Australian Foundation Investment Company Limited (AFI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'd like to welcome you to the 95th Annual General Meeting of Australian Foundation Investment Company. My name is John Paterson, and I'm Chairman of your company. The Company Secretary has confirmed that a quorum is present, and I'll now open the meeting. As we have a hybrid meeting with people attending all over Australia, I'd like to begin by acknowledging the traditional owners and custodians from all the lands that we're gathered on today. and pay my respects to the elders, past, present and emerging. May I introduce the people on the stage with me. On my immediate left is Jeff Driver, our Manager of Investor Relations and Strategy; then Matthew Rowe, our Company Secretary; Mark Freeman, our CEO, Craig German a Director, Rebecca Dee-Bradbury, a Director, Julie Fahey, a Director; Graham Liebelt, David Peever, Cathy Walter, and finally, Andrew Porter, our Chief Financial Officer. In due course, we'll be hearing from our portfolio manager, David Grace, and investment analyst, Nga Lucas. We are also joined by other members of the investment team in the front row of the audience. I will also take this opportunity to introduce Kate Logan, Partner of our auditors, PricewaterhouseCoopers. She's available to answer questions today on the audit and the preparation and content of the auditor's report at the end of the presentation. Before we get to the formal proceedings, I'd like to say a few comments about Cathy Walter, who retires as a director at the conclusion of this AGM, having served on the Board since August 2012, Cathy has been Chairman of the Nomination Committee and a member of the Remuneration, Investment and Audit Committees. She's brought her deep knowledge of the law and governance along with experience gained in a number of large ASX companies through our discussions. Her contribution to the Board and investment committee deliberations will be missed, and we thank her for her years of valued service to shareholders, wish you well for the future. Thank you, Cathy. I would also like to note that I'll be retiring from my roles of Director and Chairman of AFIC at the conclusion of this annual meeting. As previously announced to the market, Craig Drummond has been appointed Chairman to succeed me. For its 95 years existence, AFIC has always had a Chairman with deep investment experience. Craig strongly meets that criteria. He also has valuable senior executive experience, having been Chief Financial Officer at the National Australia Bank and Chief Executive at Medibank. The Board is delighted that Craig will be taking on the role of Chairman. There's been considerable adverse publicity regarding PwC of recent times. And we've already had several questions, get pass through us about PWC. Just prior to the opportunity for questions following our presentation, I'll make some comments about the relationship. So they're fresh in your minds at the time. Today's meeting is being held as a hybrid meeting. Today's presentation has been released to the ASX and made available on the company's website. I remind shareholders using the online platform, that whilst the questions can be submitted at any time, I'll not address them until the relevant time in the meeting. To ask your question, select the Q&A icon, type your question into the text box. And once you finish typing, please hit the send button. Please also note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You will see -- receive a vote confirmation notification on your screen. I now declare voting open on all items of business. I'll give you a warning before I move to close voting. Before we move to the business of the meeting, I'd like to provide some additional comments. Last year at the AGM, I highlighted our concerns that global central banks were too complacent, assuming that inflation would get back to the target ranges of 2% or 3% quickly. Our premise has proved correct. Inflation peaks and in many economies, has declined to 4% or 5%, where it seems to be stuck. And recent oil price rises will tend to reinforce that trend. What we didn't expect was the degree of resilience in global economies, in particular, the U.S. and the fact that this led to good gains in global stocks. Markets have recently become uncertain, again, in light of the weakness of the Chinese economy and rising bond yields. The latter will affect the pricing of a lot of assets. The recent profit reporting season reinforced the fact that high-quality stocks continued to perform despite considerable uncertainties. Our team will highlight some of these in their presentation soon. Moving on to the business of the meeting, I'll take the notice of meeting as read. With regards to the minutes of the 94th Annual General Meeting, they've been signed as a correct record and are available to shareholders for inspection today. The first agenda item is the consideration of the financial statements and reports for the year ended 30th of June 2023. We will do this via a presentation after which, I'll ask shareholders to comment or raise any questions either about the presentation or the auditors that they have questions about the audit. I'll now pass you to our Managing Director, Mark Freeman.

