Future Generation Australia Limited (FGX) Earnings Call Transcript & Summary

My name is Caroline Gurney. I am the CEO of Future Generation. And I'm delighted to welcome you and our guest speakers. We have Bill, Mark and Eamonn talking to you today. I just wanted to start with a short update on Future Generation, and then going through to our guest speakers and then finishing with the Q&A. What is really exciting to tell you about today is that we're actually going to be going across the country to 9 cities. And hopefully, we're going to be meeting all of our shareholders as many as possible in May, and we're calling it Future Generation Live. And there, you're going to hear more from some of our Pro Bono fund managers and our charity partners. So please visit our website to register your attendance. Excitingly, also, we launched our new podcast series and it's called 2Fold: Investing for Impact. And I'm going to be speaking to leaders each month about their 2 driving purposes in life. So subscribe and listen to the podcast on your favorite podcast platform. And my first episode was with Natasha Stott Despoja AO, and I found it really interesting to talk to her on gender parity and the pace of change for women at the moment in Australian politics, which is pretty apt with what we're going through at the moment. Our expressions of interest, the process for Future Generation Global, received overwhelming 200 applications to partner with us to actually position those charities for the future even more than they are already doing with the work. So as you all know, we really believe that young Australians have a very brilliant future in which they actually drive their own well-being. And in future, mental health is going to increasingly focus on optimizing well-being rather than treating only the illness. So we are seeing this as a chance for considerable change to happen in the well-being and prevention space, where initiatives that we fund alongside you, will aim to build young people's resilience and stop mental health issues developing in the very first instance. As an investment manager, we identify undervalued companies and invest to realize growth. So we're bringing this approach again to our social investment, where we'll be backing high-potential not-for-profits and investing in their organizations to realize that impact growth. And we're going to be announcing the partners in coming months as we're seeing them over the weeks go by, and really excited to bring that to you. So I'm delighted to welcome our first guest speaker, who is Bill Pridham. He's a portfolio manager at Ellerston Capital, which is a pro bono fund Manager of Future Generation Global. We're very grateful to Bill and the Ellerston Capital team for managing the funds pro bono through the Ellerston Global mid-small cap fund, and it carries 6.8% allocation in our SGT investment portfolio as at the 31st of March. Bill has 22 years' financial market experience and prior to Ellerston Capital, he was an investment manager at JGL Investments, an investment analyst at Kira Capital and a senior research analyst at QIC and CIO at MMC Asset Management. He started his career at UBS Australia as a senior research analyst. Bill, may I hand over to you now. And if you could give us your current outlook on the global equity marketplace.

Sure. Thanks, Caroline. Thanks for the introduction. It's a long one. I have been around for a while, when I hear that. So in terms of the outlook, look, we are in a quite an unprecedented time. When you think of all the things that are in the mix right now, it's -- I don't know what more I can add. So we've got inflation at generational highs, hopefully peaking and starting to get under control from here on in. We have the Fed who is moving quite aggressively now. If you think of the last decade, they've been quite benign in terms of their interest rates policy and clearly actually loosening monetary conditions. Now they're flipping around being quite aggressive. And signaling they're going to be quite aggressive as well, not just from rate rises, but also from quantitative tightening to reverse the quantitative -- quantitative easing we've had over the last several years. Supply chains are still under pressure. Still, we're hearing some green shoots of improvement. But I think it's taken longer for them to be replenished. Inventories is still at quite record lows. And I think going forward, if you listen to Prologis, which is one of the world's largest industrial REITs, they're saying inventories are 10% below pre-pandemic levels. And the idea is -- the likelihood is that they're going to go 10% above as customers build in safety stock. So we're going to see that come through as well. We've got the largest European war since World War II, the events over in Russia, Ukraine in sum. It's heartbreaking to watch. And we still have the pandemic. It's been 2 years. China is still in lockdowns in different regions. And all this is happening at the same time, which I think is quite unprecedented in terms of the investment climate today. But that said, Caroline, I haven't said anything new that you don't already know. I haven't added anything insightful that you don't already know as well. So that tells you the market is absorbing this, all these news. Clearly, it's going through a period of price discovery in terms of what does it all mean over the longer term, and visibility is quite low right now as well. All that said, we do live in a higher inflationary world than we have in the past. And I don't think that reverses. I think we normalize, but not to where we were over the last several years. We have a number of inflationary forces in terms of deglobalization. Energy, moving to a renewable world is inflationary. So we've got a number of inflationary backdrops. Wages are increasing as well. So I think from an inflation perspective, you need to put in your hat that, that's not going to go away anytime soon. And with that, and all these events coming together, volatility will remain high. And I think conditions will be tested at the end of the day. But from my perspective, I don't try to call where the markets are going to go tomorrow or the next month. I really focus on the businesses, how they're performing, making sure I'm positioned right in this type of environment. From my perspective, when I think of positioning, I think it's quite important to have pricing power. Clearly in an inflationary environment, tangible assets are getting more valuable by the day. Just from -- even just to build them, and replacement costs are going up. And you need to have great balance sheets and strong cash flows, clearly, with strong valuation supports as well. So there's a lot of negative influences on the market today, clearly. So the question is how much is already priced in, firstly. And secondly, everybody is -- I think the view on recession, it's a matter of when, not if. I think the market is pricing that it's going to happen. So the thought around that is, how severe could it be? I can't call that. But what I can say is that consumer balance sheets are fantastic. Home equity in the U.S. is at $6.5 trillion to $7 trillion of home equity value in their house -- in their homes. Their balance sheets are incredibly strong. They still have unspent stimulus payments in their bank accounts. The financial system is in great shape. Banks are over-capitalized. I've got a regional bank that has $26 billion at the Fed earning 10 bps. So the Fed is going to do the quantitative tightening, but then all the banks are going to start releasing capital as well. So it'll be interesting to see how that comes out over the mix over time. I think bottom line is, like I mentioned, with the balance sheet, cash flows and valuation, the market has clearly moved away from pricing concepts. Businesses which are promising cash flows and earnings way out in the future, I think that's an area where it's -- the market really moved away from, and more focused on near-term fundamentals at the end of the day. So I guess there's a lot in there, and I really haven't added anything new, but what I can say is that there's already a lot being factored in now in terms of the markets.

