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

Good morning, ladies and gentlemen. Welcome to the 98th Meeting of Australian Foundation Investment Company Limited. My name is Craig Drummond, Chairman of your company. The company's Secretary has confirmed that a quorum is present, and I'll now open the meeting. Today's meeting is being held as a hybrid meeting and is being recorded. Today's presentation has been released to the ASX and made available on the company's website. I'd like to begin by acknowledging the traditional owners and custodians of all the lands that we are gathered on today and pay my respects to elders, past and present. May I introduce the people on the stage with me. To my left, we have our Managing Director, Alison Gibson. My fellow nonexecutive directors, Rebecca D. Bradbury, sorry, she's not on my left. She's on my right. Julie Fahey. Julie. Katie Hudson, Graham Liebelt, Richard Murray, and David Peever. Also on stage, we have our company's Secretary, Matthew Rowe. Our Chief Financial Officer, Andrew Porter. And our Head of Business Development and Investor Relations, Claire Aitchison. Mark Freeman retired as Chief Executive Officer and engine Director at the end of the 2026 financial year. The Board would like to acknowledge Mark for his leadership, and we wish Mark all the best for his future endeavors. Alison Gibson was appointed Chief Executive Officer and Managing Director of the company with effect from July 2026. Prior to taking on the role of CEO, Alison, as an experienced investment professional established and managed the Australian equities team at Hester. Alison is well known to the company, having previously worked with the AFIC Group of LICs for 10 years until 2021. Alison has been using her first few months to connect with shareholders, their advisers and the team. In due course, we'll be hearing from portfolio manager, Brett McNeill and assistant portfolio manager, Winston Chong. We are also joined by other members of the investment team in the front row of the audience. I'd also like to take this opportunity to introduce Kate Logan, partner of the company's auditors, PricewaterhouseCoopers, who is 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 I go any further, I'd like to note a change to the composition of your board. David Peever, a Director since 2013 will retire from the Board at the conclusion of today's meeting. On behalf of the Board, I want to thank David for his significant contribution and dedicated service over more than a decade and wish him well for the future. Thank you, David. I'm also pleased to advise that Tom Palmer will join the Board as a Nonexecutive Director effective from the 12th of October 2026. Tom was Chief Executive Officer of Newmont from 2019 to 2025, where he led transformative transactions, including the Goldcorp and Newcrest acquisitions, and prior to that, spent 20 years at Rio Tinto. His detailed knowledge of the mining and resources sector and broad international experience will complement the Board's existing mix of skills, and we look forward to welcoming. I remind shareholders using the online platform that whilst questions can be submitted at any time, I will not address them until the relevant time in the meeting. To ask a question, click on the Ask a Question button at the top or bottom of your screen. If you have not entered your shareholder number or proxy number, you'll be required to provide these details before you can proceed. Once your shareholder or proxy number has been verified, you can choose to ask your question in writing or orally. If you require further guidance, please click on the virtual meeting Online Guide link on your screen. Please also note that your questions may be moderated or if we receive multiple questions on the same topic, amalgamated together. To cast your vote, click on Get a Voting Card button on your screen. Where prompted, please provide your shareholder or proxy number and follow the prompts. Once verified, a voting card will be issued and you'll be able to lodge your votes. Click Submit Vote at the bottom of the voting card to lodge your votes. If you have multiple holdings, you'll need to obtain a voting card for each holding. Shareholders authorized representatives and appointed proxies in attendance here in Melbourne would have been issued a yellow card to vote on each resolution. If you are eligible to vote and you have not received a yellow card, please see a representative of the share registry, MUFG Corporate Markets in the foyer. If you have any questions about how to complete the voting card, please see a representative from the share registry here today. I now declare voting open on all items of business. I will give you a warning before I move to close voting. [Voting]

Before we move to the business of the meeting, I'd like to provide some additional comments. Ladies and gentlemen, the investment team will talk in detail about the portfolio performance shortly, but I wanted to acknowledge the performance of the portfolio for the financial year was below expectations, particularly in the first half of the year due to a lack of exposure to small and mid-cap resources companies, quality being out of favor and a number of individual stock positions, which the team will talk to in the presentation. Improvement in performance is a key focus for the Board and we have taken steps to address this. There are a significant number of changes in the last 12 months, including the appointment of Alison Gibson as CEO in July 2026, and Brett McNeill was appointed as portfolio manager late last year. Alison is well placed to lead the company, given her investment expertise, combined with her knowledge and passion for the investment approach of Alison will talk about what she sees as the key areas of improvement shortly. However, she has already made strong progress enhancing the processes that equip our investment team to deliver on FX investment objectives. One of the key objectives of AFIC is to provide shareholders with a stable to growing stream of franked dividends. We are proud of the fact that we have not cut the dividend in times of stress, such as COVID and the GFC, and that shareholders were able to rely on their AFIC dividend at these times. To meet this objective, the Board has made the following decisions. Firstly, to move to quarterly dividends with the first quarterly ordinary dividend of $0.0675 per share and a special dividend of $0.025 per share being determined this morning to be paid in November. With subsequent equivalent dividends being paid in February, May and August, subject, of course, as always, to no material unforeseen adverse market conditions and final board approval. The Board intends to return franking -- surplus franking credits to shareholders in a timely manner whilst maintaining an adequate level of franking reserves. This is reflected in this morning's announcement, in which the Board noted its intention to determine a special dividend of $0.10 per share to be paid in equal quarterly installments for the '27 financial year. The company currently intends to buy back shares in a meaningful way when trading at a material discount as this is value accretive for shareholders. To that end, $243 million worth of shares were bought back in FY '26, reflecting the extent of value that the discount to net tangible assets offered. As announced in the interim results in January '26, the Board made a decision not to proceed with the establishment of a separate international listed investment company at this stage, predominantly due to market conditions. On the back of this decision, we have revised our investment approach by increasing the concentration of the portfolio to our highest conviction positions. We have retained the international exposure in the AFIC portfolio for 3 reasons. Firstly, the portfolio provides diversification to companies and sectors that are not available in the domestic market. Secondly, it provides options in the event that the ASX continues to reduce in size and breadth. And thirdly, the research provides valuable insights for companies in the domestic portfolio. The portfolio remains small in size at 1.5% of the AFIC portfolio at 30th of June 2026. This position sizing will remain while the strategy proves itself to earn a greater allocation of capital. The international investment team are here today and will be around after the meeting if shareholders have any questions. We thank shareholders for their continued support and are committed to delivering improved outcomes. We continue to believe AFIC provides an attractive investment option for all investors with access to a low-cost actively managed portfolio with an investor-friendly structure. Moving on to the business of the meeting. I'll take the notice of meeting as read. With regards to the minutes of the 97th Annual General Meeting, they have 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 30 June 2026. We'll do this via a presentation, after which I will ask shareholders to comment or to raise any questions either about the presentation or of the auditors if they have any questions about the audit. I'll now pass to our Managing Director, Alison Gibson.

