the majority of the costs incurred on the evaluation of several local and offshore acquisitions. We also saw a modest increase in other costs mainly driven by higher D&A, partially offset by lower premises costs and lower professional fees.

Finally, on group expenses, Rob will walk you through the operating model review shortly and the various benefits that we'll accrue from it. Those benefits will ultimately include $18 million to $23 million in annualized savings for the group. We expect to see half of those benefits hit the books in FY '20 and the full amount the following year. The combination of those benefits with continued investment in both organic and inorganic initiatives this year mean we expect to see expenses grow in FY '19 at the lower end of our 2% to 4% expense growth guidance.

Moving now to the individual business units, starting with Perpetual Investments. As Rob has discussed, PI's performance continues to be impacted by the prolonged bull market which has favored growth over value investing. In terms of results, total revenue of $205 million was down 12%. The decrease was largely due to lower average from continued outflows and lower performance fees. Average FUM of $28.9 million (sic) [$28.9 billion] was 8% lower compared to $31.5 billion this time last year. We saw outflows across the year largely from the institutional channel. We received $3.5 million in performance fees this year compared with $9.2 million this time last year. Those fees were largely attributable to our structured EMCF and our pure equity alpha products. Average revenue margin for the year was 71 basis points, 2 basis points lower than last year. Excluding performance fees, underlying average margins were in line with last year at 70 basis points. Expenses were 4% higher. As discussed earlier, this was impacted by inorganic opportunities as well as costs associated with the capital raisings for the PEIC and the Credit Income Trust. PBT margin on revenue was down 29% due to lower revenue achieved and investment in growth initiatives.

Perpetual Private reported total revenue of $186.1 million, relatively flat to last year's 186.4%. Closing FUA of $14.8 billion was 5% higher compared to 30 June driven by positive net flows and higher equity markets. Market revenue of $120.4 million was $100,000 lower than last year with the higher average FUA offset by pricing adjustments to certain MySuper products. Nonmarket-related revenue of $65.7 million was flat compared to last year but was higher in the second half versus the first half, reflecting the seasonality of the compliance-led business provided by our advisory team. Fordham continues to grow with revenue of $2.3 million -- $2.3 million higher than this time last year. The increase in nonmarket revenue was partially offset by repricing and removal of various fees on our Perpetual select products. Total expenses of $132 million were 3% higher and included costs associated with growth initiatives as well as some customer remediation costs. The market-related revenue margin was 4 basis points lower than last year. This was due to a combination of factors: firstly, as we called out last year, the higher margin in the first half of 2018 which related to the timing of rebates in that period; in addition, the margin was impacted by the repricing adjustments I've noted above.

Now to Perpetual Corporate Trust. PCT had another strong year. Total revenue of $112.9 million was up 9%. Continued momentum in our Managed Fund Services business and growth in our product extensions in Debt Market Services supported the result. The MFS revenue of $51.3 million was 12% higher than last year largely driven by new deals won across fund manager clients looking to appoint an independent, responsible entity in the post-Hayne world. Debt Market Services revenue of $61.6 million was 7% higher, benefiting from growth in bank but also particularly nonbank lenders as well as a contribution from the RFi Analytics business in the second half. As Rob mentioned, this acquisition, which now forms part of our data and analytics solutions business, enhanced our capability for regulatory risk and compliance reporting for our banking and servicing -- banking and financial services clients. Total expenses for Corporate Trust increased by 6% and included the completion costs and 6 months of BAU costs for the RFi business, while depreciation and amortization were up 14% off the back of continued investment in technology upgrades and product enhancements in data and analytics solutions. That program will ultimately deliver better outcomes for our clients and for our people. We are further automating activities and upgrading our data security to protect Perpetual and our clients from the ever-increasing threat of cyber fraud. PCT's PBT margin was 42% of revenue, 1% higher than last year. Debt Market Services FUA was up 10% despite lower securitization market issuance. We've also seen solid growth in repo securitization and covered bonds with our banking clients, while Managed Fund Services again experienced strong growth with FUA increasing 11% to $270 billion.

The change in cash and cash equivalents reflects lower cash generated by the business this year. Liquid investments, which include our seed funds, were 10% down compared to June 2018. This reflects mark-to-market adjustments discussed earlier as well as a sell-down of some of the investments in the first half. Goodwill and other intangibles increased by 5%, reflecting our acquisition of the RFi Analytics business and continued investment in technology upgrades. The balance sheet remains strong, gearing remains low and stable, and goodwill is supported by solid income flow in each of the 3 business units. The decrease in other assets and other liabilities reflects the successful resolution of our legacy litigation issue during the second half of the year.

