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

Hello, and welcome to the Australian Foundation Investment Company Half Year Financial Results briefing. [Operator Instructions] I would now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead.

Okay. So welcome to this half year result briefing. I would like to begin by acknowledging the traditional owners and custodians from the lands we are gathered on today, and pay my respect to the elders past, present and emerging. I have joining me today on the webinar: David Grace, Portfolio Manager; Winston Chong, Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff Driver, our General Manager of Business Development. Before we start the presentation, just a bit of housekeeping on this webinar. This briefing is based on the material available on the company's website. If you are using your computer to access the presentation via the webcast, the slides will change automatically. Finally, please note following the presentation there will be time for questions and answers. [Operator Instructions] I'll now move to the slides. The first one, Slide 2. I'll address the disclaimer, just to say we're here to talk about what we're doing in the company. We're not giving any advice as such. Jumping to Slide 3, the agenda. So I'll just give a brief overview of AFIC. Andrew Porter, our CFO, will give some comments on the results. And then David Grace and Winston Chong will talk through the markets, portfolio activity and some outlook comments. So just moving, just a reminder about what AFIC is. So AFIC primarily invests in Australia and New Zealand companies, but we do have a small portfolio of international stocks at the moment, which comprises about 1.4% of the portfolio. It is the largest listed investment company on the ASX with over 160,000 shareholders, independent Board of Directors, and importantly, you, the shareholders own the management rights to the company. So there is no external fund manager taking fees, staff for a cost to the business, which comes through then in the management expense ratio at 0.15% with no performance fees. We're fundamentally a long-term investor, and we want to be low turnover to be tax effective. And also, the focus is on finding companies that -- with long-term compounding characteristics to their businesses. We want to also have a portfolio or preference for the portfolio and the share price to be less volatile than the index with a long history of growing and stable fully franked dividends, and we'll make some comments on that in the slide. The team also manages 3 other funds: Djerriwarrh, Mirrabooka and AMCIL . So in that regard, we will -- we deem ourselves more as a traditional listed investment company or a traditional LIC as opposed to some of the -- or many of the new LICs that have come on to the market over the years that charge high fees and performance fees and have high turnover. The traditional LICs, we are simply a cost to the business, that's why we end up with a very low management expense ratio. Just the objectives then, it is to pay a stable and growing dividend over time and to provide investors with attractive total returns over the medium to long term. We picked up on Slide 7, where we just show what $10,000 invest in AFIC has done compared to the index over a very longer-term period. So on to the financial results, and I'll pass over to Andrew Porter.

Thank you, Mark, and good afternoon, everybody. So page or Slide 9, this is the traditional 4 key boxes that, I think, shareholders will be familiar with. So profit for the half year, $154.2 million, so starting up from the $150.1 million in 2023. The dividends that we received during the year were actually up $3.6 million. A large portion of that was from the special dividend that Woolworths paid during those 6 months. So that led to increased interim dividend being announced at $0.12, up from $0.115. That's in line with the Board's expressed intention to try and bring that interim dividend closer to the final, all other things being equal. So $0.12 up from $0.115. Portfolio of $10.4 billion. That is up from the portfolio at the end of December last year of $9.5 billion. So we'll go on to the return figures later on, Winston and David will take you through those. The management expense ratio, broadly in line with last year, 0.15% against 0.14%. That's $0.15 for every $100 invested. I should note, as I noted at the AGM and shareholder meetings, I would expect cost to increase as we continue to explore the options for the international portfolio, but the MER itself will depend largely on the size of the portfolio being a calculation of average costs -- of cost, I should say, over the average portfolio for the year. The cost themselves did increase 6 months on 6 months. There's some registry one-off costs that we incurred as a result of the transition, but that will lead to lower registry costs as we go forward. There's been a bit more travel this year as things have opened up and the team get around to see the companies that we invest in, and we've had some staff turnover, new staff and some changes in roles and responsibilities within AICS. So that's also led to some increased costs. If we go on to the next slide, we will see that the dividend that we paid, this is just up to the end of financial year 2024, so it doesn't include the $0.12. But you'll see that we have been paying out dividends more than the operating earnings per share has been. This is actually one of the benefits of an LIC. Because an LIC as a company, we can create reserves through past year profits and realized gains and smooth the dividend payout ratio. If you've been invested in [ our ]ETF, which is largely a trust structure, then your income would have gone up and down as that graph there is generally speaking. So an LIC doesn't mean there is a more consistent, more stable dividend. We think that's one of the attractions of investing in an LIC. I'm often asked what is the franking balance at the end of June? As per the annual report, we had franking after payment of the final dividend, roughly $0.425. So just over 1.5 years' worth. And as you'd expect, just the earnings per share were $0.43, and we announced a dividend of $0.12. The franking credit is -- that we have at the end of December is generally in line with that. There's been no real movement. So we maintain that buffer. However, one thing I should point out, if you have a look at the balance sheet, you'll see we've got a tax payable of $53 million. That translates effectively if the figure were to be that when we have to pay our taxable at the end of the year to about $0.10 per share additional franked dividend. That's not in those figures I've been discussing. That is a drag on the performance that David will be talking about, but it does mean that we do have those franking credit reserves to continue to pay out that fully franked dividend. So happy to take any questions, of course, in the Q&A session. But in the meantime, I'll hand over to David. One quick thing. The share price related to NTA, this, of course, is a key question, and I will answer this rather than handballing it to David. The Board are very conscious of this. As you can see, for the 2 years from '20 to '22, we had a higher-than-usual premium to the share price. We now have a higher than usual discount to the share price. We've been asked about this. "What are the causes for that?" "What can we do about that?" We have had a buyback during the half year. And if conditions are right, then the Board may decide to continue with that in the next 6 months. There's obviously been an increase in interest rates and an interest in offshore activities, both of which we think, of course, investors to look elsewhere. And there has been, as we all know, cost of living increases and some people are dipping into their savings, which would include AFIC to fund that. So all I can say is the Board are very aware of that. We're on the road, marketing the benefits of an LIC, pointing out what the attractions of investing in AFIC are and we'll continue to do so. And with that, I'll hand over to David.

