EQT Holdings Limited (EQT) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for today's investor presentation. This is a presentation on our first half year results for FY '25 for EQT Holdings Limited. I'm Mick O'Brien, I'm the Managing Director of EQT Holdings Limited and I'm here with Johanna Platt, our Chief Financial Officer. Welcome, Johan. So for today's agenda, I'll open with an overview of our business performance and the operational highlights for the first half of FY '25. I'll then hand to Johan to review the financial results in some detail and then we'll close with an update on our strategy and outlook. We'll take questions via the Q&A function at the end of the presentation. So, let me give you an overview. We're really pleased with our achievements in the first half as we continue to deliver strong organic growth whilst reaching significant milestones in our transformation journey. Funds under management, administration and supervision or FUMAS as we call it, reached $224 billion, a 26% increase on the prior corresponding period, excluding the businesses we exited in the period. As a reminder, FUMAS is a key driver of our revenue. That's an increase of $46 billion, of which the majority of that increase came from our clients increasing their funds. Revenue growth was 4.8% and again, if we exclude the exiting businesses was 7.6%, so a very healthy top line growth rate. The AET integration was successfully completed in December with the Insignia TSA exited as planned and NavOne, our new platform for TWS was deployed across all of the business and all client transitions were completed in the EQT platforms and Insignia's platforms. We completed the exit of the AET platform business. At the end of January, the U.K. business relinquished its licenses and the local CEO and directors were released. It only remains to close off the corporate entity. Sales momentum in Superannuation and CTS Fund Services remained strong and continued literally right through to the end of 2024 and into these first few months of 2025. Expenses remained higher as we progress the transformation activities. Employee numbers ignoring the release of some 50 people in relation to the exiting businesses were stable during the period. We expect expenses to materially decrease in the second half this year. Earnings were impacted by the cost of transformation and technology development with statutory NPAT for continuing discontinuing businesses of $12.3 million, declining by 2.9% as we flagged at the AGM. The Board approved a dividend of $0.55 per share, an increase of $0.04 on the prior corresponding period and $0.02 up on the prior half. That's in recognition of the growth of the business and the trajectory of earnings. I want to call out some other achievements for the half. We onboarded 2 new members to the executive leadership team; [ Jo ] as CFO and Nevein Versace as our Chief Risk Officer. We also acquired the ANZ will bank for nil consideration to circa 6,000 wills of high-net-worth clients. In addition to developing and launching TWS' new platform NavOne, we also deployed the following new technology platforms; Workday Human Capital Management and Payroll modules, Workday's Finance Procurement and Expense modules, added straight through application processing to our Active Philanthropy platform, iPhi, moved to an infrastructure outsourced model and cloud migration for infrastructure, enhanced our data and platform security. Now this page is an illustrative picture of the 3-year journey of transformation the business has been undertaking. The last 2.5 years has been a period of heightened activity as we've embarked on acquiring AET and integrating into our business, at the same time as undertaking major technology developments whilst we exit the U.K. and Ireland businesses. The picture shows the enormous body of work undertaken in the last 18-month HUB and finally, the remaining limited tail of work we need to finish off in this half. It's important to appreciate the program work to understand the trajectory of expenses. You can see that the AET integration involved many moving parts, outsourcing small APRA fund administration to super concepts, outsourcing custody services to HUB24, client transitions from EQT and Insignia platforms to the new NavOne platform. The completion of the body work to integrate AET is a significant milestone and we're proud that it's been delivered on time and budget and synergy benefits realized in excess of our original expectations. The technology modernization program included the development of NavOne, as I mentioned, which is a single trustee platform for all of TWS' business. There are 3 further upgrades to be delivered by our vendor in readiness for July 2025 when we move to a BAU posture. We've implemented Workday Human Capital and Payroll, Workday General Ledger and Procurement, extended our Active Philanthropy platform, iPhi straight through application processing and are halfway through establishing a data warehouse for CTS, which will bring automation of our fee invoicing to this quickly growing line of business. As mentioned previously, the exit of U.K. and Irish businesses is at the final stage of closing after an extended period, as you can see. Turning to the key results. There remains a degree of complexity in our results in this half due to the differences in statutory results and underlying results if you exclude the costs relating to the AET integration and the 3-year technology program. The other element of complexity arises from the slew of continuing and discontinued businesses and the