While EPS is down, reflecting a lower earnings profile this year, Perpetual's ROE remained strong at 17.5%. The fully franked dividend of $2.50 represents a 9% decrease from 2018. It will be fully franked. As I noted earlier, it represents a payout ratio of 100% on an annualized basis.

Before I hand you back to Rob to talk through our strategic priorities, I should note that we are planning to hold an Investor Day in late October to provide more detail on our target operating model and to dive more into each of our business lines. And we'll provide you with more detail on that closer to the time.

With that, I'll pass back to Rob.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [4]

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Thanks, Chris.

Turning to strategic priorities. Our rich heritage, our brand and long-standing reputation are key strengths of ours. We remain committed to our portfolio of businesses and the diversification benefits which result from operating in a number of important markets. It provides us with material nonmarket-linked revenue streams which account for around 35% of group revenues. Our strategic focus is to deliver sustained growth and quality outcomes for our stakeholders. We will do this by deepening our strong client relationships and by finding new ways to improve the client experience with a constant focus on improving our distribution across all of our businesses. We are working to create the right environment for our people to thrive, promoting a culture of innovation and empowerment, to be nimble and to increase productivity, and our new operating model will achieve that. We will invest in digital solutions to deliver on key employee and client expectations, investing in the right things to improve our growth prospects.

Looking at PI specifically, there are 2 things that drive sustainable growth in asset management companies. Firstly, you must have world-class investment capabilities. And secondly, you must lead the industry in your approach to distribution. My focus is to ensure we have these 2 ingredients at all times across a growing number of investment capabilities. We are intent on bringing new investment capabilities to Perpetual, and we are open to considering other investment approaches to broaden our opportunity set, as I said at the half. Over the year, we have spent considerable time assessing acquisition opportunities across various geographies, as Chris alluded to. We have pulled out of discussions for a variety of reasons. As I mentioned earlier, we have unashamedly set a very high bar. As a core strategic priority, I have signed an executive-level resource to focus on identifying and assessing opportunities. We are focused on better leveraging our brand, expanding our distribution footprint and ensuring that we have a flexible model to adapt to industry change and to open up new channels. Our new Head of PI Distribution will start in the second quarter, and part of his mandate will be to further drive our direct client channel.

Moving to Perpetual Private, our focus is on exploiting the opportunities that we see arising from the dislocation in the advice sector. The seismic shifts that are underway are presenting us with unique opportunities. To ensure we are ideally positioned to benefit from this change, we launched our new professional services model during the last half. With trust in the advice sector seriously challenged, the Perpetual brand and our focused business model are attractive to the industry's best advisers and to their clients. We said at the half we would leverage the industry dislocation to attract new advisers, and we have done so, with 5 new advisers joining PP in Q1 and a further 6 to join in Q2. And we have a strong pipeline and dedicated resources focused on attracting the best advisers to PP. As an indication of the quality of the adviser we are attracting, the 11 that I have referred to currently provide advice on a combined, or well in excess of $800 million. So these are advisers and clients at the top of the industry. Finally, there are attractive acquisition opportunities for Perpetual Private. However, they must align with our quality standards and our segmentation focus.

Turning now to Perpetual Corporate Trust. Our strategy in PCT is focused on continuing to leverage our strong market position to deepen our client relationships and open up new revenue streams over time. We expect to benefit from the growth in the nonbank sector as our client relationships are unmatched across our DMS business covering banks, nonbanks and challenger banks. We will continue to invest wisely in technology that improves our clients' experience with us including migrating our core operating systems to cloud-based solutions to improve efficiency and to reduce risk. Our strong market position means we have a unique dataset that when combined with our RegTech solutions offers real insights, risk management tools and value-add to our clients. We expect our MFS business to continue to be a beneficiary of the trend towards outsourcing responsible entity and other services in a post-Hayne world, as PCT is seen as one of the most trusted partners in this growing area.

As with our other businesses, we have an active M&A pipeline, and we will consider the right type of opportunities to extend our services or our reach.

I'll now take you through an overview of our operating model review that we've referred to. We've talked about the current operating environment, and we've talked about our strategic priorities. To set ourselves up to take better advantage of opportunities, we are realigning our business to adapt to the ever-changing environment. We are focusing on a model that brings us closer to the client, provides improved operational excellence, allows for more innovation and delivers streamlined governance and decision-making processes. This includes reframing the Executive Committee, my leadership team, to reflect areas of focus and to improve the way that we operate. With some changes in roles to focus on -- within the executive team with some of the changes of roles will focus -- allow a greater focus on our core strategic priorities. And they are in recognition of the need to concentrate our efforts on -- sorry, let me start that again. In recognition of the need to concentrate our efforts on Perpetual Investments, I will assume management responsibility directly for this important part of the business. Our new operating model will provide a better platform from which to grow the business and, through synergies and realignment of roles, will, as Chris said, deliver an expected $18 million to $23 million in cost savings on an annualized basis within 2 years. Not only will we be able to operate more efficiently, but we will be investing more in our brand, investing more in technology and distribution. We will be able to empower our people to be nimbler in a fast-changing world, leading to more ways to improve client acquisition and experience. I'm confident that our refreshed operating model will enable us to adapt, to exploit future opportunities.