Thank you very much, Andrew, and good afternoon, everybody. So moving on to the slide in relation to portfolio performance. So the chart on the left-hand side shows the performance of the portfolio against the ASX200 over various time periods. All portfolio and index return figures grow stuff for franking. And for the AFIC portfolio, the returns only include the franking that AFIC has distributed to shareholders. As Andrew has just outlined, we maintained a meaningful reserve of franking credits able to be distributed in future periods as we endeavor to maintain a stable to growing dividend over time. Portfolio returns are represented by the green bars and the ASX200 returns, the purple. The 6-month return is slightly below the return of the index. Tax was a significant drag in the period as we meaningfully reduced our holding in long-term investment Commonwealth Bank. CBA remains a well-managed, high-quality business, and we still maintain a large investment today. However, we reduced our holdings to reflect our view that valuation has now reached an extreme level. At the current price, CBA is trading near record high multiples despite an expectation of limited earnings growth over the medium term. Pleasingly, the portfolio outperformed the 1-year period returning 13.2% with the ASX200 returning 12.7%. The largest driver of the outperformance was around the weight to the resources sector and that was consistent with our view that we saw demand for commodities from China declining through the period, resulting in some large share price falls for many commodity producers. In terms of portfolio holdings, the largest contributors to the 12-month outperformance with strong performance from Netwealth Group, Fisher & Paykel Healthcare, ResMed, Wesfarmers and JB Hi-Fi. We're pleased with the 5-year performance being ahead of the market with an annualized portfolio return of 9.7%; the NTA [ fixed ], too, had a return of 9.4%. Again, the portfolio return is showing after all tax and expenses. So this reflects the benefit of long-term ownership of quality companies, allowing returns to compound over many years. The chart on the right-hand side splits market performance by sector over the last 6 months. These numbers do not include franking. And just as a point of reference, it shows the ASX200 was up 6.9%. That compares against the 7.6% shown on the left-hand side. The best performing sectors at the top of the chart were information technology and financials led by the banks, while the bottom of the chart, energy and the consumer staple sectors dragged on market performance. In a later slide, we'll talk to recent changes we've made to portfolio holdings. So on to the next slide. Just reflecting on investment markets today. There are many things that remain uncertain as we enter 2025. Geopolitical tensions are high and impending trade policies of the new U.S. administration is set to become clearer. Accordingly, there is a wide dispersion of potential investment outcomes, none of which can be predicted. We're long-term investors in quality companies, not traders of short-term share price movements. We're not aiming to capture the news of the day. We're low turnover, because when you own quality companies, you want to capture the benefit that compounding returns to deliver to shareholders over extended holding periods. We will own companies with a defined competitive advantage that generate free cash flow, maintain strong balance sheets that are run by capable Boards and management. As long-term shareholders, we want to be diversified by company, industry and more importantly, by the attributes that each investment brings to the portfolio. So in that regard, talking to the pie chart on the slide, we want a mix of growth companies in the top right hand -- sorry, top left-hand corner, the likes of CSL, Goodman Group or Macquarie. These are companies that have market leadership positions, have strong growth prospects and generate strong cash flows. [ store-wards ], over the right-hand side, like Wesfarmers, Transurban and Woolworths; companies that own difficult to replicate highly strategic assets where the long-term opportunity remains significant; income stocks, so companies with an attractive dividend yield, such as the banks and Telstra; and in cyclicals with strong balance sheets who are favorably exposed to long-term economic growth. So moving on to Slide 15. We've put together a chart just showing why long-term ownership of quality companies remains appropriate. Over the long term, the company's ability to deliver sustained earnings growth is a large determinant of share price performance. Share prices tend to follow earnings growth. The slide outlines 9 companies that have long been held within the portfolio. All have delivered strong sales growth and share price performance over many years. The numbers above the bars show the annual sales growth for each company over our period of ownership. So for example, CSL on the left-hand side has delivered 17.5% sales growth per annum since we first invested in the company in 1999. For comparison, the box in the top right-hand corner shows that over the last 10 years, sales growth for the ASX200 has been 3.6% per annum. All the companies shown on the chart hold a market leadership position within their core markets, all have strong balance sheets and all are run by excellent management teams and Boards. The strong sales growth has been delivered over many market cycles, highlighting that well-managed quality companies with market leadership positions deliver strong shareholder value. These companies own and operate highly strategic assets, have a defined competitive advantage, generate meaningful free cash flow and have a long track record of excellent financial discipline. So moving to Slide 16. The chart on this slide just shows the valuation of the ASX200 index that stands today. So the chart shows a price-to-earnings ratio over the last 20 years. And over the right-hand side, it shows the current level is currently 17.6x, being 20% above the 20-year historic average of 14.7x. While we know any valuation chart doesn't tell the full story. We still find it helpful to get a picture of investor sentiment towards equity markets, clearly highlighting the market today is very fully priced. As outlined earlier, we expect market volatilities continue and our approach during these times is to buy quality companies where short-term share price movements provide attractive buying opportunities. At this point, I'll hand over to Winston to talk through recent changes to the portfolio.