exit of 2 of our businesses, the U.K. and AET platforms in this period. What I'm showing here is simply the total statutory result and the underlying result. Assets under management grew to $224 billion, an increase of 22% or 26% if we exclude the exit businesses. This is mainly driven by growth in the Superannuation and Corporate Trustee Services businesses. Revenue was $89.7 million, which was 4.7% up on the prior corresponding period and 7.6% up if we exclude the exit businesses, which I mentioned before. The growth was driven through strong organic growth in CSTS and the impact of continued favorable investment markets. Net profit after tax was $12.3 million and on an underlying basis, it was $16.4 million. Both were down on PCP due to the margin impact of transitioning trustee services and clients into NavOne whilst internal staff were retained to ensure continuity of service, so doubling of costs in that period. Non-operating expenses increased over PCP due to the peak spend in technology as significant milestones in the delivery of NavOne and Workday were achieved as shown on that previous slide. Consequently, EPS declined by a similar amount on PCP. The Board declared an interim dividend of $0.55 per share, an increase of $0.04 on the prior corresponding period. The increase reflects the growth in the business and the expected trajectory of earnings. Now putting these results into a medium-term context, you can see we're consistently delivering growth and ultimately shareholder returns. FUMAS growth is accelerating. In fact, it's been quite extraordinary growth showing the confidence that large-scale financial services players had in Equity Trustees. That FUMAS growth is translating into revenue growth, albeit not at the same pace given our pricing structures. Revenue and underlying net profit before tax have grown at a full year CAGR rates of 17.3% and 10.2%, respectively, which is really healthy. And finally, dividends have grown by 5.7% CAGR over that time. Turning to the achievements of each of the businesses. The focus of Trustee and Wealth Services business has been completion of the AET integration program. As I said, this was done on time, on budget and meeting the synergy objectives. As part of that program, the exit of the AET platform business occurred, outsourced custody and also the small APRA fund administration and that has unlocked approximately $5 million per annum of employee cost savings from December 2024. Revenue synergies equivalent to $6.3 million per annum, embedded investment management revenue was also achieved together with the completion of the transition to a single operational platform. On the organic growth front, the TWS team secured additional large community trust appointment through the year with strong growth in the Health and Personal Injury and Charitable segments where we achieved revenue growth of 16% and 10%, respectively. The longer-term prospects for state management and continuing trust were boosted by the acquisition of 6,000 wills from the ANZ will bank. The team also is very proud of the development work undertaken in the half to fully digitize the Active Philanthropy offer and the preparations for a full launch of this offer are well advanced for the next month. The CSTS business continued to deliver strong organic growth driven by the achievement of establishing 39 managed investment schemes and custody appointments in the period. This included the launch of 3 flagship listed investment trusts, each working to very aggressive time lines, which we are very happy to have met. We've certainly seen strong activity in the launch of private credit investment schemes and we're confident we're delivering market-leading trustee services to fund managers. This growth is set to continue with an additional 40-plus appointments in the pipeline for the second half. It was a pleasing endorsement of the quality of EQT Superannuation Trustee Service to be appointed as a trustee of perpetual superannuation products. This will commence on the 1st of March. Its portfolio of funds aggregating to $6 billion. From a technology perspective, the team have made positive progress in the development of a data warehouse to enable automated billing and data extraction. Given the ecosystem of service providers that are involved in our [indiscernible] model, this will deliver improved control, visibility and speed of execution. The migration to the new operating model for small APRA funds was also completed in the first half and we believe this serves to be a compelling unique growth opportunity for the business as we market the offer to the transitioning self-managed super fund market. This slide provides an overview of the market leadership positions of Equity Trustees in the various segments of trusteeship in which we participate. Equity Trustees is a clear market leader in Superannuation trusteeship. This also includes small APRA funds where we will be the only provider in this market. Our FUMAS will be boosted by $6 billion, which I mentioned before with the onboarding of the perpetual book, taking this overall business to over $80 billion from $1 billion some 6 years ago. Equity Trustees is also the clear market leader in providing responsible entity services to the funds management industry. We also clearly believe in the Health and Personal Injury sector. In the segments of Philanthropy, Native Title, Testamentary and Estate Management equal 1 or 2, and we now scale in each of these market segments. I'm now going to hand over to Jo to take you through some more details of the financial results.