Thank you, Craig, and good morning to you all. It's an absolute pleasure and a real privilege to be here serving you, our shareholders, as CEO and Managing Director of AFIC. Thank you all to people in the room for coming today and braving the weather and thank you to those joining online. I'll now turn to our presentation and the usual disclaimer, which really just says we're here to talk about the company and not to give individual financial advice because we don't know your personal circumstances. This is the agenda for today. I'll make a few comments and say a few words and provide the details on the dividend update, as Craig has already talked about and announced today. Andrew Porter, our CFO, will talk through the financial results for FY '26. Brett McNeill, our portfolio manager. We'll give an update on the portfolio. And then he and Winston Chong, our assistant portfolio manager, will talk to the market update and outlook. As Craig noted earlier, I'm returning to the group having previously worked for the business for 10 years until 2021. In the last 5 years, I worked to establish and run the internal Australian equities team for Hester. I'm incredibly excited to be back serving shareholders and working alongside our board and team at the AFIC Group. I've been with the business nearly 3 months now. And I wanted to spend a little time today talking to a couple of key questions that I've been asked since returning. Those being, why am I rejoining the group? And what am I looking to improve? Turning to why I'm rejoining the group. Firstly, it's about purpose. I believe in why AFIC was created in the first place. Most fund managers exist to make money for themselves via fees. AFIC was created to work solely for shareholders and to provide them with an actively managed portfolio at a low cost. We're essentially a not-for-profit, working directly for shareholders with no external fees. And that purpose is something that is really important to me personally. Secondly, it's about the people. I remember being a young analyst working for J.B. Wear and I was covering the infrastructure sector. And I was asked to come up and talk to the AFIC Board, and I did so quite nervously moved into the AFIC boardroom, sat down, gave my investment thesis on companies like Transurban and other infrastructure companies. talking about their prospects for dividends and earnings growth. And at the end, the Chairman at the time, Bruce Teele, said, thanks very much, Alison. That's great. That's great information. But tell me about the people, who's on the board and who's on the management team? And what's their track record for working for shareholders interests. And that insight has really stayed with me my entire investing journey. It's always been important in terms of assessing companies that we invest in, who are the management and the Board and are they good allocators of capital. But I think it's equally as important when looking at the people that you work with every day, are they people of high integrity. Do they have a shared sense of purpose that brings them to work each day. And that is the reason -- 1 of the reasons I'm rejoining AFIC. We have an incredibly experienced Board and a dedicated team who work very hard each day because we take very seriously our role as stewards of shareholders' capital. I'm also excited at the opportunity to build on AFIC's exceptionally strong foundations, our 98-year history of serving shareholders. Our scale that allows us to deliver an actively managed portfolio at a low cost, but it's very competitive in the market. Our listed investment company structure, that allows us to look through short-term volatility and take a long-term view. Our transparency, and unique governance layer with a committed Board acting in your interests. And finally, I believe our structure offers a real opportunity to make a difference by building prosperity for our shareholders no matter what stage of life they are in by giving them ownership stakes in the best quality businesses. I believe in active management that wealth is created quietly over decades through the power of compounding. Turning to what I'm looking to improve. First and foremost, performance. AFIC has outperformed over the long term. But as the chart shows, the last 5 years have been particularly difficult, which has also dragged down the longer-term numbers. The market structure has changed. We've seen the rise of passive and systematic investing, which has increased single-stock volatility, and we've seen some extreme share price moves on short-term factors and big swings between sectors. That's created quite a challenge for active managers across the industry. I do believe this volatility where the market is hyper focused on short-term factors, does provide an opportunity for investors such as AFIC who can take a long-term view. It's important to say that our investment philosophy won't change. We invest in quality companies that are run by strong management with sound balance sheets and generate attractive returns on capital. It has served our shareholders well over the long term. But I do see an opportunity to refine the investment process to deliver stronger returns, an opportunity to enhance our risk management processes and to be more intentional about where we actively position away from the index to generate superior returns. We have a talented, highly experienced and dedicated investment team. My priority as CEO is to ensure that we have an environment that supports and enables them to be wholly focused on working for you, our shareholders. Brett will talk a little later in the presentation about his observations and the changes he has made since taking over as portfolio manager late last year. The other area I see a need for improvement is in the communication of AFIC's value. AFIC is trading at a discount to its net tangible assets, or NTA. I believe we have a unique offering in the market, which is attractive to all investors at each stage of their life. It's important that we communicate this clearly. Investors currently have the opportunity to buy a portfolio of quality companies at a low cost at $0.85 in the dollar. And the dividend yield on that discounted share price is very attractive. Our heritage, experience through market cycles, talented team and accessibility as a low-cost active manager are all clear advantages, and we need to do a better job at explaining that more clearly to current and future shareholders. As we embrace the future, we do so from a position of strength, nearly 100 years of foundations built on trust and patient long-term investing. My focus now is to set the business up for the next 100 years and for the next generation of Australian shareholders. I'm mindful that active management faces real challenges today. But I believe we are really well positioned with our structural advantages. We offer active management, not just the largest companies in the index at a low cost. We can genuinely take a long-term view when many in the others in the market cannot. So as I look ahead, I do so with great confidence and optimism about what comes next. And with that, turning to our dividend update. One of the attractive things about our listed investment company structure compared to an ETF is the allowance for dividend and franking credit reserves, which provides superior income stability. AFIC has a long history of maintaining its dividend. And as Craig said, AFIC didn't cut the dividend when the market was cutting dividends in the GFC and in COVID. It maintained its dividend because of its reserves. Whilst AFIC must maintain some reserves for when the next inevitable disruption comes, when I look at this chart, it's clear we have excess franking credit reserves. And we are keen to get those out into the hands of shareholders who value that franking. As Craig mentioned, the Board has announced today, its intention to increase the ordinary dividend for the FY '27 financial year to $0.27 per share fully franked representing 2% growth on the previous year. The Board have also announced its intention to determine a $0.10 special dividend fully franked for FY '27. And subject to no material unforeseen adverse market conditions and final board approval. In total, that's $0.37 per share fully franked, including the special dividend. One of the things we've heard from investors is they would like to receive dividends more frequently. And as such, we're moving to quarterly dividends today, as Craig mentioned. At the current share price, the ordinary dividend represents a 5.8% fully franked yield grossed up for franking. Including the special dividend, that represents a 7.9% yield growth up. It's worth noting that the Board will determine any future special dividends after FY '27, taking into account ordinary earnings, the balance of franking credits and the generation of realized capital gains and is, therefore, subject to variation. With that, I want to say thank you for trusting us to manage your company. And I look forward to your questions later on, and hopefully, a cup of tea afterwards. I'll hand over to Andrew Porter, our CFO, to talk through the financial results.

