EQT Holdings Limited (EQT) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today for the investor presentation for the FY '26 half year results for the EQT Holdings Limited. I'm Mick O'Brien. I'm the Managing Director of Equity Trustees, and I'm joined today by our Chief Financial Officer, Johanna Platt. We've got 45 minutes scheduled this leg and here's the agenda for today. I'll open with a short update on business performance and the operating context. Joe can step through the financial results in detail. I'll return to discuss strategy and our outlook before we move to Q&A. So as we move into the main part of today's presentation, it useful to revisit the foundations of our business, what we do in the markets we serve. This sets the seam for understanding the half year performance in our strategic direction. Our business operates across 2 primary revenue-generating segments, Trustee Wealth Services, TWS and Corporate and Superannuation Trustee Services, CSTS. TWS is the largest part of our business, contributing over 50% of group revenue and is central to our 140-year history as a specialist trustee. TWS provides a specialist trustee services across health and virtual injury trusts, community in native tile trusts, various forms of care vehicles and estate management. We manage assets on behalf of these clients and deliver investment administrative and fiduciary functions tailored to meet their needs and also related advisory services, including a state planning and financial advice. The breadth of TWS reflects the long-standing foundations of equity trustees and remains a core driver of their fiduciary role in the community. The CSTS business has 2 components: Corporate Trustee Services or CTS. CTS provides responsible entity, corporate trusted custody services to local and international fund managers and corporates. CTS continued to grow strongly and accounted for approximately 25% of group revenue in the first half of FY '26. And finally, Superannuation Trustee Services or STS provides trustee oversight and government services to superannuation fund originators as well as managing a portfolio of small APRA funds. Superannuation represents around 19% of the group revenue and is currently our lowest margin business and represents just over 5% of earnings in the last half. Our Corporate Shared Services team predominantly come refinance technology risk and people, provide essential enterprise-wide support that enables the business to operate effectively. I want to recap on the key strengths of the company and its underpinnings. We offered a specialist independent trustee model that aligns well with client expectations and regulatory settings. Our singular focus on trusteeship is unique in this market. We're exposed to structural tailwinds from Australia's superannuation system for our corporate lines of business and for trustee well services in a generational wealth transfer, which is set to grow at material equity rates as Australia's population ages. Our income profile is enduring with most deployments being very long-term, diversified revenue streams and parts of the portfolio positively linked to markets. a strong low-gear balance sheet, providing flexibility and our uplift of technology stack is improving client experience and operating the breach. Now across the half, we saw strong growth in resilience in our core segments. The key segments of TWS continued to drive positive outcomes for the business and our clients. In TWS, the margins improved, mostly from new business in Health & Personal Injury and also benefits from improved processes in Estate Management. In CTS, a key driver of margin improvement was new responsible entity and custody movements. Superannuation had a challenging period with the intensifying regulatory and litigation costs, while the underlying business remains strong. This is a result of the management attention to regulatory engagement and governance uplift activities, including the dense of the asset proceedings involving a subsidiary equity trustee superannuation with it. So I'm really pleased to say that the financial results from this activity continue the recent trend of strong outcomes and shows the resilience of the business model. with very strong uplift in net profit after tax to $20.5 million, up 67% based on strong revenue growth. The underlying result was up 25% due to first half FY '25 which included project costs to complete the AET transition, the exit of the European operations and significant technology uplift projects. The increase was also assisted by the finalization of the AET synergy benefits during the first half '25. Funds Under Management Administration Supervision, or FUMAS we call it, is a key driver of our net grew to $284 billion, up 28%, driven by growth in CSTS through a combination of new appointments and growth in size of our existing portfolio of schemes and superannuation funds. Revenue grew by 11.8% to sit right on $100 million. This is first time in our history over a half. Statutory and underlying EPS saw significant growth. Finally, total shareholder return to 31% was negative given the share price facing challenges mostly ASIC litigation. However the TSR is still positive over a 3-year period. The Board has declared a first half dividend of $0.56, which is $0.01 up on the prior corresponding period and the same as the final dividend for FY '25. Revenue growth has been remarkably consistent over recent halves, and our EBITDA margin remains resilient at just under 33%. This margin excludes the earnings neutral flow-through impact of the ORFR financing, which is reserves used for our superannuation funds. In the first half '26, margin included a temporary headwind of roughly 2 percentage points from irrigation defense and regulator-driven activity. Without this cost, the margin would have been 35%. Importantly, the underlying statutory margins are now aligned and following completion of the integration. The TWS delivered revenue of $55.9 million, up 9.8% on the prior period. This is an excellent result when it flexes the clean air this business unit and following the integration of a AET and the completion of the build of the new platform. The firm as growth is also significant in driving the revenue growth with increases in the number and average balances of the states currently being managed in the state management team, material growth by 9% on the prior corresponding period in Trustee Wealth Services' larger segment, Health & Personal Injury. An accelerated time to probate in estate management processes has also provided a one-off benefit in the first half '26. CSTS revenue was $44.1 million, a headline 15.1%. This continues the consistent revenue growth over recent periods, which is coming from the increase in responsible entity and custody appointments higher quality of the clients we are working with. In the first half 2026, we onboarded 77 new funds including 5 additional listed schemes. The list of area is a more complex area, and we're proving to be the preferred provider in this space. We now have a portfolio of 28 listed schemes with over $20 billion in funds under supervision in that space. FUMAS increased significantly. However, fee structures vary across market linked and nonmarket arrangements. So the FUMAS growth and some outpace the revenue at times. Our own pipeline remains strong with 30 new schemes and continued appointments currently being established. Turning now to the superannuation side. Underlying revenue growth was 7.6%, and this benefited from new funds that onboarded late last year, and growth rate was higher due to the ORFR balances becoming higher as before. Fee income from that is offset by financing costs and is broadly neutral to our result. FUMAS growth reflects a combination by the movements and net inflows, including contributions from key platform partners. Turning now to regulatory matters. As the market knows, ASIC initiated Federal Court proceedings against Equity Trustees Superannuation Limited, ETSL, regarding the Shield Master Fund in August last year and updated in October. ETSL is an RSE license and a subsidiary of EQT Holdings line and is not guaranteed by the parent. The balance sheet of ETSL inputs goodwill and the business continues to have good revenue strength. ASIC's claims alleged breaches of the ETSL's due diligence obligations when onboarding Shield onto 2 superannuation platforms. ASIC sought penalties, compensation for members and declarations of contraventions of the Corporations and SIS Act and costs. We filed our defense or ETSL filed its defense in December '25, and it's available on our website. We've previously disclosed potential ETSL 'exposure for Shield to be $73 million based on the liquidators' last estimate of recoveries. The group has customer insurances in place with substantive average compensation and limited coverage for civil penalties. ETSL reserves its right to make an application to the financial services minister under Part 23 of the SIS Act to claim recoveries for the superannuation fund. ASIC is continuing to undertake investigations in relation to First Guardian Master Fund. To date, it has not initiated action against ETSL. Member losses from First Guardian through the funds where ETSL is a trustee totaled $70 million, both on a net and gross budgets. We'll keep the market informed as and when anything changes in respect of this manner. I want to update investors regarding our superannuation business. I mentioned earlier the dimensions of the business relative to the group, and that is that it represents around 19% of the revenue but just over 5% of earnings in the last half. Board has decided to initiate a strategic review of the Superannuation Trustee Services business, given the elevated lease change and regulator activity, which has created uncertainty on the cost base and risk, reduced focus on optimizing capital allocation across the group. We've commenced the process, which maintains to promos to complete but we'll update the market as the review progresses and decisions are made. For ETSL, the superannuation trustee will continue to fill its trustee obligations and maintain service quality and government stance. So with that context, I'll now hand over to Johanna, and she'll take you through the financial results in detail.