As we all know, it's been an interesting time for the industry. There are many macro factors that play along with the ongoing industry change and regulatory pressures. Perpetual has indeed faced near-term challenges in light of this, but we remain committed to our shareholders, to our people and our investment style. And we remain very confident of future long-term delivery.

I think with that, I think we are now going to move to questions. I'd like to thank you for your ongoing support and to our shareholders for trusting us to grow and protect your wealth today and every day. And we will move to questions.

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Questions and Answers

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [1]

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It's Ed Henning from CLSA. Can I just start with a question on costs and cost savings, is there a cost to achieve those?

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Christopher Green, Perpetual Limited - CFO [2]

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Yes, there is. Yes. The cost to achieve that over 12 to 18 months, this will be circa $15 million to $20 million to achieve those savings.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [3]

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Okay. And then the second one, you talked obviously a lot again about M&A and inorganic opportunities. Can you just run us through what you think your balance sheet capacity is for those?

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Christopher Green, Perpetual Limited - CFO [4]

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Yes. Well, I think at the half, I spoke about the various levers we have when it comes to inorganic. And it's fair to say when we have investigated opportunities over the past 6 months, they have ranged from relatively small bolt-ons to large transformational transactions. And so we have a circa $200 million of free cash when you take out the regulatory capital that we need to hold to run the businesses that we have. We obviously have a lot of capacity to -- we're well within our stated leverage guidance, so we have the ability to borrow more. And we've received good support from our partners and are comfortable that should we require, we could raise equity as well. But we have about $200 million of cash, and we have capacity to borrow as well.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [5]

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And just what was your leverage ratio again?

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Christopher Green, Perpetual Limited - CFO [6]

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It's about 11.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [7]

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Sorry, your target range there.

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Christopher Green, Perpetual Limited - CFO [8]

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It's fully up to 30. 30 is the policy.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [9]

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Andrei Stadnik from Morgan Stanley. Can I just ask -- there has been one name mentioned in the media seen as a potential M&A target which looks like quite a similar value-orientated managed Perpetual, quite a similar size as well. Can you confirm if discussions is still ongoing there? Is there anything you can say about that particular target?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [10]

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Andrei, we are not in current discussions with Pzena. There's -- was there a second part to the question, sorry?

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Andrei Stadnik, Morgan Stanley, Research Division - VP [11]

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Sorry. No, no. Yes. And my second question, just around costs, can you explain a little bit more? Because $20 million out of -- at the midpoint coming through very quickly sounds quite ambitious. So can you just talk a little bit about that? And also, what is the starting point for the cost side? Is it the full $352 million? Or would you drop that by about $5 million to $7 million of one-offs that were this year? So what is that in basis point for the costs out? And how can you do this so quickly?

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Christopher Green, Perpetual Limited - CFO [12]

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Let me start?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [13]

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Sure.

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Christopher Green, Perpetual Limited - CFO [14]

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So the starting point, we wouldn't be including the one-offs that we've seen as a starting point as that number is really in the first-phase cost out resulting to having less people around. And we've talked about that first phase being executed by the 1st of October, so we have set ourselves a challenging timetable, but we're working diligently towards that.

It's important to note, though, that we're doing that in part because we continue to invest in the business. We've made a number of investments on the organic and inorganic front in FY '19, and we'll continue to look at those opportunities going forward. But to do so, we need to cut our costs, and we need to make sure that we're freeing up the capital we need to do the things that we want to do to generate that long-term shareholder value. So it's important to note that we are still looking within our 2% to 4% guidance for the year, at the lower end admittedly. That's because we'll continue to invest in the business. I think it's important there to take into account, too, that's in part why the dividend is up at the top end there. We're cognizant that we're asking a lot of our shareholders. But we're unapologetic for continuing to invest in the long-term growth of the business.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [15]

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The other thing I'd say, yes, but when you touch on timing, it seems pretty quick. We've been working on this for months now. And most of that work has been driven internally. So -- and when we look at the costs associated with the program, it's not as if we're spending multiple millions of dollars on external costs. We're driving this ourselves.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [16]

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So just to confirm, when you say the one-offs are not part of this, so the starting point for how the costs are going to be delivered, it's not $352 million, it's $347 million?