Thanks, John, and good morning, everyone. It's good to see a decent turnout. A bit of rain will probably keep a few people away. And just to point out, too, we are also getting good responses to the other sources of information shareholders have throughout the year in terms of what AFIC is doing. We're doing webinars now in January and July. So many of you may listen to that. We're getting good response to that. We do a shareholder information meeting around March. And obviously, this AGM is also being webcast. So there's lots of opportunities to hear what AFIC is doing throughout the year. I just want to start first by also thanking Cathy and then John also from the team's perspective and shareholders, but also my personal perspective. They've really been stalwarts of the AFIC Board for many, many years, and it's their passion for the shareholder that I think has really stood out. Because key cultural element of our company to your company, is that passion for shareholders. We understand deeply that we've got a real sense of responsibility to look after your hard-earned money. And certainly, Cathy and John have been a backbone in building out and sustaining that culture of being here for the shareholders. So thank you, Cathy and John, and then obviously welcome Craig into the role and look forward to working with you as well. So just moving on to the presentation disclaimer. We always start with this to say we're here to talk about the company. We're not giving any advice. Just the agenda, I'll just make a couple of opening remarks, then Andrew Porter, our CFO, will give an overview of the financial results. And as John pointed out, David and Nga will then give a thorough presentation on what's been happening to the portfolio and markets in general. So just an overview on the investment objectives again, so AFIC primarily invest in Australia and New Zealand companies, but we do have a small amount of international stocks at the moment, which account for about 1% of the portfolio. And I might touch on that again in question time. AFIC still is the largest listed investment company. I know, the ASX with over 160,000 shareholders, a very independent Board of Directors and importantly, the shareholders own the management rights to the company. So there's no external manager taking fees as such. As a result of that, the management expense ratio or the MER is 0.14%. There's no performance fees going to an external manager. Once again, we are a long-term investor. We want to be a part of the success of great businesses. An outcome of that is being low turnover, which has the added benefit of being tax effective. We know that ultimately, selling stocks, high turnover you end up paying a lot of tax and that's a significant drain on total returns. That element doesn't come through when you invest in managed funds. They all look at their performance pretax. Us being a company, we see the impact on tax and how it can drain on performance. We want to have a portfolio of stocks that's stable, that's less volatile than the index. We've got a long history of growing dividends over the time. But importantly, the stability of fully franked dividends and once again COVID demonstrated the importance of having reserves and being able to support the dividend through the tough times. And when you go back before that, it was the GFC where we were able to sustain the dividends. And where we stand today, we are very well reserved for another downturn. When it eventuates there are always downturns in markets we can't stop there. And then we've got an investment team. They're all here today. A couple here, the rest along there that manage the other three investment companies, [indiscernible]. Please approach them after this, ask them questions. They're all here to give you the owners of the company feedback on what's been happening. So please introduce yourself and ask any questions you want. So just quickly then on the objectives. So we aim to provide shareholders with attractive investment returns. We want to see growing dividends over the long term, and we want to see growth in capital as well. And so we think about it in terms of growing dividends faster than inflation over the long term, difficult to do when you have 1 year inflation spike so much. And again, attractive total returns over the over a longer-term period. Just a quick comment before I pass over to David and Nga just broadly to follow John's comments on markets. The Australian market sort of looks reasonable value to me, but there's a lot of uncertainty out there, and I'm not sure the markets have really adjusted to where interest rates are set at the moment. So there's pressures there. And it's a very uncertain world out there at the moment. So it's causing a lot of issues globally. And so it does feel a bit more like -- it's a time that we just have to be a bit cautious. And as always, I reflect by going through the portfolio consistently and saying, are we holding good companies. And the answer to that is, yes, we've got good businesses in the portfolio. And whatever happens, they will ride the ups and downs. Are they run by great people and do they have strong balance sheets. And if we can go to the portfolio and answer those questions, we'll generally be in pretty good shape. So with that, I'll pass over to Andrew, first, actually, to go through the financial results.