Thanks, Mick, and good morning to everyone, and I'm pleased to present to you today the strong financial results for EQT for the first half of FY '26. Starting with the group result versus the prior comparative period. As Mick mentioned, revenue reached $100 million within the half increasing 11.8%. CSTS contributed $5.8 million of this growth, noting $1.8 million related to the increased income from ORFR capital, which is offset with expenses. The remaining $4 million of growth is the net of new business and market impacts with some minor losses in CTS. There will also be embedding of wins in STS that occurred in late FY '25. TWS revenue grew by $5 million, reflecting the growth in client base in the Health & Personal Injury Services segment and higher state management activity, as previously mentioned by Mick. Operating expenses were $69.7 million, up 7.1%, and this includes $1.8 million of expenses related to the ORFR capital, $1 million of expenses to support the shared litigation and $1.1 million of adviser and consultancy cost to support regulatory and governance uplift programs and license undertakings. We expect these costs to continue in the second half. Despite these costs and the dilutive impact of the ORFR revenue growth, the business achieved a positive jaws ratio and a net profit before tax margin of 30.3%. There were no nonoperating expenses in the half and together with the positive impact of top line growth, delivered an $8.2 million increase in NPAT. As Mick noted from his growth outpaced revenue due to fee mix, more fixed and nonmarket-linked arrangements within CTL's diluting revenue yield. Looking at performance half over half. On this basis, revenue grew by 7.5%, whilst operating expenses grew by 9.6%, and the increase reflecting the impact of the regulatory and litigation activity in STS and higher ORFR financing costs. Despite the impact of the $2.2 million of costs relating to litigation defense and regulatory activity, net profit before tax increased by $0.9 million. Net profit before tax margin of 30.3% was down 140 basis points over the prior half, the net result of a 70 bps dilution impact from ORFR growth and the 220 basis point impact of the costs relating to regulatory activity, offsetting the higher margin achieved in TWS. NPAT climbed half over half due to a nonrecurring $3.2 million tax deduction relating to the exit of the EU business, which occurred in the prior half. Turning to our strategic workforce alignment. People costs represent 2/3 of our cost base of the group. At December, group head count was 474, up from 460 from June 30. The increase is focused in CSTS to support client growth and uplift in compliance and investment governance. One additional client-facing role was added to TWS to support the Health & Personal Injury team and 4 roles were added to the corporate risk team aligned to our planned uplift. The vacancy rate was 5.9% in December compared to 3.9% at June, we consider its vacancy rate to be within a normal range. Turning to segment performance, firstly, TWS, where we show a short form P&L and a waterfall of the drivers of change in profit for TWS relative to the prior comparative period. Here you can see the strength of revenue growth increasing by 9.8% and net profit before tax of $19.1 million, up nearly 40% and margins of 34.2%. This is a great set of half year results for TWS. It shows strength across all of the business segments and the standup of the half were the performance in the Health & Personal Injury trust team and Estate Management. Health & Personal Injury team revenue increased by $1.7 million, predominantly from new business, including 1 larger than normal client that was onboarded in the period. Estate Management revenue increased by $2.1 million. This was the result of a higher number of estates and higher average balances as well as the accelerating of time to probate. This is a benefit for clients and also results in a quicker achievement of key milestones in revenue recognition and a onetime benefit. On the cost side, operating expenses were down due to the reduction in employees that occurred in November '24 as a result of the integration of AET. Cost increases since that time have been due to the normal annual remuneration review and selective technology investment. Turning to CSTS. Revenue of $44.1 million was an increase of 15.1% as mentioned before, around $5.8 million, of which $1.7 million related to the additional income from ORFR capital facilities. The balance of revenue growth was driven by incremental revenue of new business, $1 million of market movements and about $1.4 million of lost revenue from closed schemes and custody appointments. Operating expenses grew by $5 million, $1.8 million of which was due to the ORFR financing costs million related to STS litigation and regulatory activity and the balancing additional people cost to support the growth in CTS and STS. Despite these costs, net profit before tax increased by $800,000, however, margins were impacted with declines in the STS business margins. Turning to EPS and dividends. First of all, it's great to talk to an EPS that is aligned from a statutory and underlying perspective and the growth against even measure against the prior period is strong. As we noted, the Board has declared $0.56 dividend for the first half, which equates to a 73% payout ratio, which is within the Board's target range of 70% to 90%. On a cash flow basis, cash and cash equivalents increased by nearly $106 million over prior PCP, with $73 million of this increase relating to the ORFR holdings, which are recognized as offsetting financing and investing cash flows. Operating cash flows increased by $12.7 million over the PCP due to the increase in NPAT and the timing of redundancy payments that were made in the prior period. We maintain a disciplined approach to capital expenditure and improvements in invoicing inflections have also helped to reduce receivables. In terms of the balance sheet, it continues to be strong at a low gearing ratio of 10.3% with no change in corporate debt over the period. During the half, we consolidated the corporate debt facility into a single $60 million facility, which matures in December 2027. The growth of CTS registered schemes has increased the level of regulatory capital to $93 million, an increase of nearly $14 million year-over-year. We expect that this future capital allocation support will be required as part of the success of the CTS business. All for cash holdings are offset with a crossing off of borrowings, and there is a $1.6 million differential relating to small APRA funds. I'll now hand over to Mick to talk about the outlook and our strategic update.