Thanks, Dave. To set the portfolio for the long term, as Dave spoke about, we're constantly looking for opportunities to add to our existing holdings or initiate new positions in quality companies with good prospects that are underappreciated by the market. Softer demand in China during the year has created opportunities to add suppositions in some of the portfolio cyclical holdings like BHP, Woodside and Ampol. These stocks, while cyclical in nature, have quality privileged asset bases that still generate meaningful returns at low points in the cycle. Over the period, we also added suppositions in portfolio growth companies that are experiencing negative sentiment though these long-term growth prospects are being underappreciated by the market such as Cochlear, ResMed, Macquarie Technology and IDP Education. IDP in particular, has had a challenging couple of years with policy settings on student migrations, turning restricted in all of its key markets ahead of election cycles in the U.K., Australia and Canada. Post the U.K. election, we're starting to see settings ease as student volumes recover, and we expect a similar experience post the elections in Australia and Canada this year. During the downturn, we have observed that the company remains focused on its long-term growth strategy with a focus on market share, investment in digital channels and new market development. During the last 6 months, we've also had 3 new additions to the portfolio. The first is BlueScope. BlueScope operates in the Asia Pacific and the U.S. as a leading supplier and manufacturer of flat steel and downstream products such as COLORBOND. COLORBOND has strong brand recognition and is taking share from rooftiles in Australia. The company is also pursuing a similar strategy to grow COLORBOND in the U.S. Near-term earnings pressure for BlueScope has created an opportunity for us to buy BlueScope at around its net tangible asset value, which we think undervalues a strategic asset base as well as the longer-term opportunity to grow its higher-value product portfolio in both Australia and the U.S. The second addition to the portfolio was Worley. Worley is a leader in engineering and consulting services to the global energy, chemicals and resources industries. The company is well-placed to benefit from investment in both traditional [ MNEG ] and decarbonization efforts as the world navigates the energy transition. This should enable Worley to deliver good earnings growth and cash flow over the medium term. Our third addition to the portfolio was Sigma Healthcare. Sigma is a wholesaler distributed products to pharmacies in Australia. The company has proposed a transformational merger with Chemist Warehouse Group, which will go to shareholder vote next month. Chemist Warehouse is a founder-led business, which can effectively be thought of as the Bunnings or Costco of pharmacy. Chemist Warehouse's community focused pharmacy model offers, not only great value for customers by great economics of franchisees and the franchise [ rule ]. This attractive model provides a significant long-term runway for growth in Australia and overseas, with stores in New Zealand, Ireland, UAE and China with further markets under consideration by the company. While the stock has enjoyed a very strong run of late, we saw an opportunity prior to ACCC approval to take a modest position at an attractive valuation. To capture the opportunities we've just spoken about, we've trimmed several holdings that stock prices have run to extreme levels or look to sell out of companies where the long-term prospects are challenged. Along this time, we continue to trim the banks as valuations have run ahead of fundamentals. And while all high-quality companies, we've also trimmed positions in Reece, Wesfarmers and Macquarie, and we felt the valuations were becoming extreme. Mineral Resources was completely exited from the portfolio during the period. The disappointing revelations around corporate governance practices have led us to lose confidence in the investment and have invalidated our investment thesis. The investment has been a disappointing one. However, our experience has shown that governance issues of this severity typically proceed further shareholder value destruction. The other exits from the portfolio have been Domino's and Ramsay as we believe the challenges facing both these companies mean that a significant turnaround is required to improve returns. Over the next couple of slides, I'll touch on a couple of portfolio stocks and why we believe them to be good long-term investments for the AFIC portfolio. Goodman Group is a global property specialist, which owns, develops and manages warehouses, logistics centers and data centers in major cities across 15 countries. Their customer base is typically blue chip companies like Amazon or Woolworths. Goodman has built a leadership position in key markets by owning high-quality properties that are close to consumers and then seeking the highest and best use of those properties. This approach has positioned the company very well with a strong pipeline of data center projects that are not only strategically located, but also have critical access to power at a point in time where demand for data centers is rising. While the shares have appreciated considerably and the stock look expensive on near-term multiples, we see a very strong runway for growth over the next few years. Amcor is a global packaging company with market-leading positions in defensive consumer segments such as food, beverage and health care. Their customers include the likes of Nestle, Johnson & Johnson and Coca-Cola. November last year, the company announced a merger with one of their global packaging peers, Berry Group. The merger has a good strategic rationale due to the complementary nature of Amcor and various products and geographies and offer significant cost synergies upon the combination of the 2. As can be seen on the chart on the left, Amcor has undertaken 2 other major transformative deals over the past 20 years, being the Alcan and Bemis acquisitions. Both of these acquisitions, like Berry Group, offered significant synergies, which served to accelerate Amcor's EPS growth in the years following. We see a similar trend ahead for Amcor's earnings and our due diligence has suggested that the synergies, which are, in large part, based on the combined group's procurement capabilities are realistic. Our confidence is further buoyed by the track record of the team at Amcor in executing on synergies in past transactions. And with that, I'll pass back to Dave for some outlook comments.