Thank you, Mark, and yes apologies to those of you who are waiting for David and Nga, but they will be here very shortly. So good morning, again, ladies and gentlemen, and thank you for joining us both here in Melbourne and online. So if we go to the next slide, please. I've been through some of these figures before the results briefing that we did back in July. But I am also conscious that many here may not have attended that. I should therefore be relatively brief, but I am, of course, very happy to take any questions afterwards or indeed over a coffee after the presentation for those of you that are here. The statutory profit was down to just over $310 million from last year. However, last year's figures included $75 million noncash dividend as a result of the BHP Petroleum Woodside merger. Excluding this, the profit for the year was up 8.6%. The dividends received, excluding the demerger dividend, we're up just under 7% with increases from the banks, Wesfarmers, Transurban and Macquarie being among the most significant. There was also an increased contribution from the trading portfolio, particularly from the options that are written over a small part of that portfolio. The interim dividend was increased by $0.01 in line with previous remarks from the Board about looking over time to bring the interim dividend into line with the final dividend and bringing the total dividends for the year to $0.25 per share. The board is very conscious of the need for reserves in order to be able to maintain the dividend as it is appreciated, how important this is to shareholders. Just a reminder, as Mark has already commented, AFIC did not cut the dividend during the GFC or during COVID. Now this is not to say that the dividend could never be cut. Even apart from the one-off special dividend that AFIC paid out some years ago when the effective abolition of franking credit refunds was being proposed by the then opposition, AFIC has had to cut its dividends in the past. The last time that I am aware of this being done and shareholders can -- please feel free to correct me, was in 1942 when I quote from the annual report, the year under review has been one of difficulty for investors, especially since the entry of Japan into the war. So moving to today. After the final dividend was paid out, the company had sufficient franking reserves to pay out just over $0.40 of franked dividend. So in that regard, the company is prudently reserved. The total portfolio return for the year, which is after expenses and is a key measure of how the portfolio has done was 13.9% for the year against the ASX 200 return of 16.6% and the team will provide more updated figures later on in the presentation. Turning finally on this slide to the management expense ratio or MER. It is a measure of the cost of running the company and is equivalent here to $0.14 for every $100 invested in AFIC. It is the actual expenses as a percentage of the average portfolio over the year. and therefore, both elements, the expenses and the average portfolio size have an impact. So for this year, i.e. the year ended June 2023, whilst the average portfolio value was lower than the previous year, the effect of this was actually outweighed by a fall in the net expenses. This fall was caused by a number of things. a small reallocation of costs amongst the LICs to better recognize the work effort involved, which benefited AFIC. And the nonvesting of incentives for last year, which reduces the overall expenses for the year; and finally, the write-back of the expense of the long-term investment plan, which was folded into the new annual incentive plan. I wanted to highlight this for two things: a, there will be a quiz on it afterwards, but also because it's a one-off, effectively, the cost of this should divest will be born over the next 3 years. Therefore, all other things being equal, the MER would rise in future years. However, the really big component of the MER is the average portfolio value. And this, I'm afraid none of us can predict. So if I move on to the next slide. This is one that we like to highlight to shareholders and potential shareholders and we release it every month with the NTA, and it is on the website. This graph shows how the portfolio return can be up before franking 8.1% for the year, whilst the share price can be down 7%. At the end of August this year, the shares were trading at a discount, either share price to the value of the underlying assets of nearly 4%. In August last year, they were at a premium of 12% i.e., you are paying more in the share price than you were for the assets underlying. In August 2021, that premium was 9%. This move from a premium to a discount has not been unique to AFIC and has happened broadly across the LIC space. What appears to have been the main driver is the increase in interest rates. Shareholders who could not get a yield on term deposits or fixed interest investments previously had to go overweight equities to get any yield at all. This led to the very large premiums that we saw between 2020 and 2022. Now these shareholders can switch today some of that back into fixed interest, and I have seen it myself on charities that I've been involved with, and get back closer to what their target allocations between asset classes, i.e., to equities and fixed interest should be. This has meant an increase in sellers and a fall in interest in LICs, which is reflected in the disparity between the portfolio and the share return. We've been getting feedback from brokers and fund managers, then actually, there's been a lack of flows into the equity markets generally as a result of this. So this is why we urge shareholders and potential shareholders where they can to look at the price of the shares compared to the NTA and whether they are buying or selling at a premium or a discount, this can and does move around fairly sharply. But I echo Mark's comments from earlier, we're not here to give you personal financial advice. That's a general comment. So if I can move to the next slide, this illustrates what I was talking about earlier about dividends. One of the benefits of an LIC like AFIC is that we can create reserves when times are good to release when needed. A bit like Joseph and Biblical Egypt. Here, you can see that our ordinary earnings have been up and down over the last 5 years, but we have been able to use one-offs and realized gains to maintain the dividend and replenish reserves. If you invest in an ETF, an exchange-traded fund that is a trust, they have to pay out what they receive. So your earnings, if you had only received the income shown on the graph, would have been very inconsistent. This does have a small impact on the performance of the portfolio because we have to pay tax on these earnings that does not show up as a benefit to shareholders until it is paid out. However, we think this is a price worth paying. So with that, I will finish up. We'll move on to the main course. And as I said, I'm happy to take any questions at the end of the presentation or afterwards over a coffee. But David, over to you.