Thank you, Alison, and good morning, ladies and gentlemen. So as in previous years, I will briefly run through somebody's done it quickly perform me. This is -- there we go, back on where I wanted to be. As in previous years, I'll briefly run through some of the key financial metrics for the year. As with all of us, I will be here after the main part of the presentation, if anybody wants to ask more questions about what the detail behind these figures are or indeed anything else. So profit for the year was up 3% to $293.5 million. Dividends we received were up particularly unfranked dividends and trust distributions, which has an impact on the income tax that we have to pay and the franking credits that we therefore, accumulate, and the options in the trading portfolio contributed more this year than last. The management expense ratio or MER for the year was 0.14%. This is equivalent to $0.14 for every $100 that you have invested in AFIC. As Alison has noted, this is simply the cost of running AFIC. Nobody else is making a profit out of this. There are costs in running a company that an ETF does not have, but there are the benefits, the company's structure, it's transparency, it's closed end nature, the ability to smooth and maintain dividends, as Alison has mentioned. The major component of the MER is the portfolio value as it is simply the cost as a proportion of the average portfolio. But the other element is the costs themselves. The nonvesting of the previous year's incentive payments was part of it but only a minor part. Most of the cost reduction during the year came from the restructuring of the team, a reduction in the use of external advisers and the expected reduction in share registry costs following the transfer amongst other items. Both Board and management have a focus on cost management, and this continues under Alison's leadership. What was not covered in the profit figure with the realized gains for the year and indeed for last year, which led to the increase in the franking balance. As at the end of the year, this balance had grown to $0.55 per share, as you can see there, and hence, the announcement about the special dividend today. This enabled the payout of the special dividends for last year, the $0.05 on top of the $0.265 ordinary dividend and obviously the dividend forecast announced today. I should stress that the level of any special dividend can and will change over time. We aim to keep a healthy reserve of franking credits to ensure that we can maintain the ordinary dividend in tough times as we've discussed, which is why we will usually need to wait until the end of the financial year to ascertain what our realized gains have been and what the outlook for the next year is before we can decide or determine what any special dividend will be. The portfolio size fell to just under the $10 billion mark in June caused not only by the portfolio performance and accumulation returns, remember include dividends paid, but also reflects the cash paid out for those dividends and the buyback. As you can see in the last box, and as Craig has mentioned, we have bought back $243 million of stock during the year ended June '26. This one's considerably more than the DRP, DSSP shares issued and reflects an investment decision to buy back shares at an attractive discount to the underlying portfolio value. I hope that's all clear. As I said, happy to answer any questions in more detail afterwards. But with that, I'll hand over to Brett and look forward to talking to many of you after the main presentation.