Thanks, Winston. Look, tricky time in equity markets. The Trump administration has just been inaugurated in the U.S., while a few developed markets, including Australia, have an election cycle this year. Geopolitical tensions are high and trade policies remain uncertain and have the ability to influence capital flows materially in the near term. In relation to corporate earnings, domestic economic growth has moderated and the operating environment appears set to become more challenging. In times like these, equity markets tend to be highly responsive to the news of the day. Good news gets overbought and bad news can lead to large share price declines, in many cases, not justified. The range of potential investment outcomes is widely dispersed and impossible, in our mind, to predict. So in managing the portfolio where we endeavor to remain low turnover, we want to hold a broad portfolio of quality companies that we feel are well positioned to deliver earnings growth over the medium to long term. We've shown you what this looks like on Slide 14 of today's presentation. Additionally, we've shown you that the company's share price performance over the long term closely follows the company's earnings growth. So given the starting point of high valuation and an uncertain operating environment, it's likely that expected returns may take a little longer to materialize in the current environment. As we want to hold our investments for many years, the quality of the underlying assets and the people running them are critically important. And to this point, the portfolio remains invested in well-managed companies owning strategic assets, maintaining strong balance sheets. And with that, I'll hand over to Geoff to coordinate the Q&A.

Thanks, David. So I've got a few questions here. [Operator Instructions] So in terms of the first question, I'm sorry, it's to you, Andrew. I know you covered it in the presentation, but the question really is why are our dividends higher or greater than the earnings, particularly for this -- for last year and this -- for the last financial year. And what's our sort of future outlook? And when will this be reversed?

It's not just last year, of course, as the slide showed. If you take out the worn-offs, it's been like that for a number of years. And that's a factor of the investments that we have and the yield that they produce. The dividend that they take. We pass on the dividend that we get from the market, but we're conscious of the fact that dividends are a key part of investment for many shareholders and the franking credits they're on. So we've consistently maintained the dividend and increased it where possible. We'd like that to continue. And as I said, one of the benefits from an LIC is that we can do that as opposed to an ETF or a trust fund. When it will happen, when it will turn again, I don't know. But the joy of being in an LIC is, as I said, is that we can maintain that. But I can't give an outlook as to when it will change. When dividends go up from the companies that we invest in is a simple answer.

Yes. I suppose the point is, Andrew, we do support that additional dividend from realized capital gains. So in a sense, if there are opportunities to -- from an investment perspective to want to sell something and generate some realized capital gains in, we don't have an issue distributing a small amount of those as well. And we'll continue to do that. And it all -- so I think -- sorry, from that perspective. You look at the dividend from an earnings, but also some realized capital gain.

Absolutely. And it also means the team don't have to chase stocks that are high yielding in the short term when they can concentrate on stocks that may appear to be lesser yielding but have a higher sustainable growth. And again, the LIC structure enables them to do that.

Yes. So a few questions here, which I'll sort of bundle in 1 about the buyback of the shares, in terms of its likely continuation, and now have we been happy with the outcome? And why have we sort of stopped it in the more immediate time now?

So it's Mark Freeman here. The buyback -- I guess, just how we're thinking about it, as we showed earlier, that we're at quite a substantial discount. And the way we're thinking about it in the shorter term is that we do have an ongoing DRP. We've had that in place. And just remembering that there's a pretty consistent pattern with the shareholders that go into DRP, and they tend to stay there. So we showed earlier that during over the share price was at quite a premium to NTA, so people who were going in a DRP then were probably buying expensive stock. Now they're buying cheap stock. So it tends to average out over time. So we don't really want to be switching it off and on. We'd rather just have it on. We know that people who really want to be a part of the compounding returns from AFIC like to be in it. But what it means though is that when we see periods of this deep discount, it is dilutive to have it. but what we've, essentially, done is taken a view to buy back that stock on market when you're at such a discount, so therefore, you avoid that dilution. So people who want to be in it get the benefits of it, but it's not diluting those who don't go in it if we go into the market and buy back that stock. That's our starting point in terms of buying back. Obviously, we have to keep reassessing it as the share price moves. And obviously, we can reassess it if we buy more than -- if we get to that point where we bought back the stock and we're still at a discount, then that's the ongoing conversation we have with the Board. But that's certainly our initial take on the way we're thinking about the buyback. But we do have windows around reporting of results where we can't buy back. And so obviously, we've been one of those periods. But when we get that opportunity again, we've got the DRP coming up again. If we're still at a discount then our expectation is that, that typical strategy will apply.

Thanks, Mark. A question here about BHP and what's our view on BHP, David?

Thanks, Geoff. So a couple of things occupy our mind in relation to our thinking on BHP. The first of those is just on the iron ore side of the business where we're very close, if not having already reached peak steel demand in China. So that will flow through to, obviously, peak iron ore demand. And there's new supply coming online later this year from the Simandou project, which is partly owned by Rio Tinto, which will weigh on that softening demand outlook. So the price for iron ore probably looks fair, if not under some pressure, taking a medium-term view. The part of BHP that we're attracted to, though, is just the copper side. So they've got one of the largest deposit base or asset base of copper. And as the world moves more to electricity providing their energy needs, copper is going to become increasingly important. And BHP, across their entire business offer long-life, low-cost mines. And why that's important, it's even at low points in the commodity cycle, they're able to generate cash flow. So I think all up with where the share prices trade at the moment, we think it's fair value. But we're really waiting for that transition from the iron ore earnings to the copper earnings, which is probably 2 or 3 years away in our mind.