Thank you very much, Andrew. So good morning, everybody. So I'll talk to you today about current portfolio positioning how we've got a mix of income and growth attributes within the portfolio. We'll look at current market conditions very much through the lens of the companies we've been catching up with on the back of the recent reporting season, how they're navigating through a pretty uncertain environment. And then now we'll come up to talk through recent activity in the portfolio in terms of buying and selling. So just to recap our investment process. So we're long-term investors in companies. We're not trading short-term share price movements around macroeconomic events. We believe the quality of a business is the one thing that can be sustained over the long term, and that fits in with our long-term investment horizon. We focus all of our research effort in developing a deep understanding of the growth drivers of all the companies that we invest in to and assessing how they're placed within their industry versus their competitors, et cetera. So we want companies that have strong industry positions. They're run by strong management teams and Boards, they have sustainable business models over the long term. They hold difficult to replicate unique assets, have a definable competitive advantage and importantly, have strong balance sheets, able to self-fund their growth drivers as well as pay a dividend to shareholders along the way. So we want to identify these companies and buy them when they represent value. and seek to benefit from the value that compounding returns provide to long-term shareholders. So this slide shows the performance of the portfolio against the ASX 200 over various time periods. With low turnover and accordingly, there will be periods where we underperform the market. However, over the long term, the core of the portfolio will remain invested in quality businesses with good long-term prospects. So second from the left, including franking over the last 12 months, the portfolio delivered a return of 9.6% that compares to the ASX 200, which delivered a return of 11.4%. So returns for the portfolio were shown after tax and expenses. And tax and expenses over the last 5 years have been a drag on portfolio performance for around about 0.5% per annum. And that largely reflects capital gains tax from sales that we've undertaken. But as Andrew pointed out, we now have a significant balance of franking credits able to be distributed in future periods. So a couple of things to point out on the 12-month performance is, firstly, the underperformance of a couple of high-quality companies that run within the portfolio. So that includes Transurban, ASX and Mainfreight. And for context, all of those companies had a really strong 2 years prior to that. And over the course of the last 3 years have delivered positive returns for the portfolio. And we've actually recently added to our holding in ASX. We feel the company remains well positioned to deliver strong long-term earnings growth. Secondly, and then as the chart on the right-hand side shows was the strong performance of the information technology sector, which was up 22% over the course of the last 12 months. And then below that, the performance of utilities, materials and energy, which all materially outperformed the ASX200 return. So both materials or resources and the energy sector benefited from the reopening of China post COVID lockdown in November last year. And the strength in the resources sector has really driven by small and mid-cap companies. Now we wouldn't expect to have a large weighting in the portfolio to small and mid-cap resource companies for two reasons. So the first of those is they're typically inconsistent in the dividend that they pay to shareholders. So that's one of the core investment objectives. We're trying to deliver a growing dividend yield. And secondly, small resource companies have got a poor track record in deploying capital as they look to replace their finite resources. So over the last 12 months, you can see the bottom of the chart, health care has been a material underperformer, large portfolio holdings, CSL and ResMed have dragged on performance. And no will talk later about our confidence in the long-term opportunity remains sound for CSL, and we've actually recently been adding to our holding. So in relation to ResMed, the share price has softened recently, as the market assesses the potential weight loss drugs on ResMed's business. So just to recap, ResMed develops products to treat obstructive sleep apnea or OSA. OSA is a chronic disease where your airways or muscles in your neck relax during sleep, blocking your airways causing choking events during your sleep and severe sufferers of this disease can have up to 50 episodes per hour. So there's a proven link between the incidence of OSA and obesity. And the market fear is that weight loss drugs may materially reduce the addressable market for ResMed and the number of patients that they can ultimately serve. So our thoughts around this and why we feel that the ResMed share price has been oversold following the near 30% fall in the last 2 months. The studies have shown there's over 1 billion people globally who suffer from OSA. And for context, ResMed only treated 2 million new patients last year. So the condition remains materially under penetrated. We know the incidence of obesity is increasing. And even the way these drugs have been available, we have seen an increase in obesity in the U.S. particularly and funding challenges are likely to restrict the widespread adoption of weight loss drugs given that the drug's cost materially more than ResMed's CPAP therapy. So all in all, we feel the short-term share price weakness has provided an opportunity and we've recently added to our holding. So we earlier briefly touched on market conditions. And as we highlighted, it's a period of uncertainty for all companies that we're talking to. We've highlighted both a positive and negative of how companies are seeing the current operating environment. So on the positive side, solid economic growth has reduced the risk of a potential recession. China policy initiatives trying to provide stimulus to their economy while not all through the woods is certainly showing signs of stabilizing Chinese economic growth and immigration is forecast to deliver strong population growth here in Australia. On the negative side, we know inflation remains elevated, and that proves challenging as companies try to pass through rising costs. Consumer spending is starting to slow, and that's -- the global -- we've seen that in all developed economies that the consumer is starting to slow on the back of a couple of years of strong handouts from government related to COVID. And our view that earnings growth for many companies is set for a period of stabilization following 2 years of really strong earnings growth. So we know markets are always forward-looking and trying to price what's next. And while we don't know how all of these issues ultimately get resolved, we remain committed that holding a diversified portfolio of quality companies over the long term remains appropriate and we know periods of uncertainty typically provide the best buying opportunities in equity markets. However, in times like this with so much uncertainty around the future of earnings growth requires extra diligence on the valuation that you're prepared to pay of any investment at this point in time. So now will talk shortly about our recent buying activity, where we feel short-term uncertainties provided attractive prices to add to a number of our investments. So I've shown the chart here just reports the current valuation of the market in a long-term context. So firstly, on the left-hand side is the total return of the ASX200 over the last 25 years and the general trend clearly is that markets go up over extended periods. Pullbacks while they're not uncommon when they do occur, represent buying opportunities and markets have a habit of quickly recovering. Chart on the right-hand side, over the same time period just shows the current valuation of the ASX200. And there are a number of different metrics we can use. None of themselves are particularly perfect. But this is one metric we have shown price to earnings. The point is the volatility evaluation of the market and that's the nature of equity markets. But as it stands today, the market is in line or slightly more expensive than its 20-year average. We thought these charts just provide greater context around the dispersion of current valuations in the market. And this is some research that's being put together by Goldman Sachs. And while we want to be invested in quality companies, the price you pay plays a large part in terms of the total return that we receive as shareholders and overpaying even for a quality company can deliver poor returns even over the long term. So just to put some context. The chart on the left-hand side is the valuation of the 40 most highly valued companies on the ASX200. The list is reset monthly and currently includes quite a number of technology companies as we highlighted earlier, just the strength in the technology sector in recent times. So all the value of the basket has pulled back from its all-time hires. It's currently sitting about 30% above its 20-year average. And many of these companies are high quality of interest to us. but we're looking for more attractive entry points where we feel the risk/reward is better balanced. This is particularly in light of our sense that earnings growth for a number of these companies are set for a period of stabilization. On the right-hand side, it's a similar valuation chart this time for the 40 cheapest companies trading on the ASX200 and some of these companies are facing severe structural challenges. So at a headline level, they can appear cheap. But digging into the fundamentals tells us that there's still some challenges, and they may not be good value at all. But interesting, that basket of stocks is trading 10% below its 20-year average. So the point of these charts is just to highlight the need to be diligent in allocating capital as the market is yet to fully determine the impact of rapid interest rate moves and the stubborn inflation remaining for longer than people initially expected. So in managing the portfolio, we look to own a diversified portfolio of quality companies that can perform in a variety of economic settings. We're not predicting economic outcomes. We seek to own quality companies that provide appropriate diversification. So to move around the pie chart in the top left-hand corner, we want a mix of growth companies, they are the market leaders, they're well positioned to be able to continue to deliver earnings growth outside of the economic cycle, and that includes companies like realestate.com and CSL. Over the right-hand side, stalwart companies that own difficult to replicate highly strategic assets. So that includes Transurban, Wesfarmers, Auckland Airport and Woolworths. Income stocks, companies that pay an attractive dividend yield as we recognize income plays an important part in the total return that shareholders receive and cyclical stocks down the bottom Left-hand side, and these are companies that are exposed to favorable long-term economic trends. And within that sector, we include our energy holdings, which is in Santos and Woodside. So just to give some context both of those companies, the majority of their production is from LNG. And we see LNG is really critical transition fuel as the world's energy needs move from fossil fuels to renewable and LNG is going to be critical in that transition for many years to come. So both Santos and Woodside are responsible owners. They're operating in highly regulated jurisdictions and they're both clearly stated their intended goals around improving their ESG metrics. So we feel positive that they're good corporate citizens. They've been able to manage their balance sheets to be able to invest in these initiatives to be able to deliver better ESG outcomes over time. So at this point, I'll hand over to Nga to talk through recent activity.