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Christopher Green, Perpetual Limited - CFO [17]

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That's a better number. Yes.

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Brendan Carrig, Macquarie Research - Research Analyst [18]

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Brendan Carrig from Macquarie. Just 2 questions from me. Just the first on the acquisitions, you mentioned there was a few stumbling blocks that you got through during the due diligence phases. Is there a common theme that you are coming across there as to what was hindering you? Or was it a variety of different things depending on the acquisition?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [19]

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It's more the latter, Brendan. Yes, we've been actively engaged in due diligence on opportunities across each of our businesses. That's not just PI. And yes, it's different things there. Yes, that sometimes, it's been a value question. Sometimes, through DD, you have discovery that impacts your view on value. Sometimes, in one particular potential deal, yes, through DD, we have discovery, we went back, we renegotiated the price downwards, but then other factors impacted our decision to pull out. So it really is a variety of factors.

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Brendan Carrig, Macquarie Research - Research Analyst [20]

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And the second question, just on Perpetual Private, the repricing, can you just confirm the timing of that? And should we expect that the second half revenue margin is the go-forward margin given those repricing initiatives that were taken?

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Christopher Green, Perpetual Limited - CFO [21]

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Yes, I think that's the way to think about it again, that second half margin going forward based on what we've done to those legacy products is the right way.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [22]

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It's Matt Dunger from Bank of America. If I could just ask on the second half '19 outflows accelerating, are you seeing anything happening here? What should we expect going forward? Are there -- can you give us a bit of an indication of concentrations to mandates?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [23]

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Yes, sure. Most of the outflows came from institutional, as we touched on. And yes, institutional is lumpy. But it's been widely reported that we as well as quite a few other active Aussie equity managers lost a very large mandate from one of the largest super funds. That was about 1 -- just under $1.4 billion, I think it was $1.38 billion or something like that. So -- and I think if you -- we're just looking at some numbers earlier this morning. I think the top 5, yes, individual outflows accounted for, yes, a pretty significant portion of the outflow. So there is lumpiness to the institutional component of our book, yes. And the sad thing is our institutional book is therefore smaller. Therefore, the risk was smaller I suppose in some ways. It's not the way you'd like to de-risk your business. And then -- but some lumpiness remains, yes, in that book of business. So [David], what have we announced, about 4 -- a bit over $4.5 billion in institutional?

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Unidentified Company Representative, [24]

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In Australian equities.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [25]

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In Australian equities. So that number's obviously come down, but there's a bit of lumpiness left in that. But yes, we -- as I commented on before, we're doing as much as we can do from a client relationship and distribution perspective to encourage our investors, some of whom have been with us for very long periods of time.

Yes, for example, that $1.4 billion mandate that left us had been with Perpetual Investments for just over 20 years. And over 20 years, Perpetual Investments over the 20 years, each and every year on average are there, the 350 basis points. Yes, people say that active is broken. Well, that proves it's not. So yes, we are urging our clients to stay the course. And I think as I've commented on before, we're getting a lot more feedback coming from institutional investors, not just in Australia but the world over, who are starting to consider shifts in their portfolios based upon where markets and conditions sit, so we're hopeful.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [26]

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Just on my second question, on Perpetual Private, at the half year result, you're optimistic about new advisers joining the business. We've seen a small increase in adviser numbers. Do you expect this to continue? Is it early days?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [27]

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Yes, it's not small. At Perpetual Private, it's never been a number of advisers game for us. We have 60 advisers, so growing by 11 is actually quite material. It's the quality of the individuals. The average -- looking at the math, the average funds under advice per adviser at Perpetual Private is exceptional, because we only operate in that part of the marketplace. So for Mark Smith and team to have signed up 11 people in a half I think is quite remarkable. I don't think there's sort of been anything like that that's been done before at Perpetual. But it shows -- we did say at the half we hope for that to happen. It has happened. It is very material. And I gave you a conservative number in terms of those 11 and the assets they currently advise on. Now that's not to say the -- yes, that sort of north of $800 million that they currently advise on is going to all walk across on day 1. It takes time. It might not all come. And in fact, yes, I think on average, we would say in the first year, it's probably a net negative to the P&L because we have costs that we take on when we take people onboard. But yes, I think it really shows the size of the opportunity that Perpetual Private has and how our business model and our brand is a honeypot for the best advisers.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [28]

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Can that run rate continue going forward?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [29]

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Mark, can that continue going forward? Good luck. I mean I know how active he and his team is. And Mark has dedicated, yes, specialist resources to the cause. And then thrown in, on top of that, the fact that there are some really interesting bolt-on acquisition opportunities as well. So I think it would be hard-pressed to continue to grow at 20% for the half. That would be -- I think the trend can definitely continue, and it's a multiyear event.