Thank you, David. Look, a few questions here about the international fund about what's the time line for international IC? Should we make it bigger in the current portfolio? So Mark, do you want to comment on where we are with that particular...

They're all good questions and we keep reassessing it. So we've been doing work in the background. It does take time to do the accounting, legal work to get in a position to be able to do an LIC. And so we've been beavering away at that, and we've made good progress. But then, I guess, on how we might time that, I guess, a lot of things have to come together at the same time. And so like all things to do with markets. Markets always talk about windows and when we think it's the best time to launch that. All I can say at this point is that's still ongoing discussions, work in progress. We said we'd be patient with this. Importantly, the stocks that we bought have added real value to the portfolio. They are great companies that we own. And as I said, they have enhanced the performance of the portfolio, thinking about could we put more money in? Yes, it's something we talk about, but we want to make sure we need to do it when we think we can add value. So we think about markets, the currency and all those factors that make us think about when's a good time to invest. So all those options are available to us, but we think where it stands at the moment, it's been very accretive for us to run this project within AFIC. And yes, the best I can say at this point, we are still assessing it as we go, but we're pleased with what's happened so far.

I suppose the follow-up question here is -- Mark, is why don't we make it larger within the portfolio?

Yes. And that's a good question, but that's about -- if we think there's an opportunity to -- that opportunity is now available to us. If we think we can add real value to it based on, again, where we're seeing overseas markets, where we're seeing the currency, there's nothing to stop us doing that because that's what we want to do is use the experience and research teams to add value to the portfolio where we can.

Okay. Thanks, Mark. There's a question on CSL and our view on the share price, which seems -- it's obviously been static for last few years.

Thanks, Geoff. So it's been pretty much flat for the last 5 years. So the starting point of that 5-year window was where the share price was excessively overvalued. And despite the company having delivered pretty steady earnings growth over the last few years, in our mind, it's now looking like good value. And so there are a couple of reasons as to why the market has fallen out of love with the company. The first, they could control and that was the acquisition of Vifor that they made. And in hindsight, they're clearly overpaid and that hasn't delivered the earnings growth or the returns that the company expected. And the second one was just the impact of COVID, where there was an inability for donors to be able to get to plasma centers, led to a period of increased costs and that's weighed on margins throughout that period. But I guess where we sit today, the plasma business, which is the largest part of the earnings for CSL is really well positioned, so there's still really strong demand for their end products. They're able to get annual price growth through. And importantly, over the last few years, have invested the excess cash flow that they've been able to generate into their manufacturing and their R&D pipeline. So they're really looking at the medium to long term in terms of where they're deploying capital internally, and we feel that positions them really well to be able to deliver meaningful earnings growth over that time frame. So where it is today, we actually feel really comfortable that CSL will be a good long-term investment for us.

A question about Qantas stock, it comes up so often. It's obviously done very well lately. It sort of on our watch list or...

It is from time to time. I guess with Qantas, just given the nature of airlines, they're highly volatile. And when you think about our investment approach where we're trying to hold companies over a 5- to 10-year time frame, and we don't want to be traders of those stocks. We really struggled to justify Qantas over that time horizon in comparison to other things that we felt were better uses of capital. Having said that, the share price has done incredibly well and the management team has been very successful in repositioning the business and getting the cost structure right and in terms of where they're investing capital. So it's been a really strong performer, but really difficult for us to take a 5- to 10-year view in comparison to other things we find more attractive.

We mentioned Ramsay Health Care in terms of the position it's in. What was sort of the factors that -- what are the sort of key factors that means it's lost its competitive motion?

So I think -- first of all, as the acquisitions that they made over many years into the international markets haven't lived up to expectations and the returns have been below what the company had expected them to be. And then the core of the portfolio or the largest part of the portfolio being in the domestic market, what we saw through sort of the last 5 to 10 years is really an oversupply in terms of the number of hospital beds that were built, and it's seen a drop in utilization across the private hospital network. And that's come at a time where cost inflation has been elevated. So whether that's on consumables, whether that's on wages. And coming out of COVID, people have been more reluctant to actually go to a private hospital. They're preferring to rehab at home. So you've had this perfect squeeze where the revenue they're able to generate is less than what they've delivered historically at a time of high cost inflation, and that's a cost that the company's had to wear. And ultimately, that's led to reduced cash flow for the business. Having said that, these are highly strategic assets. We don't think the private hospitals are going anywhere. We know the not-for-profits in the organization are actually making losses, and there's been a number of articles written about health scopes, challenges in terms of their level of profitability at the moment. So Ramsay continue to own the best network of private hospitals in the Australian market. It's just needing to work through that oversupply and getting the equation of revenue and cost growth back in their favor, which we think will happen, but likely to take a number of years from here.

Thanks, David. So a few questions about where the share price is trading relative to net asset banking. So I'll try to capture this in sort of in one question. So do we think about increasing the size of the existing buyback? Or do we, in fact, think that lowering interest rates may change the equation in terms of that discount premium, which it has done in the past. And I guess the other point is in terms of the competitive nature of the market, have ETFs taken away from the investments to AFIC, which is the true [indiscernible] to discount, so a pretty broad-based question, Mark, but there...