Good morning, ladies and gentlemen. On the far right-hand side, we show existing holdings that we've added to in the last 6 months. We used share price weakness to buy quality companies when we see value presenting. Short-term share price weakness gave us the opportunity to add to our holdings in Goodman Group, CSL, BHP, NAB, ASX, Telstra and IDP. I'll talk in more detail about CSL, Telstra and Goodman Group later in the presentation. We added to our NAV position as we believe the Australian banks are well regulated and well provisioned even in a tougher economic environment. The mortgage market is holding up better than expected given the strength in our labor markets. Banks are a key source of fully franked income for our shareholders. and have become increasingly important as resources stocks, the other group of major dividend payers are experiencing earnings pressure and dividend cuts. We added to our ASX position as we believe the core exchange business remains a high-quality monopoly, and we believe the core -- we believe the negativity around the CHESS replatforming is now factored into the share price. We added to our position in IDP as we believe the negativity around the loss of the Canadian monopoly in English language testing is overplayed versus the long-term opportunity for the business. We also added to our position in BHP in share price weakness. We like the growing copper business, which includes some of the highest quality, lowest cost assets in the world. In the new purchases column, we added one new stock after a recent share price weakness. Mineral Resources is an Australian mining services company and an iron ore and lithium producer. We like the lithium thematic given the strong demand from electrification. We believe the company now has a clear and sound strategy of engaging with EV manufacturers directly to secure long-term demand for their lithium. The CEO and founder Chris Ellison has proven to be an excellent strategic thinker and capital allocator. He owns 12% of the shares in the company. The companies listed on the left-hand side show stocks we've trimmed or exited during the period. We trimmed our position in Carsales, Transurban, Mainfreight, NEXTDC, Woolworths, Brambles and REA as valuations started to become more extreme or to manage the size of those positions. Carsales shares have had a strong run following excellent execution by management of both overseas acquisitions of Trader Interactive and WebMotors. We trimmed Brambles as we think the share price was fully reflecting the strong COVID induced operating environment, which we think will prove to be temporary. We trimmed REA following the sharp bounce in the share price, reflecting the expectations of a short-term recovery in property listings and strong yield growth. We trimmed NEXTDC as the company benefited from strong contract wins and optimism around the demand for data centers driven by AI. Whilst we are positive on the supply and demand dynamics in the industry, we are cognizant of the high capital intensity in developing data centers. The decision to exit InvoCare, Ansel and Iris reflects our view that the long-term prospects and returns for these businesses are challenged. During this time, InvoCare received a takeover bid assisting our exit price. In the following slides, we'll focus on a few portfolio companies in more detail, highlighting why we consider them to be good long-term investments for the AFIC portfolio. Starting with CSL. CSL is a specialist biotech company that develops and manufactures products to treat serious human medical conditions. We've seen a decent pullback in the share price recently, largely over fears around a new competing product. The results of this competing product are now known. Whilst we expect CSL to lose some market share, we believe this will be manageable and only very small in the context of the broader growth opportunity for the company. We've used the sell-off to add to our holding as we think the share price reflects good long-term value, and the company has attributes we like, including a very strong management team and Board. The company has market leadership positions in its core plasma fractionating business and has a proven track record of delivering higher returns than competitors. Recent capital investment should again drive increased capacity, efficiencies and higher returns. CSL invests more than 10% of revenue in R&D, which is a key driver of new business growth. We continue to have high confidence that CSL has many years of strong earnings growth, delivering attractive returns to long-term shareholders. Over on to Telstra. Telstra is a leading telecommunications company in Australia with dominant market shares and extensive infrastructure assets in fixed broadband Internet and mobile. The mobile business is a key driver of the company's profits. Telstra's key competitive advantage lies in its network superiority with 99.5% population coverage and leading 5G coverage at 85%. Telecommunications and in particular, mobile service is seen as a critical -- is seen as critical for the business and is a nondiscretionary item for consumers. As you can see from the market share -- on the slide, most people choose Telstra for its superior network with Telstra now holding 50% market share. Following years of aggressive mobile competition, we believe the industry needs to be rational to repair balance sheets and industry returns. Both Optus and TPG, have signaled their intentions to drive returns higher as they are currently below their cost of capital. We think Telstra offers shareholders, a defensive investment in more challenging economic conditions whilst paying a growing fully franked dividend yield. Over the slide to Goodman Group. Goodman Group is an industrial property specialist. They own, develop and manage logistics and distribution centers, warehouses, business parks and data centers in major global cities. Their customers are the likes of Amazon and Woolworths. They operate in 14 countries and have built a leadership position in its key global markets by building high-quality properties that are close to consumers, providing essential infrastructure for the digital economy. The company recently flagged a large opportunity in the data center market. 30% of their current work in progress is from data center developments, and they have ample access to power and land for future developments. Goodman's has over $80 billion in assets under management and is led by founder and shareholder, Greg Goodman. He remains highly motivated and disciplined in his investing. The very experienced management team are in a great position with their balance sheet to take advantage of any opportunities should they present in the current industrial property market. At this point, I'll hand back to Dave for some outlook comments.