Thank you very much, Johanna. Our focus here is for the remainder of the FY '26 here are clear. First, we want to make solid progress on the superannuation strategic review, which we've already commenced on. Secondly, we have to advance the resolution of the Shield matter and continue the governance uplift in subornation business and continue to have constructive regulatory engagement as we are with both key regulators. Thirdly, we continue to invest in the CTS operating model and technology to support the elevated growth rate that is being experienced in that business. And finally, we need to drive productivity, enhance the client experience through digital workloads and data automation across the group. Now just going to the outlook. Looking ahead, we remain really positive on the outlook of the business. The structural demand for independent trustee and fiduciary services supports that ongoing growth. In Corporate Trustee Services, the top line momentum is expected to continue. I mentioned the strong pipeline before in trusted wealth services, the growth should moderate from the first half, which included some one-offs, but should still continue to remain very strong. We expect litigation and regulatory costs to remain at the elevated level throughout the second half with the trajectory these in over FY '27 is more. The outlook for the civilian business will be communicated as a strategic review of advances, and we'll update the market when appropriate. Whatever the Board decides and other actions in respect of the portfolio will likely have an impact on future earnings in the balance sheet of the group. Results will remain sensitive to investment market movements as they always to through our asset weighs. So that brings us to the end of the presentation. I'm happy to take any questions in the chat function now.