Thanks, Andrew, and good morning, everyone. By way of introduction, I've been with the AFIC of companies for 7 years now after I joined as the portfolio manager for our Djerriwarrh Investment Company back in October 2019. And as Craig and Ali mentioned, I became the portfolio manager of AFIC late last year. So going back 7 years ago, the main reason why I joined this group of companies is because I genuinely believe that this style of investing is the best way to invest. I think I believe in taking a long-term view, investing in quality companies primarily and being in a long-standing, trusted proven investment vehicle, that's low cost and has that shareholder-friendly structure. That belief was developed over my career since I started working in markets and also some of my first introductions to the share market. And that primarily involved my late grandfather writing me letters about his investments in the share market, what he was invested in and often sending the newspaper clippings of financial market topics, and it included things like his favorite investment companies, which included Australian Foundation Investment Company. So naturally for me, given that history, I certainly consider an honor and a privilege to continue working for the group as well as now being the portfolio manager of this portfolio, AFIC. So before I go into some detail on our recent portfolio activity, I do want to give a brief recap of the key elements of our investment approach and how they're supported by what we see as our key competitive advantages. I strongly believe that we're in a unique position to deliver attractive income and growth for our shareholders over the long term. The permanent capital nature of the listed investment company structure means we don't have to deal with fund inflows and outflows that managed funds and other investment vehicles do have to, and I think this gives us greater scope to take that long-term view, particularly during times of market stress. And the investor-friendly structure that we have where the shareholders own the management rights to the portfolio means that AFIC continues to be low cost with no extra management or performance fees being taken out of the vehicle, and that allows for maximum pass-through of returns to investors. So given what I certainly see is our unique position, our investment approach remains focused on owning high-quality companies within a diversified portfolio, and having the right mix of income and growth, and this should allow us to deliver strong compounding returns over the long term. And I think that AFIC way of investing, our investment approach has certainly been well proven over time over the long term, but the recent underperformance, as Ali mentioned, has certainly given us good reason to review and identify some necessary improvements to our process. Some of the key enhancements that we've made include making a more rigorous assessment of the company's quality, particularly during times when the company being analyzed is under change. They might have made a big acquisition or a change in management and the like. And I think we now have to more rigorously assess that view, particularly of the long-term quality, part of that as well as having a much greater level of debate and challenge within the investment team and then also using additional risk management tools to complement the work done by the team already in this space. And whilst it's early days, the results so far from the improvements over really the last few months have been very encouraging. We've already had some great recommendations from the investment team, and these have made a meaningful contribution to our performance. And this can be seen in AFIC's more recent performance, albeit short term, which includes our NTA total return being ahead of the benchmark for calendar year-to-date. So given that backdrop, I'll now talk through some examples of the buying that we've been doing as a result really of these improvements and that long-standing process. Some of the more significant buying that we've done in recent times has been in Woolworths and Telstra. These are key stocks for AFIC's dividend income and then not just about delivering a high dividend yield on our purchase price, but importantly, a growing dividend stream over time. And so on the slide here, we show the dividends paid by these 2 companies over the last 5 financial years, along with the market's expectation for next year's dividend. If we look in the case of Woolworths on the left-hand side, they paid a special dividend to shareholders in financial year 2024 before they had a much tougher year in 2025 with a lower ordinary dividend. During that time, the share price fell significantly, especially in late 2025. And thankfully, we took advantage of that to increase our position in Woolworths given that our long-term view of the company, which we tested rigorously was unchanged. Pleasingly, Woolworths' performance has rebounded since then under new CEO, Amanda Bardwell, and shareholders have been rewarded by a strong increase in the dividend in the most recent financial year, and this looks set to grow again for financial year 2027. In the case of Telstra, it's been a very consistent performer in recent years. CEO, Vicki Brady, we think, has done a great job maximizing the value from Telstra's market-leading position. And the solid profit growth has translated to dividend growth and good share price performance, and this has been a real benefit to our returns given the buying that we did around a year ago. So both Woolworths and Telstra, we think are blue-chip companies operating in very attractive industries with a strong market position and they remain core holdings for the AFIC portfolio. Looking now at 2 companies that we've bought recently but more for growth than income. And these are Pro Medicus and Technology One. We show on the slide here the track record of earnings per share growth over the last 5 financial years for Pro Medicus and Technology One, along with the market's expectations for their earnings per share for the next financial year. We see both of these companies as having a number of very attractive characteristics, which you call part of our quality assessment of them. We think they've both got very strong and aligned management teams both got strong balance sheets. They're in a net cash position. They make a very high return on equity, and we think they've got terrific long-term growth potential. So that's the quality on the growth side, but an important part of our investment process is always not buying at any price. The valuation that we buy it needs to make sense. And after following these companies, for a number of years. We decided to add both Pro Medicus and Technology One to the portfolio in February and March this year, and that was because the market sell-off of growth stocks gave us the opportunity to buy them at what we thought was a reasonable valuation. And again, early days, but pleasingly, both have already added good value to the portfolio. Turning now to gold. So gold has been 1 of the biggest stories in investment markets over the last few years. A number of factors such as government debt levels as well as geopolitical tensions have pushed the gold price up significantly, and that has made gold equity some of the best performers on the local share market in recent years. In recent years, AFIC has not owned any gold companies. But during the last year, we earmarked this sector for the portfolio as long as we could buy after identifying high-quality companies, that we could add to the portfolio at attractive valuations. The research that the team did identify 2 companies in particular in the large-cap space being Newmont Corporation and Evolution Mining, and identified them as being very appropriate for our portfolios. And when gold equity sold off in July this year, so only a few months ago, that gave us the opportunity to buy both of them for the portfolio. In our view, both Newmont and Evolution are very well managed. They have high-quality assets, in particular, being low-cost large mines that are predominantly in stable locations such as Australia, Canada and the U.S., and both have very strong balance sheets. They're both net cash. At current gold prices, both Newmont and Evolution are extremely profitable, which is the information that we show here on the charts. So in the case of Newmont, they're set to make around USD 13 billion in operating cash flow for the December and financial year 2026 result. And for Evolution, they reported AUD 2.6 billion of operating cash flow for their June end financial year 2026. We think both these companies are using significant cash flow in a very sensible way, they're returning some to shareholders in the form of dividends and share buybacks in the case of Newmont and fully franked dividends in the case of Evolution. And as well as that, they continue to invest in the existing portfolio to set themselves up to continue to deliver long-term growth and returns. So, so far, it's been a relatively obviously, new investment in gold, but for the portfolio, but it has been well timed in terms of adding value, and we think it really improves the quality and diversification for our portfolio. And just to touch quickly on some other stock purchases that we've made in recent times. We've added to our positions in retail companies, JB Hi-Fi and Sigma as well as the investment platforms Hub24 and Netwealth, but our biggest purchase over the last year has been buying back AFIC shares in the form of the share buyback that we've spoken about. And just rounding out the key transactions and portfolio activity with a few quick comments on the selling, which, of course, has funded the buying activity that we've just run through. So basically, we've trimmed some holdings based largely on valuation and position sizes, and we've exited 4 companies largely on quality considerations. The trimming of NAB and Westpac was done much earlier in the year at what we saw as very full prices at the time. The BHP trimming was done as a result of some call option exercises after the share price performed very strongly. The Brambles and James Hardie position sizes were reduced, and that was based on our updated view of these companies' prospects. And in the case of Ampol, it's been a very good performer recently, but we think the long-term challenges to their business remain and hence, we have reduced this position into the current strength. The stocks on the right-hand side that will complete disposals were all smaller positions, none were previously in AFIC's top 25 holdings. We sold out of Sonic Healthcare, given our strong preference in the health care space for what we think are high quality, high-growth companies like CSL, Cochlear, ResMed, and Fisher & Pike Healthcare. Plus we do think Sonic will struggle to meaningfully grow the dividend from current levels. And for Wally, PEXA and IDP, there will be -- each of those 3 companies have been very disappointing investments for us and we decided to fully exit the position given our original investment case had not played out. So before I hand over to Winston, I'm just going to give a quick update on the international strategy and portfolio that Craig mentioned earlier. So even though a separate listing of the international portfolio has been shelved for now, we do retain some exposure to international equities within AFIC. The portfolio totaled $157 million at the end of August, which represented 1.6% of Ethics total portfolio. And the portfolio at that time owned 20 stocks with the biggest positions being Schneider Electric, Amazon and Microsoft. The portfolio is managed by Andrew and Brock, and both of them are here today to answer any questions you might have on international later. So with that update on the portfolio, I'll now pass over to Winston, and he's going to cover some of the key themes from the recent profit reporting season.