So thanks, Nga. So just to recap as we earlier discussed, there are a number of threats and opportunities for companies that are occupying our mind currently. We're maintaining regular contact with the companies that we're invested in as well as their competitors just to get a sense of what's happening within each of the industries. So some observations. Those businesses with market leadership which is the core of our investment portfolio, a best position to be able to pass through rising costs to their customers. And then strong balance sheets are critical in this environment as we've seen rising interest cost for many companies. So we feel our approach to maintain a diversified portfolio remains appropriate. We feel the portfolio is well positioned, invested with an appropriate mix of income and growth attributes to be able to meet our investment objectives. So that concludes the presentation. I'll now hand over to Jeff, John, sorry.

Thank you, David. And now -- a very good presentation. I'll now make some comments about AFIC's relationship with PricewaterhouseCoopers today earlier foreshadowed. The discussions in the public arena about PwC focused foremost on the tax advisory practice and the reputation of PwC in its entirety. Firstly, PwC are our auditors and not our tax advisers. Secondly, as is mandated, our audit partner at PwC changes every 5 years. And alongside that, there are changes in the underlying team conducting the audit over time. The change in audit partner last occurred in May 2022. At that time, the Board interviewed three potential audit partners suggested by PwC, and we made the most appropriate choice based on skills and experience. As regards to putting our audit up to tender, we lasted this in 2017, requesting proposals from all major accounting firms with PwC being selected. At the time of the change of audit partner in 2022, we did not go to tender, but did ask PwC to refresh the proposition for us. We believe our PwC audit team has met our requirements and all our expectations. We also gained some assurance and comfort from the comment by Dr. Switkowski states the PwC's assurance that is audit business appears to be substantially model best practice. We will continue to follow the issues that have been reported. We've discussed them internally, and we've discussed it with PwC. We've sought and received assurances from about how they are dealing with the situation and at this stage, we are satisfied with that.

I'd now like to invite questions from shareholders. For those in the room, we have microphones available and if shareholders could please state their name when addressing the meeting and ask all questions through the chair, that would be appreciated. Before I start with questions in the room, I might ask Jeff, there's a couple of questions that have come through on the Internet that we'd like to address first.

Give some -- people some time to have a bit of a think. But I've got a question for the auditor. So there's two questions here. Well, three questions, in fact. What are the audit fees for PwC? Do PwC perform any other actions for AFIC and is the auditor happy with the internal controls within AFIC. So I've got Kate Logan, Partner as John introduced earlier on, to answer this particular question.

Thank you, Geoff. So if we turn to Note F2 in the financial report, that's where the auditor remuneration is laid out. And within that, you'll see that there is audit services, the review of the financial statements and the audit of the financial statements and this other audit-related services. In addition, there are some nonaudit services in there that relate to tax compliance and are nonjudgmental in nature. In respect of the nonaudit services, I can confirm that we have not I can confirm that we have formally assessed whether or not they are permissible and they do not impair our independence. And so the second question was in relation to controls, Geoff?

Yes.

Happy with the controls. So our opinion covers the financial report as a whole. And informing our opinion, we do consider the control environment. The company's internal auditors also issue an independent assurance report on the control environment of the company. So as part of our consideration of the control environment, we do obtain that report, and I can note that, that report was unqualified.

Thank you, Kate. No further questions for you. So John, we have a question from the ASA, Steve Van Emrick, who unfortunately couldn't make it today. ASA is supportive of low-cost LOCs like AFIC. However, note that many of these have moved to -- from trading at a premium to NTA to [discount] -- to the detriment of shareholders as ETFs have become more popular. What actions will AFIC take to ensure the negative trend does not continue?

Well, one of the things, if you have a look at that chart that we had earlier, the premium or discount to NTA, we've been in the current position a few times before where it's been somewhere between minus 10 and zero. So I think we feel -- this is sort of one of the normal trends that goes on in markets. It generally goes on when there is a lower level of interest in the market. And I think we've tended to find that in periods where the market is under stress and people are concerned, we often trade at a premium. So we're not concerned with the current position. We don't see it as likely to keep on widening as a discount. And probably in the medium term, it will as usual close up. So no particular actions on our front. But it's one of the things as we say shareholders should look at that when they're considering buying or selling our shares.

And there's no doubt, John. We've increased our communication with the market as well to ensure people understand what we're doing, how we're performing and where that share price sits to NTA. Another question from the ASA, John before we move to perhaps questions from the floor. PwC has been AFIC's auditor for past 95 years. The Australian Shareholder Association recommends tendering the audit every 12 years. Given the recent well-publicized events regarding PwC, will AFIC put the order out to tender?