So Bill, one of the exciting things that our shareholders really love is to talk stock picks of yours. So I wonder if I could avail (sic) [ prevail ] upon you to give us your 2 stock picks at the moment.

You bet. So -- it's actually -- it was quite hard to figure out which ones to do, but I wanted to do 2 quite different ones. One, the first one is called GXO Logistics, it was a spin-off in August last year. And it's at $62 a share, the stock is today, a $7.2 billion market cap company, got very little debt. So what are they? They're the largest pure-play contract logistics player globally. And with that, it really benefits from 3 really strong themes and thematics. The first one is warehouse automation. We talked about wages going up. Labor is an issue. Every company is talking about labor prices going up. So what do we need to do, we need to automate. We need to make the global warehouse fleets more efficient and more capable of handling the goods that are going through right now. So they're a big player in that space. Secondly, you have e-commerce. E-commerce is a big part of their business in terms of not just sending the product up but reverse logistics as well. So that's a big part of the business, and that's a long-term thematic driving the business. And thirdly is outsourcing. I think a lot of companies are realizing that to handle logistics is bloody hard, and it's better to outsource that to a competent player like a GXO to let them handle it. They do that globally at the end of the day. So those are the main thematics that are driving the business. And clearly, you have supply chain disruption. I mentioned that they are starting to heal, but there's a lot of reparation to come through over the next 12, 18, 24 months to come through yet. So that's going to continue to drive the demand for GXL and new services at the end of the day, because they are a logistics specialist. And they have global operations. And they have major customers, like Nestle is a customer, Apple is a major customer. So it's some big customers that they're managing their logistics for them at the end of the day. So it's predominantly exposed to e-commerce and food and bev. So when you think about those 2 end markets, they're pretty solid secular growth. Food and beverage is a nice stable one. E-commerce is your growth angle around that. So you can argue that they're quite stable and growth angles in terms of the end markets. And what I like about it, they have very long-term relationships, decade-long relationships and they have 90% to 95% customer retention rates. Once you use them, you realize the savings that you get and you stay with them, and you actually expand your business over time as well. So at the end of last year, a $2.5 billion sales pipeline. Just remember, it's a $7.2 billion stock, it's got a $2.5 billion sales pipeline in place today. They've already announced new wins last year worth $800 million, or just over $800 million, and that represents 10% sales growth for this year coming up in FY '22. So they've guided this year to 8% to 12% revenue growth. They've already got 10% done with these new deals in place. And that doesn't include new deals on top of that as well. So I feel pretty comfortable that their guidance and their sales expectations are pretty solid. They should generate over $700 million of EBITDA this year. It generates great free cash flow as well, and it generates 30% return on capital in terms of the business. So it's a very high return capital business, high retention rates and decent -- and strong growing end markets as well. So right now, we have it trading on a little under 9x EBITDA for next year. There were rumors of bids from Blackstone before spin of 13 to 14 times. At 9x, it's just way undervalued. So it's come down from $103 down to $62. I think a lot of that has to do with their European exposure market concerns around that. But like I mentioned, they've got some strong secular drivers to offset any economic issue from that perspective. So that's the first one in terms of -- I think, one, if you look over the next year, 2 years, it's going to be a very strong performer. Second one is, it's a little bit different. It's called TKH Group. So TKH is [ it's around ] just under $40 -- it's just over $48 a share, [ it's probably a euro ] a share today. It's down double digits from its high. It's one of those few stocks that are really exposed to a number of megatrends in the market today. So