Thank you, Brett, and good morning, everyone. With reporting season wrapping up just over a month ago, we'd like to share some of our themes that we're observing and some color on how the portfolio is positioned. The first theme is that some of the strongest share price moves we saw during reporting season were driven by relief rallies. That is stocks like CSL and cochlear which moved strongly on the back of the market's relief that results were not as bad as feared. This is as opposed to strong underlying earnings upgrades. Both CSL and Cochlear have been a drag on AFIC portfolio performance in recent years. And while it would have been easy to give up on them at the bottom, deciding to stick with them when the market was at maximum negativity ended up being the right decision for the portfolio. Secondly, the consumer has come under the spotlight of late with a number of negative trading updates from discretionary retailers as consumers battle with the impact of higher oil prices, inflation and rates, preferencing spend on staples instead. In that environment, our preference is to be in the highest quality, lowest cost retailers with strong balance sheets, such as the likes of JB Hi-Fi and Wesfarmers. Softness has also been visible in the banking sector as property prices have rolled and mortgage application volumes declined after the federal budget tax changes. That said, they appear to have stabilized for now, with the major banks now forecasting modest system credit growth for next year. Thirdly, corporate activity has been another feature of this reporting season with a number of bids for companies in the last couple of months. This includes 2 smaller portfolio companies, Cleanaway and Equity Trustees receiving bids. Both outcomes are still unknown and are unfolding with Cleanaway in due diligence and Equity Trustees rejecting their proposal, but leaving the door open for better offers. And lastly and importantly, we saw a dividend growth that was good across the market, and I'll touch on this on the next slide. This chart shows that dividends from the 10 largest portfolio holdings report reported in August. As you can see, dividend growth was very strong across the board, but especially buoyed by resources stocks like BHP whose dividend was up 50% during the year, but also some very strong solid growth from blue-chip industrials, like Woolworths and Telstra that grew dividends double digits and solid growth from Wesfarmers, Transurban and CVA. CSL's dividend was down 8% and whilst negative fell a lot less than what the share price suggested in mine earlier in the year. This good growth in dividends has on average been slightly ahead of our expectations and provides a good setup for our operating income in FY '27. So overall, a mixed reporting season, some weakness in the consumer, but also good to see some fundamental valuation come to the fore of it through some of these relief rallies and take [indiscernible]. And importantly, good to see a solid period of dividend growth for the portfolio. And with that, I'll hand back to Brett.

Thanks, Winston. So to finish this section of the presentation, we've just got a slide that shows a snapshot of the AFIC portfolio as of the end of August. So the portfolio value of $9.9 billion was spread across 59 stocks and it equated to a net tangible asset backing per share of $8.06. And as you know, the franking credit reserves that Andrew talked through are not part of that NTA that would be valued on top of that. Overall, we're very confident that we're well positioned across the portfolio and quality companies with BHP being the largest position in the portfolio. Commonwealth Bank and Wesfarmers remain top 10 holdings for us, with the most recent trimming that we did being some months ago and at prices well above current levels. CSL that Winston mentioned, remains a top 5 holding, given that we did maintain our position and thankfully benefited from the very strong rebound that it's had in recent months. So overall, financial year 2027, we think, has started well for AFIC, particularly in terms of our dividend income that we received from the companies in the investment portfolio, but also our recent investment performance. Portfolio strategy continues to be focused on adding quality companies at attractive valuations. And in this context, buying back AFIC shares remains strong consideration at current levels. So with that, thank you very much for your attention, and I'll now pass back to Craig.

Thank you, Alison, Andrew, Brett and Winston. 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. We have had a number of pre-submitted questions, and we'll be addressing those questions before moving to the questions from the floor and indeed online. So Claire. Do we have any questions on the financial statements?

We do, Chair. Sorry, I hope you can hear me. So we've had a number of questions on performance over the time frames of 1, 3, 5 and 10 years and what the Board and management team are doing to address this?

Thank you. I think we're obviously very conscious of the performance over a 5- to 10-year time frame. And I think you've seen from the presentations today, we have addressed our disappointment on all of your behalf of performance over the last 12 months. But I think you've also heard from Alison and Brett about some of the changes that we are proposing to make. So I wasn't intending to make any additional comment on performance because I think we've worked through that in the presentations. But we -- your Board is very conscious of performance and an issue that we are constantly discussing with management.

We've also had multiple questions on the payment of quarterly dividends with many people asking us to pay for dividends.

demand I think those questions are now probably somewhat secondary, given the announcement today that we have moved to the payment of secondary dividends with the first payment in November.

Is the Board reviewing how conviction is sized when lagging holdings added to when calls are written over a position that is working?

So the Board through the Investment Committee is responsible for approving the transactions that are brought to the investment committee by the investment team. As a nonexecutive directors, our role is to review the policies and procedures that the executive and the investment team have in place and assess their effectiveness. The investment team carry out the investment research and make all stock selections. And as Alison mentioned, she spent the first few months reviewing the structure of the team and the investment processes, and you've heard about some of the improvements making. But I wanted to be clear, this question says, what is the Board doing around investments. And the Board does not select the stocks. That is for the investment team. We review the governance and the policies and procedures and risk management around those stock selections.