It's a question that will probably come up at AFIC when the 5-year audit partner rotation comes to an end. I don't think I can preempt what the decision will be at that time. Clearly, we want the best outcome for our shareholders in terms of the quality of the audit. We do always -- because we want a low MEA, where we're also conscious of the cost of the audit. But I think at the moment, we'd say we -- we're comfortable with the way the audit is being performed. And we're watching the -- where PwC ends up in terms of the transformations that will need to occur in the coming years. But it's probably a question that will come up in 2027. Now we'll open it up to questions from the floor. So we've got some microphones if anyone would like to ask a question. We've got run down here. I think we've got a shareholder here who might have been around almost as long as me at these AFIC meetings.

An actual fact, we both did a report on franking credits back in 2000, something and now mine and yours are about the same. Anyway, on PricewaterhouseCoopers and the other three shall remain nameless, but I think the Senate is doing a good job on that. But I don't think the changing of the partner is good enough, one or the whole firm. every 3 years or 5 years, whatever it may be. And perhaps not one of the big four picture partners and a few others floating around.

I think I take your point about other accounting firms. I think we would regard the Big four is giving a degree of confidence for our shareholders that we would like to have. So I think we're probably likely to remain in the space of the big four. But obviously, it's something that would be reviewed at the time of a tender. Certainly, we had an open mind when we went to tender in 2017. And in that case, it comes back to what we see as the best proposition going forward. I understand the history and your point about the history, but I think it's a case of when we go to 10, we need to be sure what the forward-looking position is.

Gordon Glen here. About 5 years ago, I asked Mark Freeman, after the meeting why there were no investments in agriculture in Australia given the importance of it to our economy it is somewhat surprising. I think his answer at that time was, well, you tell me, one, we should be investing in, and I probably couldn't. But it is quite an interesting question in terms of the balance of our economy and the portfolio.

Yes. We're always open for suggestions. So happy to have a chat at the end of it if you've got any idea since then. Agriculture is a big part of the Australian economy. But obviously, we're trying to find companies that give returns and ultimately, returns that can beat the market. So we look at any business. We don't have anything against agriculture. But again, the difficulty, I'm just looking to Dave, is there any that jump out? I mean we still -- from a distance -- well, not we actually still follow Nufarm pretty closely, but we just struggled to find I guess, the quality in that in terms of is that going to give us great investment returns over the long term. Any others Dave?

No. We followed GrainCorp as well. But I think the challenge for us is when we're looking over the 5- to 10-year investment horizon is when you've got businesses that are so susceptible to the operating environment, whether it rains or not, it's hard to see that as a demand for capital over other potential investments that we can make where we feel we've got more sustainable opportunity to grow earnings. So we look at them closely, but against the opportunity that we're investing in, it's just hard to see many of them stacking up unless we can see real value emerging, which doesn't often happen.

There's been a couple. We've been Incitec Pivot in the past, too, but they're just very, very challenging industries to make a sustainable long-term return. And we talk about being quality companies. So these are businesses with more consistent earnings streams, strong balance sheets, businesses that we think have great prospects of growing earnings, better than the market over time. And it's unfortunate but some of these businesses just -- it's difficult for them to achieve that. But we'll continue to look. And again, we're always open to suggestions.

[indiscernible] got a number of questions here John. So I guess one of the questions is to you, Andrew, how well is the company protected from cyber attacks.

Cybersecurity obviously a big issue at the moment. I think Geoff, I divide the question, and bear with me for a moment, please, into 2 parts. First of all, there are the assets that are being protected. And secondly, there's the operations of the company. In terms of the assets being protected, shareholders should be aware, we don't hold any of their information. That's held by Computershare. And the Board get Computershare in once a year to discuss cybersecurity with them, and we get an audited report. The banks hold our cash, the brokers hold our shares. We don't actually have any data I think that a cybercriminal would be interested in trying to steal to hack or to use as blackmail. In terms of the operations of the company, we don't have a supply chain. We deal with brokers to buy and sell shares. So we take these responsibilities of course, as an overview very seriously just because you have no assets in the house doesn't mean that there's not an expense as somebody breaks into it. So we need to make sure that the doors and windows are locked and that the alarm is on. So we have a third-party computer company, IT services company that maintain our machines, make sure regularly patched review things maintain our backups all of the stuff that you'd expect. And this year, we've actually introduced another third party who reviews all the data that comes in and out of our systems ensures there's no malicious activity going on and performs a 24/7 review of what's going on. So never say never, but I would say that we believe that we are adequately and well protected against cybersecurity.

On the international portfolio, as we've talked about before, potentially being precursor to establishing a separate low-cost listed investment company in the future. Has management considered retaining and growing the international portfolio internally with AFIC. And also, I guess, just in a more general sense, how is the portfolio performing and what do you see the outcome for the international portfolio at this point in time?