it's a $2 billion market cap. So keep that in mind when I talk through what it is, EUR 2 billion market cap. So it is the leader in 3D vision. You think about Industry 4.0, the need for cameras processing at the edge. You need to inspect, watch and enable robotics, and they are the leader in 3D vision in that sense. They are a player in 2D as well. So they're one of the global leaders in 3D 2D vision, which has got some very strong drivers behind it from Industry 4.0, security, vision, you name it. There's a number of different angles for the business. That's one part of the group. And I want to just touch on that or expand on that a little bit more. If we -- what they've done is kind of put a highlight or a spotlight on the divisions in terms of what they're making. So it's the vision business, they separated it out. And if you use Cognex, which is a -- excuse me, a U.S. player, a similar type of business, and use the multiple that Cognex is trading on today. You're getting the rest of what I'm going to talk about for less than 0, okay? So let's move on to what's left in terms of the business. So it's the, a key player in connectivity in terms of energy, renewable energy. So what they do, they connect a lot of the offshore and onshore wind farms in terms of the cable. One of the few players in the world that can do that at scale. And they are going to double and triple their capacity over the next couple of years just from the pipeline they're seeing. When you think of what's going from an energy demand point of view, Germany, France, they're spending dramatically on renewable energy. And TKH is one of the key beneficiaries from that spend over time. And finally, it's got a business -- believe it or not, this is actually quite an interesting business. They are one of the largest -- the largest tire manufacturing system producers globally. So when you think of tire manufacturing, the world's fleet is 12, 15 years old. It's moving to a number of SKUs which they didn't have before, especially with electric vehicles coming through. The electric vehicle tire needs more torque. It's a much more complex tire than your traditional tire. So they have 70% market share of tire manufacturing systems, [ let's start with ] the big 5 players like Pirelli and Michelins. But those Pirelli and Michelins have been trying to develop their own capabilities, but they can't. So they're starting to employ TKH now in terms of their tire manufacturing system. So you've got a refurbishment cycle coming through, plus they're rolling out their next-generation platform, which enables all this next-generation manufacturing, which is a lot cheaper, a lot more efficient and enables the electric vehicle tire manufacturer as well. So it's got the 3D and 2D vision business, and you're getting everything else we talked about for 0, at the end of the day. It trades at 15x P/E this year, 12.5x next year. Management team is fantastic. I've been to Amsterdam to an Investor Day a year or 2 years ago now, just before we got shut down and met the whole management team over there as well. So they are performing incredibly well. They actually had results last night, their first quarter. Organic growth was 28% for the first quarter. Earnings dropped 30% as well. For a business trading at EUR 2 billion, generates great cash. For me it's a great long-term play. So those are the 2 picks I'll talk through today.

Excellent. Thank you so much, Bill. That's actually -- they're really interesting and quite different stock picks [ at this call ]. I'd now like to introduce Mark Landau from L1 Capital, our pro bono fund manager for Future Generation Australia. And we are very grateful to Mark as well and L1 Capital. They have a 7.6% allocation in the FGX investment portfolio as of the end of March and through L1 Capital Long Short Fund and the L1 Capital Australian Equities Fund. So Mark, who is going to speak in a few moments, he co-founded L1 Capital and he has since jointly managed the L1 Capital Australian equity strategy and the L1 Capital long-short strategy. Before that, he worked at Invesco Australia as an investment analyst in the large cap Australian equities fund and as an investment manager in the Invesco Smaller Companies fund. And before that, he was a senior strategy consultant at Accenture. Mark, thanks very much for joining us today. Would you mind talking just a little bit more about what you're seeing in the Australian equity market at the moment?