Yes. Sure. And these are all the discussions we're having internally. So it's the impact on -- to the extent it's the impact of ETFs, to what extent some retirees staying to go back into the fixed interest mark and the term deposit, which you were getting nothing for those over the last decade and perhaps money needs to rebalance there. We think about -- we know there's been a number of LICs that have had -- newer -- I call them newer LICs where -- we're traditional LICs, as I touched on earlier, new LIC that had poor performance, high fees, high costs, and I think they've sort of tarnished the market to some extent we like. We think it makes sense to neutralize the DRP as a way of buying back stock, and we can't really buy stock in market and use that to issue as DRP. The structure doesn't work like that. We have to do a DRP issue stock, but then we neutralize that by buying our market. We do have discussions with the Board, should we go further and try and buy back more? But that's an ongoing discussion. And how effective is that on a sustainable basis? These are all issues that we're discussing at this point. The other thing is that when markets we've seen certainly this many times before, when there's a hot market, which we are in, we do get -- tend -- we tend to get left behind. So that's -- we've seen that before. So these are all factors that go into the mix. And just to remind everyone, it was only 2 years ago we were trading at a 10% to 15% premium. So things have changed pretty quickly. So I think our best pathway is just to continue to buy -- neutralize the DRP to discount, consider buying more stock and really trying just to educate the market on the benefits of what I'd call the traditional LICs. There's only a few of those in the market, those that have no external manager and no performance fees. I like the way of thinking about AFIC. You can buy a portfolio of great stocks at $0.90 in the dollar. The other way I think about it is we go through our portfolio and multiply every share price by 0.9%, what prices do we get? They look pretty good to me. So the dividend yield, if you're buying at a discount, you're getting a better dividend yield, so -- at a consistent -- so there's lots of ways. So what we're trying to do is we are getting around the markets, banking to more planners, more brokers. I think at the broker level, as some of the older brokers that probably knew us better in the past have retired. Younger people have come in. So I think we just need to keep up with the educational process with financial planners, brokers, our shareholders to the benefits of an LIC and the opportunity that such a discount at the moment presented to investors. So it's all in the mix, and it's all being talked through, and we're working actively on.

And we're working actively on...

And we're working actively on those. And switching, we have picked up some -- more recently, some very interesting new shareholders that I would say that are pretty savvy and seeing this opportunity. So certainly, more which is broadly called marketing of this and I'd call it educating the market about the traditional LICs and its benefits. We've done a lot more of that, but we definitely need to do more.

Thanks, Mark. Question around Woodside in terms of our view around that particular company.

Yes. So Woodside we added so during the period, and it was really just as the share price fell on the reduced demand. Primarily, it was coming out of China. So we saw a reduced demand for LNG, and that just saw the share price fall quite materially to a point where we found that really attractive. The other thing was the market was a little bit -- we're just around some M&A that the company made within the North American market over the last 12 months. So we still see that LNG is going to be a key transition fuel that's going to be in demand for many decades to come. Woodside, they're operating very strong assets within that space, and they're very good operators. And the past, in terms of our -- Mark as a CEO, capital allocation has actually been pretty strong. So we still believe that management are making the right decisions in terms of where the capital is going, and they're still able to pay an attractive dividend yield to shareholders. So it's really using that temporary mispricing opportunity just to add to our holding where we feel the medium-term opportunity is still significant.

Thanks, David. Andrew, question for you. So you talked about the costs. What has the total cost, which make up the M&A, increased by in dollar terms? And what is that, as a percentage of total costs?

The cost over the half let -- I'll come on to why because this is actually quite a complicated question. It's not as simple as it looks. It will be an increased net cost. So net of the recoveries that we get from other LICs, about $1.5 million, which is about 17% to 18% of the total cost. Now that does look high, but there are a number of reasons for that. The one-offs we talked about, about the increase in registry costs, there will be more costs coming from looking at the international LIC, which as I said, is a separate project that's under active consideration and Mark talked about how that needs -- looking at the -- probably the main cost though is -- or the main reason for that increase is that last year, as we said, we saw a turnover in staff. So last year's costs were artificially low as a result of that. When we have the cost that we do, we budget them. We charge the LIC what we think it's going to cost. That's what we incur in our books, particularly with regards to incentives, et cetera. And then the LICs will get a refund from AICS depending on performance. So although we take the costs now, we may not bear all of those costs. We'll get a refund in the following year. So as said, apologies. That's a complicated way of looking at it. But in essence, as I said, a lot of those costs. And the reason for the increase is the very low cost that we had last year. We are approaching more normal costs, I would say, this year.

Thanks, Andrew. There's a question here about, I guess, related to that. Has there been any changes in the AFIC investment team over the past year? Sort of cleaning the house.

Yes. Yes. Well, there's always going to be some change. So Winston is new. So we had someone have been with us for a decade actually. So that's a pretty long run. So decide to sort of have a bit of a change in what they wanted to do in terms of managing money. And that was -- went without blessing as such, but then Winston has come in and joined us, and you've heard comments from him today. And before that, we had a -- more of a graduate who's been with us for a couple of years, moved on to another company. And again, it gives us an opportunity to keep refreshing the team. So there were 2 main changes, and we've had an additional resource coming to the international team as well, which has sort of beefed up our capacity there to do research on stocks, which has been fantastic for that team.

Thanks, Mark. So a question about Mineral Resources, obviously, sold that because of governance issues. Do you still have concerns at the prices fall considerably? Or is it only viable with the change in CEO?