Yes. So just to reiterate, at the moment, it's around 1% to 1.5% of the portfolio. So that's how much we have allocated into these portfolio over 40 to 50 international stocks. So it's a very small part of the overall AFIC portfolio, but it actually has added value to it. We always said that we would be patient with this. It's applying the AFIC way of investing to international stocks. We're in no rush. We've been around a very long period of time. And we're not going to rush into, I guess, a new product unless we felt we were really comfortable with it and the timing was right. And so we will just continue on that path. We did say we would explore an opportunity to develop another LIC. But we do talk internally about do we keep running with some stocks in the portfolio regardless of that or not. So there's lots of permutations and combinations about how this could develop. But I certainly think it's been a good skill set to have within our team. If you look through the AFIC portfolio of Australian and New Zealand companies, increasingly, they are international stocks. If you think about the likes of -- we were talking earlier about CSL and then ResMed, but James Hardie, Macquarie Group, Fish & Park or Healthcare James Hardie, Brambles, Amcor, the list goes on and on. These are international companies. So it's not like we're doing something that's new. And so we see, if we cover other global stocks it should be additive to the investment process and the learnings and understandings we're getting on our core stocks and what's happening in the world. But I'd just reiterate that we'll be patient with this and we'll just develop it as time goes on. But I think the team are working very hard. We've got 2 of the members here today, [ Gilbert ] and Andrew Sutherland. Rose is not down here today, but she was at the shareholder information meeting in Sydney. They're working very hard to -- on this product, and I would encourage you to ask some questions about how they're seeing it.

So a question here or a comment we got prior to the AGM. For the second year in a row, AFIC has underperformed the ASX benchmark. Should you look at changing your managers managing the portfolio.

Right. One of the things when I look at AFIC and its performance, I think the really important thing to look at is the 5-year or 10-year performance figures. The annual figures or 2-year figures swing around a lot. The last couple of years, we've been slightly behind the index. That's been a function of strength in resources, particularly smaller resources whereas the previous 2 years prior to that, we had outperformed pretty strongly. So if I go to the 5-year figure, we're broadly in line with the index, and that includes us having to bear the cost of costs and tax. So quite a satisfactory performance. Can you figure we're a little bit behind. We had a learning experience there. We've had a very good period of winning in terms of oil explorers. We've been [ Tolsemethane ], PNG, Northwest Shelf. And what we've learned is that when you do that with commodity companies, you should cash in some of the winnings. The other thing is we had a completely different sort of portfolio. We had 100 stocks. And one of the things with 100 stocks is it doesn't impose a discipline to get rid of stocks that are disappointing and it doesn't give you the scope to have bigger bites of things that we think are good. And we've reduced that to about 60 now. You'll find that the stocks between #10 and #30 in our list, we have much stronger bets on those now, and we are getting the benefit of it. So I wouldn't read too much in the last 2 years. I think if you keep on looking at our 5-year figures, that's the real test.

And I'll just add to that, to reiterate the point, and again around that tax for the last couple of years, the capital gains tax has been quite considerable, and that doesn't come through in our performance numbers because we haven't yet paid that out as a frank dividend. So you can play around and if you add that back in, the performance has been sound. And particularly, when you think about the low volatility of earnings and the more consistent dividends. So supporting dividends through things like the GFC and then COVID, we think they are also an important part of the shareholder returns.

We might come back to the shareholders in the room and see if there's any more questions.

There's been a lot of talk about Pricewaterhouse today, but I want to raise another issue in terms of the share registry. As one who operates and does a lot of things on my own, I found that the share registry that we operate with is far more difficult than, for instance, link. And I was wondering if -- I don't know whether I would like through the chair to address this to the Board, as to whether they use these 2 registries. But the question I wanted to ask is, when will you review the share registry? And on what basis would you use it because my point that I want is ease of use. And I found that this particular 1 that we have at the moment is not the most friendly compared to other registries. So I'd just like to pass that on to the Board, and thank you for your opportunity.

Right. I'll make 1 or 2 comments there. Might throw it to Andrew. We did do a tender a while ago.

Matthew's got the details actually.

And we assessed at that time that we felt Computershare gave us as a company holding -- our holdings a better proposition and in terms of price and likely performance. We clearly like them to look after our shareholders as well and written into our contract with Computershare of certain benchmarks that they have to meet. And they tested on that, I think, monthly and they pay penalties if there are significant breaches there. But I can understand that probably doesn't capture all the interactions shareholders have with registry, but we really have to look at it in terms of our holdings to some degree. But Andrew or.

I think what Matthew just saying it was 5 years ago years ago. We did do an open tender, but -- and we're probably.

We'll keep it under review. I know from my team's point of view, interesting enough, we find Computershare easier to deal with than link for the holdings that we own, but that is interesting feedback.

Yes. Well, I've tried to do certain things on that side and had...

No, I'll take a point. So that's -- yes, that is interesting.

Yes. Yes. Well, if you give consideration because that's my experience. Maybe it's nobody else's here. I'm just [indiscernible]. But anyhow, I'll leave it with you on...

The shareholder experience is really important to us. So we'll take that away and look again.

John Lance [indiscernible]. I personally geared up with all the 4 share registry offices completely and I write to a gentleman like Mark, [indiscernible] it's not just Mark, it could be the CEO, CFO, whatever it is, and I get a positive response. And I just tell them this charity three of us are too slow bureaucratic and go out of the way to upset shareholders and then Mark [indiscernible] help out a lot, but I didn't say that.

We may go back to the Internet questions after this one.

Thank you for your presentation this morning. A difficult question, Woodside have just suffered a setback in developing the Scarborough project. I just wonder if the board has any insights as to the ability of Woodside to deal with this serious setback and how the Woodside Scarborough project might proceed as planned.