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Christopher Green, Perpetual Limited - CFO [30]

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I think the issue there is that we probably could continue to do that, but it's the quality filter that's actually the impediment to that. And to give you a bit more guidance, it is a negative drag for the first year when we take on these new advisers. They pay their way at some point during the second year. And then over 4 or 5 years, the IRRs, it's in excess of 50%, so it grows very well. But that first year, it's a negative drag.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [31]

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I think the other thing to think about, too, is if you wound the clock back, what, 18 months, Mark, 2 years, what would you be paying for these businesses if you're buying them? What sort of multiple are they? And we're not paying for them. Yes, there's a salary cost and there's compensation costs and take-on costs. So it is a unique -- yes, I think Mark's referred to it before as a once-in-a-lifetime opportunity, and that's how we see it.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [32]

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Kieren Chidgey, UBS. Chris, maybe just starting on the cost-out target of around $20 million by FY '21, I'd say this year, you called out sort of lower variable rem as sort of an $8 million benefit. As we look out over 2 years, with the cost out coming through, helping the P&L, does that $8 million come back? I guess the question is does the $20 million drop through to the bottom line, or we'll just see some offsets through line items like that?

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Christopher Green, Perpetual Limited - CFO [33]

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Yes. I think maybe thinking about them separately to a degree, we are assuming that performance in FY '20 is better than FY '19, so there'll be a rebound, if you like, in that variable rem line. By the same token, we are going to have fewer people in the business, and that has obviously a countervailing impact on that number. But there's a correlation. But what's going to drive the variable returns up to something like FY '18 is more our assumptions around how we're going to perform during this year more so than that -- the cost-out model.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [34]

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Okay. So the $20 million is a gross number?

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Christopher Green, Perpetual Limited - CFO [35]

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Yes.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [36]

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And the BAU cost growth, I think you said around 2% next year?

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Christopher Green, Perpetual Limited - CFO [37]

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Yes, overall.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [38]

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Is that a similar sort of level you can maintain into '21? Or...

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Christopher Green, Perpetual Limited - CFO [39]

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Yes, I think the variability we're going to see on that expense growth is going to come through. And you see it in -- and what we've talked about today, which is we have a number of organic growth opportunities that we are executing at any given point in time. The listed retail strategy has costs associated with it. And on the inorganic side, we've spent a lot of time and had a lot of activity evaluating opportunities, and that has a cost to it as well. Both of those, when you add to the adviser take-on, are difficult to predict and forecast, so that's going to be the variability that comes through this year and next.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [40]

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Okay. The divisional mix, sort of can you give any broad indications of the costs out and sort of whether or not we should anticipate any revenue leakage off the back of the actions?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [41]

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I'd say no, you should not expect any revenue leakage on the back end of, yes, the decisions we're making around the operating model. In fact, to the contrary, yes, we will protect our revenue streams as much as we possibly can, so there's no sort of frontline activity impact there. This is about being a more efficient organization, making decisions quicker, taking away layers of decision-making and creeping bureaucracy and ensuring that, yes, I mean at the end of the day, Perpetual is not that large a firm, yes. And we -- at times, the organization acts as though it's a CBA or a Westpac. We need to act like the size that we are and be nimble.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [42]

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Just one final follow-up question on the acquisition opportunities you've been looking at. Can you just provide a bit of color in terms of which regions and the sort of businesses you've considered over the past 6 months?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [43]

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Yes, sure, sure. Pretty much all the things that we said we'd look at the half. I think at the half, there was a slide that talked -- had, yes, a bunch of boxes that we needed to tick: world-class investors, yes; obviously, yes, good numbers over a long period of time; yes, running money in the right sort of capabilities that we think are relevant going forward. Typically, our assumption is whatever those investment capabilities are, they're going to have global in the name somewhere. Yes, Perpetual is long and strong on domestic assets and domestic clients. We need more global capabilities, and we need more global clients to diversify.

Yes, we -- it's quite often the case that when you see terrific people with terrific performance and terrific products, that the potential of the business is limited, so we've got to have the potential. So there needs to be significant capacity left as well. And that's one of the things that makes it a challenging search because, quite often, if the people, the products, the performance is all fantastic, they've grown well or they don't need much help growing. The nature of the engagements that we've had with people and geographically, we've had really good engagements with people in the U.S. and in Europe, is that, yes, when on first blush, yes, managers in those places will think, well, what value is Perpetual going to add? The obvious stuff is that we can help them with Aussie distribution, yes, and we've got one of the strongest brands and a great distribution footprint here. The less obvious stuff is that, quite often, these firms are institutional in focus. Quite often, they struggle to really operate effectively and grow effectively in retail markets, their own retail markets. And through various people here and, yes, historic connections we have, we can help them with distribution plans wherever they are. Yes, there are serious numbers of super high-quality distribution people, many of whom I've worked with before, who want to work for a shop like this. So we can help them put together those sorts of teams and help with distribution solutions in the U.K., in Europe, in the U.S., even Latin America because we know how to do that stuff.