Yes, sure. I think -- so a really interesting time that we're doing this webinar, just given all the things happening in the world. I think what's instructive is to look at, I guess, where we've come from over the last couple of years. From our perspective, the last 2 years has been a relatively straightforward bull market. It's been basically a no-brainer to have kept as much money as possible in the market. The starting point of valuations was incredibly attractive because of the crash we had when COVID hit. Share prices looked great. Earnings multiples were very low. And at the same time, you had just this massive injection of liquidity from central banks, zero interest rates, governments doing everything possible to boost consumers and corporates, and then on top of that, we had this huge EPS upgrade cycle. So obviously, earnings per share is EPS. That's been driving share prices higher because you have companies slashing costs aggressively. And at the same time, revenues bounced back much quicker than people expected. On top of that, you had extreme investor pessimism, which is usually the best time to invest, whenever -- as Buffett always says, "be greedy when others are fearful". I think that was a classic case a couple of years ago. And on top of that, you had people too bearish on the outlook for COVID, whether vaccines would work, whether life would get back to normal. So you had this very unusual, almost once in a decade type event. That was a time to be all in, and that's how we positioned the portfolio over the last 2 years was to be more than 100% invested. Very unusual for us. We're normally about 65% invested, for context. And you also had this relative calm period geopolitically, which is obviously unchanged in the last few months. So if you fast forward to today, we think that the free money, that the easy money, if you like, is over. The stock market's enjoyed a huge rally over the past 2 years. If you look at the ASX 200, it bottomed out around 4,500. As of a couple of days ago, we were about 7,500. If you look at the U.S. market, the S&P 500 bottomed out around, I think it was about 2,300. We're now at around 4,300. So that's about an 85% rally over 2 years for the U.S. It's about a 65% rally for Australia. That's way higher than normal returns. And as a result, we think the outlook for the market is much more subdued. So for the first time in the last 2 years, we're actually not so excited by the market. We think that returns are going to be lower. You've got central banks starting to withdraw liquidity, raise interest rates. We think the corporate profits, if anything, have downside risk rather than upside risk for the first time in a couple of years. And then lastly, as Bill touched on, higher inflation is a negative for most companies. So you've either got pressure because you've got higher wages you have to pay your staff, higher soft or higher commodity prices, higher transport costs that tends to lead to lower margins and therefore, risk of profit downgrades. And then the last one, obviously, with this Russia situation and obviously, with China and the U.S. being at a much more tense environment. The tail risk from geopolitical events is much higher. It's obviously very difficult to predict with any certainty how it plays out, but we just know that it's a riskier time than it has been. So the summary of all of that is the, I guess, the passive investing approach or just plunking your money in the market and expecting a 10% return, I think those days are going to be much more difficult. And essentially, going forward, you'll have to find ways to add value beyond the index to get those sort of 10% type returns. So that's, I guess, sorry to be the mood killer, but I think that the world is a tougher place today than it has been for the last couple of years.

I think that's why we have such managers as you and Bill managing our money, so that we get the best possible return for our shareholders. But what -- what are you -- in terms of your stock picks at the moment, what are you looking at for the long term? What are your 2 stock picks for our shareholders today?