Hard to know in terms of the sentiment towards the stock in relation to the CEO, but we certainly exited just around those governance concerns where our history has shown where there are significant governance concerns that the company generally leads to poor outcomes for investors, so we made the decision to exit. But just in terms of the underlying commodities that the company produces. So on the iron ore side, I sort of spoke earlier in BHP about a softening outlook over the medium term, and we're still reasonably cautious around lithium where over the next year or 2, it seems that the market is going to be oversupplied. And lithium has been a really immature market, and we saw prices skyrocket about 3 or 4 years ago just where the supply wasn't available. But on the back of higher prices, it incentivizes more production to come, and that's exactly what we've seen. And now it looks like we're set for a period of oversupply, which will no doubt put pressure on the lithium price in our view. So that's sort of where we see the outlook for the company from here.

Thanks, David. Not unexpected with a question here about what our expectations or thoughts on a particular market segment for us now that the Trump administration is in control in the U.S. And I guess, the ancillary question to that, what do you see, international policy -- explain the most influential role, I should say, in the companies that are invested, specifically in the U.S.

Look, the answer to that first bit is no, we don't really make decisions based on changing 1 president. We're trying to find great companies and great companies are, I think, sort of set themselves apart from what's happening at a political level. So -- and companies change and adjust to the conditions with our economic conditions, who's in power, and they get on and try and run that business. And that's really been the feature forever. And so we're not going to make trades based on who the coming President is, not at all. And so -- and it's really hard to get clarity on what it is going to do. We're getting lots of questions on this. And there are some general themes that he's focusing on, but without seeing the details in any of that, it's really hard to assess. But when you look through the components whether it's our market or the Australian market, I think most companies will be able to get on and run the business. There might be some specific companies that get caught up in some way, either for the better or the worse, but we're certainly not going to trade on that sort of information that we have around who the President is.

Thanks, Mark. A question on the slide that was centered around the sales growth. What -- do you have --what is the profit return over the same period for each of those, David?

I don't have it available to hand. But the only point I'd make is there's quite a lot of analysis around. It just shows you what ultimately drives share prices over various time periods. And over a 1-year period, those drivers can be wide and varied, whether it's the multiple the market's prepared to ascribe to it, whether it's cash flow, whether attorneys or whether it's sales growth. But over time, sales growth becomes increasingly important and a larger part of the determinant of earnings growth for a company. And naturally, if you're growing your sales, that gives you the ability to be able to control your costs better, and you're selling a product that ultimately, your end customers want. So that was sort of the point of the slide, to just show that over many years and over many cycles, those companies have been able to sustain really strong sales growth and that just gives each of those companies a lot of optionality in being able to invest in their business to be able to maintain really strong growth over many, many years.

Thanks, Dave. Question here about challenges that face, we have -- the challenges we may face in terms of growing the dividend.

Well, I -- as we went -- as I discussed earlier, I think the changes -- the challenges will be what is going to be the growth in the dividends that we receive from companies that we invest in. What will be the realized gains that we make as we maintain a portfolio with low turnover, what will be the tax regime and franking credits regime into the future. And what will be the challenges that we foresee in terms of if there's a sudden market and dividend paying downturn, like we saw in the financial crisis of 2007, 2008, like we saw in COVID. In both of those instances, AFIC, due to the fact that it had maintained reserves, was able to maintain its dividend when many others cut by 20%, 30%, 40%. So we are very conscious of the declared intent to pay a stable to growing dividend over time, and we remain committed to that as far as we can.

Thanks, Andrew. So for the 3 stocks that AFIC has completely sold or exit, sorry, during the half. Are you able to share with us the net amount of realized gains or losses?

I would say, overall, for the 6 months, as we've said, we have net realized gains. We talked about that, and that's been a drag on performance. In fact, by my calculations, without that tax, the 6-month return figure would have been above the market figure. And we do track portfolio returns separately. That's shown in the annual report and the remuneration report each year. But all I would say is because one can go back and have a look at when we bought them and when we sold them, Mineral Resources and Domino's Pizza, I would describe as disappointing result and Ramsay Health Care, I'll describe as quite a good result for when we did that. That's probably about as far as I can go.

Yes, that's correct. And Ramsay Health Care have been held for an extended period of time. So we're able to benefit from some pretty good strong growth from that company in the pre-COVID days. Dominos...

[indiscernible] in the past.

Yes, correct. And then Domino's is one that we got wrong. So it hadn't been in the portfolio for that long, and we had actually suffered a loss on the sale of that. And really, it was what's happened with the maturity of the international assets is likely to lead to a lower return profile going forward. And most notably, that would be in Japan, in our view. And the company, during the COVID period, made a decision just to roll out to many stores. They saturated the market, and that's led to lower returns across their store network. So that's really been an issue that they're now having to work through. There is a new CEO appointed to the company. We haven't caught up with him as of yet, but we're looking to do so in the near term just to understand what that looks like. But that's issue the company faces, and we made the decision that's going to constrain returns going forward over an extended period, so we decided to exit.

Thanks, David. A question about, do we have any cost investments in the other LICs that are now stable?

Yes, we do. We've got Djerriwarrh. We like the yield on that. We've got Mirrabooka. That gives us a good exposure to that share of the market.

But they're small position.

They are relatively small.

And they've been there a long period of...

Yes. Well, they've basically been here since they were established. So in a sense, we haven't actually added to those for a very long time....

The rationale for holding them remains opposite.