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Unidentified Analyst, [44]

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[Michelle Wubbels with Norton Corporation]. Given you've got very high standards when you're looking for these acquisitions, is there the possibility that you could spend another $4 million or $5 million next year and still not have anything that meets your standards?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [45]

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Well, Chris will have his view on this. I'd be pretty disappointed if that was the case, [Michelle]. Yes, it's hard to predict these things, but I would be pretty disappointed if that was the case. Yes, this is, I think I've said it clearly before, strategic priority #1. And yes, we are not sparing the horses in terms of our approach to ensuring that we find the right solutions here. It could be an outcome, but I'd be pretty disappointed if it was.

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Christopher Green, Perpetual Limited - CFO [46]

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And we were fairly deeply into due diligence on a couple of opportunities this -- in FY '19, that sort of dive at the depth. So we don't want too many more of those.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [47]

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Well, and sometimes, those can come back, too, for various reasons. It's amazing the power you get in negotiation when you walk away.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [48]

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It's Nigel Pittaway here from Citi. Just the first question on the revenue margin in Perpetual Investments, I mean given the nature of the outflows you've been experiencing, you're saying margins were pretty flat half-on-half. I mean is there anything else going on there? Or is it just timing that's preventing upward pressure on the margins given the lower margin nature of the flows?

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Christopher Green, Perpetual Limited - CFO [49]

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There's a mix issue there as well, which is the outflows are coming largely from the institutional channel which is lower margin.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [50]

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Which would normally push margin up, but you're not seeing that.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [51]

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But we're also seeing some, yes, outflow but lesser pace of outflow from legacy books of business, so it sort of counteracts itself.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [52]

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Okay. Secondly, just further on the pricing adjustments in Perpetual Private, I mean on those MySuper products, how material is that actually? And presumably they were just made as a competitive reaction, is that fair to say? Or are there other reasons?

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Christopher Green, Perpetual Limited - CFO [53]

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I'd say less a competitive reaction and more that notwithstanding the fact that we weren't called before the Royal Commission or we'd say we're very different to a lot of our competitors, we did look very closely at our book in its entirety. And there were areas of broadly really all product or product that was acquired over time that we determined that we need to adjust. But they're not large numbers and not material.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [54]

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MySuper is $200 million of assets.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [55]

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So it's pretty immaterial, really, it's just that called it out. Yes. Okay. On the acquisitions, do you have -- I mean I appreciate you said the pipeline is improving. But I mean do you have any live at the moment or are all the ones that you've tried?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [56]

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Yes.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [57]

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Is that a significant number?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [58]

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Depends on your definition of significant, Nigel. We've got live -- well, yes, live M&A opportunities in each of our businesses now.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [59]

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Right. Okay. And then finally, it's just a point of clarification, but those one-off costs associated with the cost savings, presumably you're going to take them below the line, are you?

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Christopher Green, Perpetual Limited - CFO [60]

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Those one-off costs, yes, we will.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [61]

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Russell Gill, JPMorgan. Two questions. Firstly, just on your -- the listed investment trust that you've raised, a lot of your competitors have pushed quite aggressively down this path the last couple of years. Can you just talk -- there's obviously a cost associated with that. Can you just talk through your thoughts on that marketplace and where you see that going in the next year or 2?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [62]

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Maybe I'll talk to the market, and maybe you can talk to the costs. Yes, there has been a massive resurgence in this space in recent times. And the other thing, there are some people coming out with interesting and innovative structures. But yes, in many ways, it's indicative of the changing distribution landscape in the country in that everything's up for grabs I think from a distribution perspective. And by having listed vehicles, that provides, yet, more direct access to the price that a lot of people have been seeking, that is access into self-managed super funds, which is typically difficult to access. Yes, I think -- thinking about the changing distribution landscape in the last decade, you could be incredibly successful as an asset manager by having 10 good relationships, yes, the banks, yes, AMP, IOOF and Macquarie and some of the hubs. That's not the case anymore. That's all going to change. In many ways, I can sense a reversion in the distribution landscape back to the way it was when I started at the industry in 1987 when it was hand-to-hand combat dealing with lots of smaller businesses. So yes, we need to make sure that we're attuned to the potential of the distribution landscape to change to that extent because it most likely will. It's already starting to happen, and yes, the emergence of smaller dealer groups, specialist high-net-worth businesses popping up probably, and then different mechanisms like through -- getting access directly through the ASX. And you think -- an old colleague of mine, Dom -- and I know Dom Stevens running the ASX. The ASX now is an interesting vehicle because it provides an access point to all asset classes, all different investment styles, and it actually looks and feels a little bit like a platform. So I think we just need to be attuned to these changing dynamics. We need to make sure that we front up to them in the right sort of way. And we'll continue to do that. And you're right, there is a cost that comes with it particularly with these listed vehicles. But I think when you take a long-term view of the captive capital they provide, it's -- they're pretty -- very important vehicles on trust.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [63]