What impact do you see the ETFs have on the performance of the Australian market? And how will AFIC differentiate itself from ETFs? And just a follow-up, why should a new investor buy AFIC rather than an ETF?

I might pass to Alison for that.

Thanks, Craig. Just making sure we're on. Yes. Thank you. I talked earlier about the rise of passive index investing and the growth of ETFs in the market and the impact that it's having. It has meant that a rising share of money is allocated to companies according to their size in the index rather than their fundamentals. And that supported the valuations of the largest companies. And in recent years, it's made it harder for active valuation conscious investors to keep pace with the index. Over the long term, we believe that valuations are ultimately driven by company earnings and quality. And that's, as you've heard today, where our research is focused. I do believe that AFIC offers a compelling investment opportunity for investors. We provide an actively managed portfolio at a low cost and with no external fees. The LIC structure in particular, relative to ETF does enable us to retain profits and franking credit reserves, as I talked about earlier, and that steady stream of fully franked dividends over time. And we've clearly demonstrated today that we are looking to pay out those fully franked dividends to shareholders as we know they're important.

Chairman, we've had several questions on how the Board handles potential conflicts of interest and our investments in other including the company's participation in the AUI DUI scheme of arrangement.

Thanks, Claire. The Board and the investment committee have robust processes in place to manage any potential conflicts of interest and have done for many years. Directors disclosed their interest at each Board meeting and will recuse themselves on any discussion on stocks where there is a potential conflict of interest. At the very least, directors with an interest in a particular security as a Nonexecutive Director of another company, do not participate in the discussion and we have on occasion as directors to leave the meeting to ensure a full and frank discussion has had with the team. On the AUI DUI situation, in particular, DUI has been a long-standing holding of AFIC was bought when an attractive opportunity presented itself many, many years ago and has provided an attractive yield. Like many LICs, DUI was trading at a significant discount to NTA prior to its merger with AUI. The company received, that's DUI received -- sorry, AFIC received AUI shares as a result of the merger with DUI and the holding will continue to be assessed through the normal investment processes. As Chairman of the largest shareholder of AUI, I recused myself from any decision and any discussion in relation to the AUI DUI scheme of arrangement, which I was under normal and usual conflicts processes that the company follows followed later of the law. The investment team made the decision based on the investment merits at the time of that merger. But to be very clear, I think, for the shareholders asked the question, Mafic didn't actually buy a stake in AUI. It already had a stake in DUI that was simply receiving AUI scrip for its DUI holding.

Chairman, we've also had several questions regarding the on-market share buyback, including what level would cause the Board to materially increase the share buyback? And how do we assess buying back shares against buying portfolio companies?

I'm going to ask Brett, given Brett's making the investment decisions here.

Sure. Thanks, Craig. I mean it follows on from the capital management strategy being discussed and decided between the investment team and obviously, at the Board level. And once we've got that like we have, then it really becomes an investment decision. So the considerations for further share buybacks really involve an assessment of where the AFIC share price is trading relative to the net tangible asset backing at the time. That's the key one, but we also need to take into account other factors such as market levels at the time. other portfolio priorities in terms of other stocks we intend to buy and our funding position, which is why it's a decision really for not only myself and Winston but with Alison and Andrew's involvement there as well given all those factors. So with all of that in the mix, obviously, we've judged the buyback to be a very compelling investment for the AFIC portfolio over the last year, given especially that discount to the net tangible asset backing. And from here, we'll continue to assess it in the same way. And we obviously made some comments about how we consider to still be a very, very live option compelling at current levels.

Thanks, Brett. Chairman. Could the Board outline whether this is a year to go further on selling holdings such as Commonwealth Bank and Wesfarmers applying the tax proceeds to a large special dividend prior to any changes to CGT legislation?

Well, we have provided a larger special dividend today, but I might -- in terms of the investment decision, would we sell more Commonwealth Bank and Wesfarmers as an example, which would, in all likelihood, generate substantial capital gains. I'll pass to my colleague, Brett.

Yes. Thanks, Craig. So it will always be driven by a portfolio decision. So we're never going to look to sell something to generate a large capital gain just so we can pay out a special dividend. The special dividend is the outcome of it to distribute the franking credits and the gains in a timely manner to shareholders. In regards to those 2 stocks, the majority of the selling was done over a year ago. So it was a big part of the financial year 2025 result, so over 12 months ago. We've continued to trim a bit of Comm Bank and Wesfarmers in the last 12 months, but not in recent months. And so that's why I made the comment earlier that the last trimming we did at CBA and Wesfarmers was done and share price is well above current levels. But I think it's fair to say whether it's those 2 stocks or any others, we clearly have the ability and the willingness to distribute any realized capital gains and franking credits in a timely manner. I think that's the key.

Thank you. Chairman, can you explain the growing discount to NTA? And what is the company doing about it as there will be a drift of investors ultimately, if nothing is done?

I think we've probably covered that topic of fair bit today. Alison covered in her presentation. We obviously announced additional dividends today. Brett's talked about the buyback I think Alison also made mention of performance clearly is very important and communication is very important. So I think we've addressed that. But it is a function for all LICs in the market at this point in time.

Previously, the company's goal included beating the benchmark index over time. I see this is not discussed in the annual report or update to shareholders. Is this an avoidance tactic as the company has met this target. And what is management and the Board doing about rectifying the suspect of underperformance?

I might pass this 1 to Alison. Thank you.

Thanks, Craig. The company does seek to generate attractive returns over the long term. And while we have outperformed the index over the long term, as you saw on the chart, the shorter-term numbers have been disappointing, and we've talked to that in the presentation. And those shorter-term numbers have dragged down the longer-term performance numbers. It's something that we're very conscious of and a real focus of mine and the team, and we talked to some of the improvements we're making to deliver improved performance over the long term.

Chairman, the total dividend was $0.315, but EPS was $0.2342. How should shareholders think about the sustainable ordinary dividend level versus distribution supported by realized capital gains and accumulated franking credits?