Thank you, Mick, and it is my pleasure to present the first half '25 financial results for EQT. To open with 3 points on the financials being presented today. Firstly, the results are being presented on a continuing operations basis. This means that they exclude the trading results for the former U.K. and Irish operations. Secondly, I will refer to underlying measures of profit, which mean they exclude non-recurring expenses relating to the integration of AET, the 3-year technology program and the divestment costs relating to U.K. and Irish operations. And thirdly, that we are introducing the profit measure of net profit before tax and amortization of management rights based upon the feedback from analysts that this is the preferred measure for tracking cash profits. So, turning to the results. Group revenue was $89.4 million, a growth of 6.5% on prior comparable period or PCP. The top graph to the right sets out the movement in revenue by business unit. AET platform revenue of $0.9 million was included in the first half '24 result, a business that was exited in the latter part of FY '24. Excluding this, net organic growth was $6.3 million, a growth rate of 7.6%. CSTS revenue grew by $3.8 million, underpinned by the 39 new corporate RE and custody appointments that Mick referred to. TWS revenue grew by $2.3 million due to the impact of positive investment markets and growth in key service segments. Underlying expenses, excluding amortization of management rights increased by 12.3% and I will talk in more detail on the drivers of change in the next slide. Expenses increased in the half due to the rate of technology delivery, the impact of transitioning to NavOne and HUB24, which, as Mick mentioned, enabled the release of 43 employees in November. Consequently, underlying net profit before tax and amortization decreased by $1.6 million to $25.6 million. The second graph sets out the key drivers of changes in this profit, the first 2 being the revenue drivers noted above, offset by the impact of increased people costs, outsourcing costs related to custody and administration relating to the small APRA funds and changes to technology services and financing costs. The decline in profit due to this period of transition was foreshadowed during the AGM in October. Turning to a reconciliation of the movement in expenses on PCP. Statutory expenses for the first half of '25 were $69.8 million, an increase of $7.5 million on PCP. And this was made up of $400,000 increase in non-operating expenses and $7.1 million increase in operating expenses. Walking you from the first half result of '24 across to the right in this waterfall. Non-operating expenses in FY '24 totaled $4.3 million and they related to the integration of AET, technology program and transaction costs relating to the exit of U.K. and Ireland. Therefore, operating expenses in the first half of '24 were $58 million. These increased by $7.1 million in the first half of '25, driven by increases in people costs of $3.7 million, half of which relate to 51 additional FTE on a year-over-year basis up to November, which was subsequently reduced by 43 as a result of the integration activity. The balance of increased people costs relates to the annual remuneration review and extension of the LTI scheme. Technology costs increased by $700,000 due to the move to an outsourced cloud-based Infrastructure as a Service model, which will reduce future CapEx. Financing costs increased by $900,000 linked to the increase in the offer reserves of $600,000 and our corporate debt. Completing the outsourcing of custody services and administration increased expenses by $1.8 million. And finally, non-operating or significant expenses in the first half of '25 totaled $4.7 million. The uptick was in technology spend to $1.7 million and AET and U.K. Irish exit costs also [Technical Difficulty]. Turning to EPS and dividends. Earnings per share on both an underlying and continuing operations basis declined on PCP by around $0.05 to $0.06 per share. This reflects the earnings decline discussed previously. Given the successful delivery of the measures to realize expense synergies in the second half, the Board approved a dividend of $0.55 per share, an increase of $0.04 on PCP. This dividend equates to an 89.5% payout ratio on an underlying earnings basis. Turning to the performance of TWS. Headline revenue grew at 2.9% to reach $50.9 million. However, there were some one-off events over this time, namely the exit of the AET platform business, which, as I mentioned before, contributed $900,000 of revenue in the prior year, the repricing of the Community Trust and the catch-up of invoicing of AET legacy estates. Excluding these events, organic growth and positive investment markets delivered $4.5 million of incremental revenue. Net profit before tax and amortization declined by $2 million due to the impact of elevated expenses as the business transitioned through the outsourcing of custody services, the exit of the platform business and the migration to NavOne, which collectively enabled the release of the 43 staff in November. FUMAS grew by 16.2% on PCP, reaching $20 billion with positive investment markets contributing to this growth. Average revenue yield was 53.9 basis points, a decline of 8.5% on prior year. However, with the one-time events previously described, this equated to 3 bps of this impact. Turning to CSTS, delivered strong revenue growth of 11% with the Super and Corporate operations growing by 7.2% and 14.2%, respectively. Interest income from offer financing arrangements grew by $0.6 million or 7.4%. As previously mentioned, 39 managed investment schemes and custody appointments were onboarded in the first half of '25. And whilst these attracted fixed fees in the setup phase, we expect some incremental revenue from AUM-based fees going forward. The bulk of group FUMAS growth was attributed to CSTS, where it reached $204 billion, nearly 27% up on PCP with Superannuation assets reaching $73 billion, an increase of 23% on PCP and Corporate Fund Services and debt securitization reaching $130 billion, increasing by 29%. Underlying net profit before tax increased by $100,000 to $10.4 million. Profit and margins were impacted by the growth in people costs for this line of business, reflecting the additional resourcing to support the high level of new business onboarding activity. Average revenue yield for Director Trustee Services and Super declined in the first half due to the relatively fixed revenue model for these segments. Turning to cash flow. Cash on hand, including liquid investments declined by $14.4 million from June to December. This was due to the impact of payments previously accrued relating to the AET integration and exit of the U.K. and Ireland. This one-time cash outflow reduced net cash flow from operations by around $11 million. $5 million of corporate debt was repaid in the half and regulatory capital requirements remain at circa $75 million. The release of $10 million of regulatory capital linked to the AET custody and AFSL licenses is pending approval of either the courts of the regulator. Turning to AUM and revenue sensitivity. Given the growth of the business, we are seeing a change in the mix of revenue and considered it timely to update our view of the sensitivity of the value of assets under management and revenue to changes in investment markets. The top graph shows the line of business view of strategic asset allocation. For example, in the middle stack, CSTS Corporate FUMAS is estimated to be 40% global equities, 18% Australian equities and 42% other, where 20% to 30% is linked to cash or fixed income. The second graph sets out the proportion of revenue for these lines of business that is asset-based and that which is fixed. For example, for TWS, 78% of revenue is derived from asset-based fees and approximately 22% from fixed fees. For clarity, fixed fees includes minimums and regulatory cost recoveries. We plan to spotlight the changes in revenue yield and explain the drivers of mix, volume and variable versus fixed fees in the upcoming EQT Investor Day. I'll now hand back to Mick to close off with an update on our strategy and outlook for FY '25.