Well, I tend to give very contrarian and very unpopular stock picks. So please bear with me because I'm going to mention stocks you're probably going to groan at or you're going to hate. But that's how we've made our money historically, and hopefully we'll continue to do it. Essentially, we have a very independent approach when we find stocks. We don't care what the market thinks. We don't care what stockbrokers think. We don't care what the newspaper says. We're going to work it out for ourselves and we do very, very detailed bottom-up research. And the stock that you're going to groan at that I'm going to recommend first is QBE, which has been an absolute basket case for the last 15 years. And I think every fund manager understandably hates it, because they've disappointed people so many times over that period. When I started my career in funds management, it was actually the biggest position in our Invesco large-cap fund. The shares went from $4 to $35 over a period of about 5 or 6 years post September 11, and the reason that happened was you had this massive reduction in capital that went into the insurance industry, and therefore, premiums could go up really quickly and you had this huge increase in profitability for insurers. And then over the next 15 years, the QBE share price has gone from $35 down to around $12, where it is today. So effectively, it's gone down roughly 70% over 15 years. And for that reason, people hate the stock and they've given up on it. But what they're missing is that the industry is at a massive inflection point, similar, not as dramatic, but similar to what we had in 2001. So if you look at QBE today, there is a company that was struggling to grow premiums at all for the last decade. At the moment, they're growing their premiums by 10% to 20%. So their rate increases are 10% and their GWP, which is the total amount of premiums that they're issuing, is up 20% year-on-year. So that's a dramatic change. At the same time, your claims growth, which is effectively the negative. So if your revenue is up 20%, how much are your costs going up by? Your costs are going up at 4%. So the difference between those 2 is essentially your underwriting profit margin. And what we're saying is the underlying profits of QBA have increased dramatically. But you've got a new CEO that's come in and the job of every good new CEO is to tell you how bad things are. They want to get their shares issued at a lower share price. They want to get their options priced at a lower share price. They want to tell you how tough things are. So that over the next few years, they can tell you what a great job they've done. So if you look in detail at the last result of QBE, net profits, if you take away all the actuarial assumptions that effectively lowered their profit, their profit was actually 40% better than what they've told the market. And you can -- if you go through the numbers in a lot of detail, you can work that out. It takes a lot of work to work it out because QBE results are probably the most complicated of any company I look at in Australia. But once you do that process, the profit is actually 40% better. On top of that, they've done a huge amount of what they call reserving. And reserving is effectively saying what you expect claims to be going forward. So what you want to do as a good insurer is to have lots of reserves so no matter what claims come up, you'll be covered. What they've been doing is boosting and boosting and boosting these reserves to the point where they've got such conservatism in their assumptions that they'll be able to hit their profit numbers almost no matter what. And that's the point we're at today. So the underlying business has dramatically improved over the last few years. The share price is exactly the same as it was a decade ago. So none of this is priced, and we think you've got a fantastic CEO. So the new CEO who has come in, used to be the CEO of Beazley, a European Insurance Group. He presided over a period where Beazley increased its share price 400% over the period he was there. And then COVID hit and it withdrew all of that good news because they were unfortunately in a lot of lines of business that were hard-hit by COVID, no fault of his obviously. And at the same time, you've got one other really good dynamic. So they've obviously got a lot of good stuff happening in the underwriting business, which is essentially where you're writing the insurance. The other part of all insurance businesses is the investment book. So QBE has $28 billion of essentially short-term bonds. Those bonds have been yielding nothing because of COVID. Every interest rate around the world went to zero. They got no return on that $28 billion. Now the 2-year yield, which they're most exposed to, is around 2%. So you say okay, well it's only 2%, big deal. Well, every 1% increase in bond yields is roughly a 20% increase in their profits. So if you say bond yields are going to stay at 2%, you've got roughly a 40% increase in profits. If you say, okay, I think bond yields are going to reverse, half of that money is going to come back, okay? Well, that's still a 20% increase in profits, which for QBE is massive. This is a company on a P/E of 10, on a 5% dividend yield, no one is expecting any increase in profits, let alone 20% on top of the underlying insurance business. So for us, QBE, we think we could easily make a 50% return over a couple of years. Expectations are very low. No [ firm around ] is telling you to buy QBE, everyone's telling you about exciting tech stocks and other things. So hopefully, we'll be able to give you some good news over the next year or 2 on that one. The other one is also a Q stock, Qantas. And I've recommended Qantas once before at Future Generation. For the record, the last stock I recommended at Future Generation was [ index ] about 18 months ago. That's down about 100% over the last 18 months. I don't think Qantas will give you 100% over 18 months, but I think it will give it to you over about 2 to 3 years. And the reason is, we think that Qantas is at a massive inflection point right now. So this month, as Easter holidays started to go crazy, Qantas had previously told us that around 60% of their fleet domestically was operational. So effectively they had 60% capacity. We think that when the data comes out for April, you'll see that they're at 100% of pre-COVID levels if not higher. And then on top of that, fares have been going up dramatically. So I don't know if anyone's been booking holidays recently, the fares have gone through the roof. If you want to go to the U.S., they've put through 5 price increases just over the last few months, and there's been no negative impact on demand. If you look at domestically, air fares are up a lot. And the reason is, their two major competitors, Virgin and Rex, have very limited fuel hedging. So the impact that you've seen from higher fuel prices means that they've had to put their prices up almost straightaway. But Qantas is fully hedged until the middle of this year. So even though they're getting no negative impact from higher fuel costs, they're getting the benefit of higher air fares. So essentially, you're getting really strong demand, you've got really good pricing. You've also got a $1 billion cost out that they did because of the crisis. They would never have been able to cut this much cost if it wasn't for the COVID crisis. They already had shaved $900 million of that. We think they're easily going to exceed the $1 billion. And then the last one is the valuation. So on our numbers, by FY '24, which will be a full year of a normal -- a relatively normal world, hopefully. We think you get close to $1 of EPS and the share price today means that you're trading on about 5.5x earnings. It's about $5.50 per share price. In a normal world, if you were seeing Qantas trade at the same discount to market that it's always traded on over the last 10 years, which is about a 40% discount to the ASX 200 Industrials, that gets you a P of 12. If you put that $1 of EPS on 12x, you get a $12 share price, that's almost 120% upside from today's share price. So we think from a demand point of view, from a sentiment point of view, from a cash flows point of view, we think we're at a massive inflection point and people haven't heard the good news yet, so they haven't priced it. But as Qantas starts to tell you how busy they are, how good their air fares are, how good their fuel hedging is, we think you're going to see a big increase in the share price. So that's my second of the Q stocks for today.