A question here about comparing -- interesting observation, the market index, like the ASX, disguises the fact that bad performers drop out of the index whilst good performers are in, certainly presenting a better return that could be available by holding all the shares the index in the longer term. Why don't we compare our returns against leading ETFs and other LICs?

Yes. Look at that -- sort of take that on note. It's something we can think about. I think most -- I guess, most fund managers in the market just look at the ASX200 internally. Internally, we do look at peers in terms of the way they're performing. But yes, there are different comparisons you can make, but I'll really take -- perhaps we'll take that one on notice and pass it back to the committee.

And I suppose the other thing, too, not -- all else are equal, so I mean, certainly within our stable report after tax and after cost, there are other LICs there that report their returns, pre-cost, pre-fees and pre-recapitalization. So it's not such an easy thing to cross the prospective LICs, even the market.

That's right. Getting a like-for-like is really tricky because we're LICs, so we pay tax, all the costs are there. It's all taken out. Even in an index ETF would be after the cost, but it would still be kind of pretax depending on what tax break you are, personally. And managed funds, when you compare ourselves to any fund manager, you look at that generally, you're going to be after costs and fees, but you want to check some -- talk about gross returns where you need to look at net returns, which is after fees. But then they're all going to be pretax as well. And generally, I would say most other unmentioned markets are a lot more active than us, and they would be incurring a lot more tax if they transact, so.

Yes, we'd like everyone to report the way we do, but it's -- that's not going to happen.

But we're conscious that, as we said, that there is a holding cost that a shareholder bears for the fact that we do have those costs and that tax in order to be able to stabilize dividends and provide a consistent return and there is a cost involved in that.

Yes. And despite the challenges that I highlighted in the question, the ASX300 is widely used across the industry just because it's seen as the proxy for the opportunity set of the available investments that can actually be invested in, in terms of managing money. So for us, we can also invest in New Zealand stocks, but the ASX200 is broadly a good representation of the opportunity set.

Thanks. We're fast approaching the hour. So I'll just ask a couple of more questions and respond to others from our e-mail. But the question is about why WiseTech Global, is it still a great company given the recent events that have occurred there?

Yes. Look, I think there are a number of personal issues that, while disappointing in terms of the behavior, in terms of the investment itself, we still see WiseTech as being an excellent long-term investment. We think the Board has appropriately dealt with the issues that came to hand over the last 12 months. And just to recap, so WiseTech is providing the software to the global logistics supply chain. And they've been around for about 20 years, and they've gradually been able to capture most of the large operators within that business, and they've now reached a tipping point where they've got about 14 of the top 25 global freight forwarders that are now using their software. So it's become the industry standard. The industry is growing, and there's still a number of operators that they can continue to convert across as customers. So we still see a very strong long-term opportunity for this business as they do become the industry standard in what they're trying to address.

A question here about, should AFIC consider acquiring Djerriwarrh, which is obviously one of the other companies with stable to improve total returns for both AFIC and [ Djerri ] shareholders.

Yes. Look, I'm not really sure how you kind of -- how that works and how you do it because where share price is, you can never take over a company for the share price you see. You're always going to pay some sort of premium. Plus they're different products. And so [ Djerri ] is really more focused on yield, particularly franked dividends. And the yield on that is nearly close to 2% higher than what you'd get out of the index when you include the franking. So it's really -- but it's sort of a trade-off. So if you want higher dividend, you give up a bit of capital growth. So that sort of search people who want to use the market to get more frank dividends in yield, whereas AFIC's more of a total return. So they're just different products. And simply buying something, it doesn't necessarily add to what you've got. So yes, I don't think that's on the agenda.

Mark, just a little bit of the last question. So capsulate sort of a few comments around -- back to international again. Would AFIC -- if we do have a separate international fund, would AFIC consider still holding a percentage within the -- within percentage ownership of that particular fund? And also, in terms of the objective, what do you see the objectives, international funds in terms of dividends as well?

Yes. Look, first on the second point, I mean, the reality is when you invest internationally, there are not big dividend pays and you don't get frank dividends. And it's more about total returns. And so you've got to factor that into your thinking. But as we've touched on, if we're in a stock that has no dividends, for example, but gives us great capital return, we can occasionally sell a little bit, generate franking credit and pay out some dividends, so there are ways to do it. But it's all about being -- I mean, ultimately, it comes down to buying great -- if you find a great business that's well priced, you'll make a great return on it and how that returns come to you could be dividends or it could be capital growth. But certainly international, it's not going to be when you go in there for dividends and yield. It's more about the capital growth you can get from those businesses. But if you look at some of these companies, they are major companies that we see globally. If we did do an LIC, would AFIC retain a position? Well, that's a decision the Board would have to make at a time. I think our track record is that when we've done the other LIC, that's what we have done. It's not saying we will do it, but certainly, our track record says we would maintain a position in a new LIC, but that's part of the analysis we're doing.

All right. Thanks, Mark. I think we'll close it there. There are a couple of more questions, but I'll respond through our e-mail. I think it makes it more appropriate. So we're on the hour and the number of participants is going down.

Okay. Well, thank you very much for your attendance at this. I'm really pleased there was lots of questions to keep the team busy. Just to remind everyone, we will be doing shareholder information meetings around the country in all the major cities in March, so look out for that if you want to -- it's a great opportunity to meet the team and ask questions once again. And obviously, we'll be doing another webinar in July for the full year results. So thanks again for your attendance.

Thank you. That does conclude today's webinar. Thank you for your participation. You may now disconnect your lines.