Thanks, Joh. So, as we move to sum up today's presentation, it's important to remind ourselves about the industry dynamics and how they favor our business. There are strong industry tailwinds in all our key markets. For TWS, the older age cohorts of the Australian population are the fastest-growing parts of the population. A simple data point is that the over 65s will double in their proportion of the Australian population over the next 40 years. Not only growth in Superannuation drives the growth in both our Superannuation business and our CTS Fund Services business. Finally, it's projected that due to the aging of the population and the growth in wealth and intergenerational wealth transition will be some $3.5 trillion over the next 20 years. Along with increasing expectations from government, regulators and the community for greater independent oversight of people's wealth and the expansion of niche areas that require fiduciary oversight, there is strong and building demand for our services. The industry dynamics are very positive and our market position is strong. We have market leadership in multiple market segments for both Corporate and Superannuation Trustee Services and Trustee Wealth Services. We have the opportunity to grow the business into new attractive established markets such as custody of real assets and securitization where we have small market shares, but we are well positioned with our people's expertise and technology. We have the opportunity to expand where we have market leadership, but we are confident the market segment could be expanded materially, such as in the small APRA fund market or in the Active Philanthropy market. Finally, we're at the turning point on being able to capitalize on our technology investment. We will achieve improved client service, create a better employee proposition and achieve operational leverage and improved margins. The outlook for the balance of this half is to capitalize on the sales momentum in CSTS with 40-plus investment schemes currently in establishment. We have 3 new Superannuation fund take-ons in this half and fund consolidations to be completed by June. We're well progressed in a CTS pricing review. We'll be moving to implement this in this half as well as increasingly implementing cost recovery in Superannuation for major regulatory change. From a technology perspective, we'll be completing the 3-year plan. So, the last 3 NavOne upgrades will move us to BAU and will be deployed by July. The implementation of Phase 2 of the Human Resources in Workday be delivered in May, along with the implementation of the CTS data warehouse delivered in May as well. The launch of the Active Philanthropy offer is also on track with the refreshed overall website launching in March. As we foreshadow, expenses will materially decline in the second half. Total expenses are expected to decline by some $6 million from the first half. This will broadly be half operating and half non-operating expenses. As we move into [indiscernible] post the AET integration, we're focusing more on non-organic opportunities as well. So in closing, it's been a very busy and productive 2.5 years, particularly the last 18 months where many initiatives have been running simultaneously and are now coming to completion. You can see we're coming to an end of this period of transformation and very much looking forward to finalizing the last technology developments in this half and then capitalizing on our market-leading positions in the market. So, happy to finish there and look forward to taking some questions. So, we've got a number of questions already.