So I'll just get questions up here. All right. So Trustees Services margins have ramped up strongly. Can you talk about what the OpEx base is in the business and where we'll go from here. Are there more efficiency gains or OpEx rise? And I hand it over to you, Johanna.

Yes. Thanks, Mick. We see the -- as you could see from the head count page that we showed that people resources are relatively stable now in TWS. And we feel that there are more full technical technology-based benefits that we'll receive over time. So we see that cost increases should be very modest in the future.

Our next question is, are there ongoing revenue synergies available to the TWS segment. Well, we've achieved a lot of synergies, revenue synergies over the course of the last 2 years since the AET business was integrated I think there will continue to be some synergies as we move forward. But I think they will be extracted over a period of a couple of years as we make changes to the way some parts of the AET portfolio are managed. The next question, CTS growth has been impressive. What does the pipeline of new schemes and customer arrangements look like from here? Well, I think I mentioned before, we're currently working on about 30 establishments of new schemes or customer appointments. Most of those are new schemes that a number of them are listed vehicles. So that pipeline remains really strong. There seems to be -- well, there is an increasing trend to perfume majors to extract grade distribution in the retail markets and do that by listing their vehicles. We've seen that over the last couple of years and expect that to continue. There continues to be great influx of new global fund managers into the Australian market, just given the sheer growth of the superannuation assets in this market. So and our win rate has been higher in the last year or so and that will continue to be the case. The next question is, will you apply for the government systems by Part 23 of the SIS Act. Well, obviously, the subrogation subsidiary trustee will effectively maintain that possibility of doing that. I think that part of the act is designed as a recovery of last resort when fraud has been instigated against a trust in a fund. So we'll be doing all other actions first before we head down that track at this point in time. CSTS profit before tax and amortization margin was softer, but not down as much excluding the shared cost flag of $2.1 million. Of that amount, what was the recurring regulatory cost versus one-off?

So in the half, Shield litigation costs were $1.1 million, so we treat those discrete and related to that matter. There's another $1 million of general regulatory activity. We would see the majority of that has been project based on one-off as well.

Thanks, Johanna. Next question is what might be an optimal commercial outcome for the superannuation review? Would a novation of the trustee shift to another provider for some consideration to be possible. While we have all options on the table, and we certainly see that there is value in that business and be looking to if there was any change the way we consider that business, look into consideration for the appointments that we have into the funds that we have. So we'll update the market when we can, but we're looking at all options for that business. Can you talk through the Board's declaration of an interim dividend despite the potential risk of adverse judgment in shelfs guarding cuts? Is this a read on confidence in the case outcome or confidence in the worst-case cash cost of EQT. That's an excellent question. I think I would look at the dividend and say, well, it's reflective of the earnings results and the cash generation that we've just experienced in this half there is obviously considerable uncertainty as to what would unfold in relation to the Shield First matter and will take some time for that to unfold for the superannuation subsidiary. So I don't think you look at that dividend so it reflects anything about the confidence of the case. We've said that obviously, ETSL is defending that case, and we'll continue to do that. But it really is a reflection of how the business has performed so strongly in the course of the year -- course of the 6 months. Can you confirm that ETSL has no cross guarantees across EQT Holdings and client liabilities are its own? I can confirm that EQT Holdings Limited does not have any guarantees across any of the trustee entities that it owns. It guarantees the services company that provides its deployment and all other contracts that doesn't guarantee any of the trustee entities. What is the revenue contribution from ETSL?