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Can you give us approximate cost, the cost you -- for the $400 million, how much of cost raised, the MCT?

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Christopher Green, Perpetual Limited - CFO [64]

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Well, so not to actually disclose it, right, look, there's 2 ways to think about the cost. The cost of a new vehicle, which we incur those costs, we amortize it over a reasonable life. When we tap the market for further money raised with the equities vehicle, we take all of those costs at the time. And that's -- so that makes a tap at the market more -- a more expensive way of raising the money than the initial raise itself. But look, they are large numbers, but we always -- whether it's inorganic, it's organic, we take a long-term view on the prospects of -- and the way we deploy our capital, we think the way we deploy the capital into those vehicles in FY '19 is going to give great benefits over the 3 to 5 years.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [65]

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And I think it goes on the credit link, one of the reasons that we kept the -- raising $440 million was to ensure that the investment managers could invest that capital in an appropriate time frame. That's happened, which is good news. And probably -- it happened probably quicker than we initially thought, so that opens up opportunities for the possibility of future raisings.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [66]

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Just a second question on capital going forward, which I think it was the very first question, you still got $70 million allocated to liquid investments which includes seed funds in there. As you think acquisitions going forward, can you just talk through what level you think your seed funds should be sitting at and whether you can, I mean, take money from that to redeploy into acquisitions?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [67]

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Yes. I guess we're not a natural seeder. Some businesses are more natural seeders because they're a life company, for example, or houses with bigger balance sheets. So that's -- we can certainly help provide seed, but we're not a natural seeder. So that's probably -- for a potential partner of ours, it's probably not an attraction point. Yes, we could certainly help when we do actively seed, yes, on local products, but it's not as if we can drop hundreds of millions of dollars in co-investment programs.

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Christopher Green, Perpetual Limited - CFO [68]

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And we haven't -- when we've thought about capacity in our inorganic strategy, we have not thought about freeing up capacity through those investments as part of that capacity.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [69]

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Anything else? Yes, here's one.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [70]

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Ed Henning from CLSA again. You just touched on the changing dynamic in the distribution space. Can you just expand a little bit more on that? Do you need further investment in that space? Are you in the right areas? Are there other pockets of money overseas that you should be targeting? And just run through your thoughts on that, please.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [71]

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Yes, sure. So quite domestically first, yes, I said that we have a new Head of PI Distribution commencing, I think, [if I remember] it's December 3 is his start date. We can't announce, this is important, for another couple of weeks for various reasons, but we will announce that pretty soon. Considerations about the changing landscape are going to be pretty important for us. I think, yes, we may well -- yes, our resource allocation in PI to distribution in sheer number of heads is good. Yes, I really can't see that we need to add to those heads. I think yes, the channel focus will be something that he will look at. Yes, and I think -- yes, so I don't see us adding cost to distribution. It's about the way we front up, and so mix may well become relevant there.

Yes, the other thing I would state is that we've obviously had plenty of pressure, yes, on our Aussie equities book and including on things like a recommended status at research houses. And I think the fact that we've maintained the vast majority of those recommendations during a period of sustained underperformance shows the strength of the product. And the fact that people, 96%, 96% of research house recommendations maintained during the half given our underperformance is now well into the medium term I think shows that people really do believe in what we do. So yes, the core proposition is there. I think yes, when we add more investment capability in the way we front up to the market, we'll continue to adjust.

And I've made comments about offshore. Yes, I think we have to have investment capabilities that are more relevant to Aussie investors but more relevant across the board in a sense. Yes, I think one of the boxes we need to tick when we look in global asset management companies to partner up with is that I think the perfect capabilities, global capabilities of those, can we say, are sold in the same shape, in the same form, yes, to multiple countries. Yes, I think if over time, we can have 2 or 3, 3 or 4, 4 or 5 of those sorts of capabilities, so I can tell you more stories about, yes, stable investment team, generating terrific numbers, terrific growth from multiple jurisdictions, then I think we'll be in a good place. Well, that's the story. Andrei?