Well, I think you should think about the dividend. The ordinary dividend was $0.265 versus $0.235 ordinary EPS. There was a $0.05 special paid last year. And we do say in our release again today, that in announcing a special dividend that there will be variability, and that's the nature of a special dividend. There will be [ verability ] but we'll be very focused on making sure that the ordinary dividend is stable to growing, which is our objective.

BHP now represents 11.7% of the portfolio given AFIC has no formal maximum stock or sector limits, what internal risk thresholds does the investment committee use before concentration becomes excessive?

Alison or Brett, would you like to cover that one?

Yes, I can start, if you like, Craig. I mean, it's a combination of looking at the absolute weighting of the portfolio, which is around 11%, but also the relative position. So it's a big weighting in the benchmark. I mean the key -- for us at the stock level, the bottom-up analysis is we rate the quality of BHP very highly at the moment. We think the company is extremely well placed, very smooth management transition to Brandon and Craig and we've met with him and he was very impressive. The chair as well being Ross McEwan, who's preaching capital discipline at this point in time for BHP, which I think is very welcome. The balance sheet is extremely strong, much stronger than in previous strong commodity cycles, portfolio is in great shape, particularly the copper and iron ore and returns continue to be very strong. So we always need to be mindful of that absolute way, but I think taking into account the relative way to with the quality overall.

Thanks, Brett. Chairman, what does the Board plan to do in view of the economic and political problems, which affect many of the holdings of AFIC?

Thanks, Claire. Look, the portfolio is diversified. And as you've heard today, continues to be focused on quality companies. with strong balance sheets and competitive positions, which we believe are the best place to manage economic and political uncertainty. The investment community monitors the risk closely then as a long-term investor with no need to sell to meet any redemptions, AFIC can use periods of volatility to add to high-quality companies at attractive prices. So I think the environment is very uncertain, and we've seen a big uplift in long-term interest rates, but we do believe that by being involved in high-quality companies that are managed incredibly well and have got strong balance sheets leaves us best place to manage that uncertain economic environment.

Is the calculation of the share price premium to discount to NTA, which for those following along is Figure 7 in the annual review, based on pretax NTA per share or post-tax NTA. And which of the 2 measures is appropriate for shareholders to consider and more?

Andrew Porter.

Thank you, Chairman. It's a good question. The premium discount figure is based on the pretax NTA. And when I say pretax, it's before the unrealized tax on shares we haven't sold yet, it is after tax have realized. That's consistent with the weekly and monthly ASX releases. Both measures are published monthly. The pretax NTA is the industry standard, and we believe it's appropriate for a long-term investor like AFIC, which does not intend to sell the whole portfolio. It's consistent with the market is what people normally think of their shares as being valued. Because we're not indenting to sell the tax on the unrealized gains is unlikely to be paid in full post-tax NTA is essentially the balance sheet figure and shows what would happen if we did sell all of the portfolio, but that's not the intention.

Thank you, Andrew. Chairman, we have a shareholder who is suggesting that you have the AGM in a different city each year. This would be more equitable and enable more people to attend who cannot. Have you considered putting this idea into practice rather than information meetings. And I would like to know your thoughts on this.

I'm going to hand to my colleague, who organizes the AGM. So Matthew Rowe.

Well, thank you for the suggestion. Obviously stating your obvious this AGM is hybrid, which allows shareholders to join from any location and ask questions. We also -- in addition to the AGM, we have 2 results meetings by webinar and we go around the country to all the capital cities in the investor road show. When considering the AGM, we are very mindful of cost, as Andrew and Alison has mentioned, so keeping our costs down and the additional travel costs, combination costs for not only the Board who are mostly based in Melbourne, but will be staff that have to attend. So that is a primary driver, just keeping our costs down.

Thanks, Matthew.

So we've got 2 questions.

So that was a no, was it?

We'll take it under advisement.

We've got 2 questions regarding the exit of WiseTech and Sonic Healthcare. These companies have experienced large declines in their share prices in recent times. The questions: one, what prices were these companies sold for and how close to their risk 52-week low prices where they sold -- when sold, sorry. And two, were these companies sold for a capital loss?

Brett.

Sure. Thanks, Craig. Yes, we don't give details on individual transactions. But just because the question has been asked to give a bit of flavor on it. So Sonic, I covered in the presentation. We sold it in recent months, and we did sell it at prices thankfully, that are above the current share price. But again, that's early days. WiseTech we sold late last year. We exited that from the portfolio, and that was based really on quality considerations, particularly around the people and some other elements of the business. And basically, because of the timing, having sold that late last year, again, that was sold at a share price that is significantly above the current share price. So -- and then in terms of the tax impact of that, combined, those 2 positions haven't had a material impact on our overall realized capital gain position.

Thanks, Brett. Chair, we've also had several questions on of the international portfolio and the stocks currently held within the portfolio, do you like to make some comments?

Sure. Thanks, Claire. As noted in the presentation, the international portfolio represents 1.6% of the total portfolio of AFIC. The recent short-term performance has been slightly below the MSCI, M-S-C-I, largely due to the outperformance of particular sectors, such as the AI-driven memory and storage sectors. But the longer-term numbers still remain ahead of the ASX 200. And since -- over the last 5 years, for example, our portfolio international portfolio is up 8.5% versus the ASX 200, up 7.8%. I think we have in our presentation today and will be -- it's available online listed all of the stocks and the nature of the companies that we invest in, in that international portfolio.

We've had 3 questions on the company's approach to ESG, including how do we use our voting power to influence companies on their climate change policies. Do we see ourselves as an ethical portfolio given our investments in BHP, Rio Tinto and the big banks? And do we invest in any ventures that address climate change?

Thank you, Claire. Alison, might pass you on that one.

Thank you. And thank you for raising the questions. Environmental, social and governance factors, including climate are considered in the investment framework by the investment team. And we engage with and vote on the companies that we own. AFIC isn't an ethical or ESG screen fund and doesn't exclude particular sectors. Our objectives are to pay stable to growing ordinary dividends over time and to provide attractive total returns from a diversified portfolio of Australian companies. It is worth noting, though, that the carbon intensity of FX portfolio is below that of the S&P ASX 200 Index.