Yes. The financial statements of both entities, ETSL and HTFS are available actually on our website for FY '25, so that cash reference. The market has commented on the value of the HTFS contract being around $5 million per annum in FY '26 for trustee fees and ORFR. So that's representative for the half.

Thanks, Johanna. Next question is could you help us understand what you believe the drivers for the preference of larger scales of nation funds to utilize in-house trustee Well, I think that has been a sort of a natural way of larger scale superannuation funds have operated their business. So the large retail funds, the large industry funds and some of the platforms. no particular reason for that other than the larger scale, the more ability to put in the level of resources that are required to run a civilian ocean trustee, including its Board and including action trustee office that is effectively we source with a broad range of pretty high-level skills. So obviously, you need scale to do that. So it's a normal option for smaller sitting funds, but it is once funds achieved significant scale. It does, of course, introduce other potential issues of conflict management that need to be managed. So there's a number of considerations that go into any superannuation fund originator thinking about we're going to have an in-house model by or an outsourced independent model. Our next question. I've got 3 questions in one. I will take them one at a time. So prior to the dividend and debt facility being reduced in size was the message to investors here on the potential for compensation? Johanna, do you want to take that?

I'll take the first question. So in terms of the debt facility, we originally had 2 facilities at $40 million, one was corporate and one was laying to AET. So we and the integration. So given that had completed, we've effectively rolled to an increased corporate facility of $60 million. In terms of the dividend, you would have a comment around the growth in regulatory capital. And so we, as part of the dividend consideration, had to take into account the increase in funding required to build reserves to support that red cap.

Thanks, Johanna. The next question is any time line on the verdict regarding insurance? What I can say in insurance is what I mentioned before is that we've got what you would expect the customary cover around remediation, and we have some limited cover, there is a limit cover in spec of silos. Legal costs also covered under our insurance coverage. So though that has kicked in effectively as we stand today. There's still a lot to go in respect of fuel panels and what may happen with First Guardian that is another separate map effectively relates to insurance, and that hasn't been addressed at this point in time. How do we think about the head count growth in the second half given superannuation is under review? Do you want to take that?

Yes, sure. As we see before, CSTS has had a significant uplift in resourcing, but permanent employees and some contractors. We see some head count increase in the ETF side of the business in the second half. We feel we're appropriately resourced to support STS in the second half.

Okay. Next is what near-term growth opportunities look most open based on the first half performance and market signals? Good question Well, Corporate Trustee Services has had an extended period of very high growth, and it has got good momentum. It's recognized as the leader in the provision of responsible entity services in the market. and I don't see that changing at any point in time, particularly as the other is shifting more to listed schemes. So we'd expect that momentum to continue. I think the results for Trustee Wealth Services in the last 6 months is the best set of results that printed in 10 years and really reflect that they've integrated that AET business really well. is given the market leadership in so many segments and in most of the states across Australia. I don't think we can repeat exactly that performance going on, and it's really pleasing to see the Health & Personal Injury business is progressing and also the state management business, which is primarily being driven out of our previous estate planning activities. So the momentum in that business is really strong. So we'll bring a lot of time and effort into that area and expect to see some good results going forward. We've run out of questions. So that brings us then to the end of the presentation. I appreciate everyone getting online. Sorry, I've got one more question just come in. Given the increased costs and less you referred to regarding superannuation, what's your ability to raise prices with customers to share the cost of these increased requirements? Good question through the course of FY '25, we had a lot of regulatory change, and we did put in place some, if you like, one-off project type pricing to meet those costs, and we'll be looking to continue to do that through the course of FY '26, addressing the risk issue is a little different and we are looking at all the options we've got in respect to pricing. And there are some constraints on that, but also there is considerable flexibility available to us. That does look like it's brought us to the end of the questions now. So thank you, everyone, for attending this morning. And I appreciate that, and I hope you enjoy the rest of your day, and thanks very much.