So first, at the AGM, you said you expected slight margin expansion for the whole year. Is that still the expectation? And is it on a statutory or underlying basis? [Technical Difficulty]

Thank you, Mick. We -- as we've given some guidance on where we have projections for expenses where our comments around underlying margins remain consistent in terms of the guidance we gave at the AGM.

Next question is, could you talk through the $6 million reduction in total expenses you're flagging for the second half? Is the $12 million annualized? Are they non-operating expenses? Can you break down line by line and the question goes on. So, I might hand that to you to comment on.

Yes, sure. So in Mick's slide there, we talked that it's around 50-50 in terms of the split between operating and non-operating. And for operating, you can consider that an annualized benefit.

[Technical Difficulty] perpetual superannuation accounts given their competitive position, so what type of margin applies to that $6 billion. Perhaps I'll take that. There's been a lot of change in superannuation regulation legislation and some of that change whilst we can manage it across a large scale of our portfolio for other parties that have got small positions, some of it is actually quite difficult. So, I guess the [ FAR ] legislation that's coming up would be one reason why the [ pigeon ] might think it's worth getting a more efficient solution to their Superannuation trusteeship, so I think that's what's happened in the situation. And what type of margin applies on this sort of account? Well, it's a fairly large complex account. And it's priced typically along the same lines as the rest of the portfolio of Superannuation is what I would say. The next question is, can you talk about areas of OpEx growth in the first half? Can I confirm the underlying OpEx reduction is $3 million in the second half and $3 million of below the line reduction?

Mick, that's correct. We're broadly saying $3 million in operating and non-operating. Obviously, the operating is recurring, so just to flag that again. We talked through those movers in costs for the first half back on that expense reconciliation page, around $3.7 million relating to people costs on a year-over-year basis. In the pack, we have a reconciliation half-to-half as part of the appendix. To flag, as Mick mentioned, that FTE actually held constant from July through to December once we exclude the FTEs that were part of the November restructure program. So, all other FTEs remained flat. So, that's a good peaking sign [Technical Difficulty].

I think the next question we confirm, is there an annualization of $3 million underlying OpEx?

Yes.

Yes. Next question, is the $3 million OpEx reduction net of any other costs going in for wage inflation, i.e., the reported OpEx should be lower by $3 million half-on-half.

So, there will be no change in remuneration in the second half. We will go into our normal cycle in the first half of '26, but that will be something to take into account in the '26 outlook.

Can you talk about the M&A outlook? Yes, I can. Through the period when we've been integrating AET, we've been simply focused on that and haven't been that active in the market. That's changed in recent months and we have been active and there remains a number of attractive opportunities for us to be looking at and we are looking at those. And hopefully, we'll be able to talk more about that as time goes on. The TWS revenue margin was 54 basis points using single average FUMAS. Was there a late run-up in FUMAS that brought this down? I would have expected to see margin pick up given the asset management internalization.

Mick, as I flagged, there were a couple of events in FY '24 numbers. I'm not sure there were comparison point there. But if it's against the first half of '24, those items related to the platform and the revenue that was built for legacy estates from AET. So that's part of the reason why there's a change and also mix. So, there's no change in pricing per se across the TWS portfolio.

Yes. And I'd also say just on that, that effectively we're getting the same type of margin on trusteeship as well as asset management in that business at the level of [Technical Difficulty]. Next question along the lines, are the $3 million in operating cost savings in the second half coming from the reduction of 47 staff in November?

Yes.

By and large, yes. Next one. Referring to Slide 17, TWS one-off decrease of $1.6 million in revenue, can we please explain that?

Yes, sure. I'll just [indiscernible] response for everyone again. One moment. So, there was $900,000 of platform revenue in the prior period. So, just to call that out, obviously, the business was exited for FY '25. There was a catch-up of invoicing for AET legacy estates that occurred in FY '24. It was a one-time event as part of the transition of that book. And there was a $600,000 I think it is change in pricing on a community trust. That's the step change.

Thank you, Jo. Next question is what type of organic transactions do you wish to look at? That's fairly simple. We're focused singly on trusteeship. There are more opportunities, I guess, in the corporate trustee part of the market, more so than the private client trustee part of the market, but we're looking for the specialist trustee businesses and would only go outside of that envelope to a minor degree. Can you talk through the expected FTE headcount growth into the second half '25? Yes, we don't expect any material FTE headcount in the second half of '25. I guess the exception to that might be if there's continued very strong sales going on in some parts of the business and we need to accommodate that. At this stage, I think we're well set. AET integration, is this employee -- as there is no slide presentation, what is remaining for FY '25? I can say the AET integration is complete and completed in December. So, we have no connections to Insignia other than a partnership in terms of business development. All data has been brought across all processes are aligned to TWS processes, albeit are in the same premises across the country. There is nothing more to do on AET integration. As I mentioned there are 3 more upgrades going on to the NavOne platform, but that's just our normal business effectively and nothing to do with AET integration. So, it is complete. We exited the TSA on 1st of December. That brings us to an end of the questions. I appreciate all those questions from everyone. Looking forward to over the course of the next week getting out to see shareholders and others. And I hope everyone has a lovely day. Thank you.

Thank you.