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Andrei Stadnik, Morgan Stanley, Research Division - VP [72]

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Just wanted to ask a follow-up question around the pipeline of strategies that have been suited, how big is that pipeline? And you expressed 0.5 year ago a view towards moving away from being a value-only investor organically. How quickly can you meaningfully diversify more broadly than just value investment?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [73]

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I think moving away from value investing is less likely to happen organically. That will happen -- more likely happen inorganically. Yes, I think, yes, you can do 1 of 2 things. You can either -- this is obviously a PI-specific comment. You can either see a high-quality team and lift them out of their existing shop and set them up. But that's a multiyear event before you reach profitability, typically, unless it's an incredibly exceptional team. So you're going to have higher run rate costs because you've got to pay people salaries and keep them incentivized and build some systems and add some distribution stuff to take them to market. And yes, you're generally going pretty well if you're starting to accumulate assets after 3 years. And I think actually, yes, the buying habits of people globally now means that that's probably going to be longer unless it's an exceptional opportunity. And I think certainly in my experience, in having done, I don't know, how many lift-outs, 20, 30 lift-outs over the years, whatever fund managers say they're going to bring in terms of assets, divide it by 2, and what -- the time they say it's going to take, if they maybe come, multiply it by 2, and it's probably about the average. So for all those reasons, I think lift-outs are less likely. I think the great news about the right sort of acquisitions and having had done plenty of these in my time, yes, if you -- again, if you're ticking all those boxes, yes, momentum is such a critical thing in any business but in particular in an asset management company. So if you can buy a business, people understand the story. They know why you transacted. They know that the team is intact, the process is intact, and the whole story is about there being no change, only value-added, then you can keep momentum going. So that's what we would aim to do. Yes, actually -- yes, sorry, we haven't asked about questions on the phone. And maybe we'll turn to the phone for any questions.

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Operator [74]

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(Operator Instructions)

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Robert William Adams, Perpetual Limited - MD, CEO & Director [75]

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They've all hung up. All right, nothing on the phone? Thank you. Maybe we'll make this the last question what time are we meant to finish?

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Andrew Ehlich, Perpetual Limited - General Manager of IR & Corporate Finance [76]

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10:00.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [77]

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Well, I'll keep going.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [78]

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Sorry, Kieren Chidgey again, UBS. Just another follow-up question on distribution. What's -- or how should we think about your exposure to the major bank and AMP adviser channels given all the very significant disruption, both in their advice businesses and their platforms at the moment? Sort of what risk do this -- does that pose to the assets you're managing?

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Robert William Adams, Perpetual Limited - MD, CEO & Director [79]

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Yes, it's a good question. Yes, they've been important to us just as they have been for any domestic asset manager. Yes, we've got really good relationships with each of those major hubs, and yes, we'll continue to do so. So that's always helpful. Yes, there is some effect there, but bear in mind that quite often -- yes, let's say an adviser or group of advisers leaves one shop and start -- goes to another shop, it doesn't necessarily mean that they're going to change their manager exposures. It just means that we have to probably front up to more clients in a way. There is some risk of loss in that transition. People make a different decision. People change their asset allocation. People aren't happy with performance, and that's a trigger. So I think, yes, there's some risks there in that, and that's something we work with really closely. Yes, and I think also, industry flows, I'm going to be really interested to see what industry flows look like when we get real numbers coming through, but they're going to be seriously down. So I think, yes, there is -- well, I'm presuming they're going to be seriously down. Yes, so there is that industry-wide impact, which is yet another reason for us to be not so reliant on one market.

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Christopher Green, Perpetual Limited - CFO [80]

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I think the other side of that major platform's coin is the IFA market and what's happening there. And our brand remains very strong in that space, and so we will continue to cover that very well. And we had the first road show in 7 years this year, so that's an important space for us.

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Robert William Adams, Perpetual Limited - MD, CEO & Director [81]

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Well, and in fact, I'm glad you mentioned that, Chris. It is important to reinforce that. We -- yes, to be frank, I think Perpetual's been under-invested in some -- PI, Perpetual Investments has been under-invested to some extent in some of those relationships. And so the fact that we did the first Aussie equities road show to IFAs in 7 years is material. It's the costs associated with these things, but it's so important. And the fact that we had 92% of attendees say that they'd come back to another Perpetual road show is a good sign. We need to keep doing that.

Anything else, folks? All right. I think we're done. Once again, on behalf of Chris and the broader management team and everyone at Perpetual, thanks so much for coming along today, and yes, we look forward to seeing you again. Thank you for your support. And any further questions, come through us -- to us directly or to the IR team. Thank you. Have a good day.