Thanks, Alison. Chairman, can you please include a short glossary of key terms and communicate in a way that is accessible to the average English reader?

That's a fair question. I think -- and maybe it's because we're all finance people, and we take things for granted and they accept the feedback, and we will take that feedback on board to provide a clearer and simplified language in our future shareholder communications. We take that on board. So thank you for that feedback.

Why has the AFIC share price remain dormant for years despite rising U.S. share prices?

Well, as you, I think, all know, AFIC predominantly invest in Australian companies. So its performance is driven by the Australian market rather than that of the U.S. share market. And then over the last year, for example, the ASX 200 Industrials Accumulation induce that's price plus dividend has declined by 7.1%. It might not seem so, but that's actually the numbers. The ASX 200 Industrials Accumulation Index is down by 7.1% over the past year. So the share price of AFIC has also been affected at times in moving over the last few years from a small premium to NTA to a 15% -- 14%, 15% discount. So there are the 2 big factors, that's probably -- I think through cohort, we might have got to a 10% plus premium to NTA. And now we're at about a 14% -- 13% to 14% discount, so that's a 20% plus move. Plus, as I said, the Aussie -- the Australian share market. Certainly, ex gold and small resource companies has noticeably underperformed the U.S. soft market.

Okay. And AFIC is 98 years old. For all these years, it has been audited by PwC and its prior partners. Surely, it's time for a change. In the U.K., the audit firm changes every 10 years.

Andrew?

Thank you, Claire. Yes, AFIC is 98 years old. I'm glad to say that our audit partner is not 98 years old, just here in the front. Under Australian law, the lead audit partner must rotate every 5 years. So we believe that does protect the independence of the auditor. We have a different audit partner every 5 years. the Audit Committee does review the independence performance and fees of the auditor each year. And it is also the plan to carry out a comprehensive review of the auditor in the near future as recommended by the new ASX corporate governance guidelines.

Thank you, Andrew. That's it for the pre-submitted.

That's it? So Claire, can we perhaps go online and see if there are any questions in relation to the financial statements or presentations that we've discussed today.

We do. We also have a number of online questions. This shareholder has said, in my view, the AI is a classic bubble and a great deal of shareholder wealth will disappear. Can you assure me that a will act with great caution and not get carried away by the high and by overpriced high-risk shares incoming NeoCloud/ASX flights?

Every investment we looked upon on its merits. And if that's a reference to firms, we're not going to comment on individual securities. But like everyone in the crowd here and online, we are all educating ourselves and continuing to educate ourselves on AI. And certainly, from a Board's perspective, how we govern our executive and our investment team for example, right now, I'm about week 5 of an 8-week course online. This is my third course I've done on AI, and it's that the whole market is moving so quickly. You need to continue, whether it's board management the general population, you need to continue to educate yourself about those shifts. But Brett, did you want to just make a comment in relation to AI investment?

Yes. Sure, Craig. I mean there's like any investment sector and theme, there's going to be good companies to get exposure to the theme and bad companies, and that's obviously a big part of our job. Let's say, you look at what's in the portfolio at the moment, a company like Goodman Group, who builds data centers. So it's almost a bit of the picks and shovels play for the AI boom. The company has long-standing customer relationships high-quality, valuable land bank and expertise in building these facilities, which has been borne out of the group's long-standing history in developing industrial sheds, backing the people part of it in the balance sheet, and that's why we own that company. Other companies that might be looking to do the same. So these unnamed companies that might be launching IPOs in the data center space, we'd look at it through the same lens and assessment of the quality, the reliability of the revenue streams that are being forecast, and so we much prefer the stocks that we own at the moment and probably going into any new ones where we wouldn't have -- where we might not have a good view of the people.

Thanks, Brett.

Chairman, why wasn't Tom Palmer put up for election today as opposed to being announced today and then serving 12 months without a mandate? And did we use a recruitment firm to source him? Or was it a direct or network job? Also, thank you to David Peever for his 13 years of service. It's always helpful for investors to have access to some exit perspectives from retiring independent directors. Could David please comment on what he regards as the best 2 decisions AFIC made during his time on the Board. And does he have any regrets?

Look, I'm happy to answer the first couple. I think it's unfair on David to ask that question. But I'm happy to give David a microphone in a moment to chat about his time in an exit sense. But I think putting him on the spot to ask what may be his best 2 decisions over the last 13 years is a little unfair. Let me talk about Tom Palmer. It was purely the circumstances of Tom's availability and that's why Tom was appointed from the 12th of October, nothing more, nothing less. Did we use a recruitment firm? No, we did not. There was a bunch of people that knew of Tom and new of Tom's capability. And I think he is now absolutely outstanding candidate for our Board, has been Chief Executive for 6 years of a global -- 1 of the largest global gold companies in the world and having 20 years on Rio Tinto. And given David's expertise another Rio Tinto CEO, it was just a perfect match for us. So David, do you want to just talk briefly about that?

Yes. Thank you, Craig, and thanks for the question. I'd really have to think a lot about the best 2 decisions over 13 years. So happy to discuss it over a couple of tea when I've had more time to think about it. But I will say, first of all, in relation to Tom, he's -- I knew him not well, but knew of him in Rio. He's a little bit younger than I am, so he's got a good path forward in terms of his involvement with AFIC. But he is an outstanding person and will bring lots of experience and expertise and also into base metals, which I didn't operate extensively. And so he brings an awful lot to this Board, and I commend him to you. From my own perspective, it's been a real privilege to have served the shareholders over the last 13 years and to work with all of the directors, I had the privilege over that time to with and the executive team as well. From what I see today and as a shareholder now, not a director, I feel that the business is very well placed in terms of its people, its board, of course, and we're seeing that in the decisions that are being made. So I'm quite confident about the trajectory of the business from here. And -- but nevertheless, as a shareholder with great interest, as you all do. So again, thank you all very much for the opportunity to serve AFIC over this period.