[Operator Instructions] And now it's my pleasure to introduce our third speaker. As you all know, Future Generation is a dual-purpose model. So we deliver shareholder investment and social returns. And we're really proud that we actually support and work with leading charities in Australia. And so I'm delighted that Eamonn McCarthy -- Dr. Eamonn McCarthy, who is the CEO of Lighthouse Foundation, which is one of the partners of Future Generation Australia, is joining us. He's Victoria's one of the most respective forensic psychology -- psychologists in the field of childhood trauma, attachment and high-risk youth. And was formerly the principal practitioner of Child Protection of Victoria and a member of the Center Against Sexual Assault at the Royal Children's Hospital. Eamonn has provided support for the state's most vulnerable young people. And what he's doing now is particularly impressive, and we've had some great conversations about the young people that Lighthouse are actually supporting at the moment. So since the beginning of our partnership in 2014, FGX has invested $2.4 million in Lighthouse Foundation, and that's really provided crucial support to Victorian youth at risk through risk of homelessness throughout the pandemic lockdowns. And Eamonn, thank you very much for joining us.

Thanks, Caroline.

We really want to hear more about Lighthouse Foundation and the work you do with young people, but also something that we spoke about briefly last week was just that increasingly homeless number of students that might be happening as we see it over the next few years. And I'd really love to hear more about that.

Absolutely. Thank you. Yes, look, I mean, Lighthouse Foundation has for approximately 30 years now, in various shapes and forms, been seeking to address the issue of youth homelessness. And certainly the historical vision and the current one and certainly the projected future one is very much that, that's something that occurs through a process of empowering the community to work the problem together, as opposed to any one service or individual trying to achieve such a lofty outcome. And so to date, we've been able to achieve fairly incredible outcomes substantially, thanks to support such as that from FGX, and that's been through providing, I guess, a well-rounded and holistic approach to young people residing in Lighthouse homes who are currently at risk of homelessness. And so that means ensuring that they have the basics, if we can put it that way, in terms of appropriate accommodation, accommodation that you or I would be happy with -- appropriate levels of intervention from a therapeutic perspective, but also addressing those functions that don't just, I suppose, insure an individual's current happiness, but really cement the future to ensure that long after Lighthouse has finished direct engagement with someone, they've been left with all the necessary skills, support and empowerment that enables them to go on and not only escape the cycle of homelessness, but ultimately go on to lead careers that may very well contribute to the solutions needed to end future youth homelessness. And look, of late, I guess, Lighthouse Foundation has been able to recognize the fact that it's not simply a case of addressing current youth homelessness. Rather doing that, but also turning a lens towards the future generation of potential homeless. So young people in and out of home care, children who are experiencing far less than ideal family environments, recognizing that research demonstrates the high percentage that will go on to become homeless. Doing something now, often having to do, from at least a cost perspective, significantly less now to ensure that down the track, they're not essentially creating the next wave of those who may be at risk. And that led conversation I was having with you in relation to one of the exciting new directions that Lighthouse is looking to take. So in Victoria, amongst the percentage of youth who are considered either homeless or at risk of homelessness, it's very much recognized that to be -- that a definition of homelessness isn't as simple as having a roof of your head, rather it's about having a social space that you've got autonomy over. Your accommodation is more consistent, predictable, that it essentially enables you to carry out the other really important functions in life, such as relationships, employment, socialization. And so that group is sort of colloquially referred to as couch surfers. And what we've seen more and more are, these couch surfers were typically those who might have a friend's couch to sleep on, in its most basic sense. But also, for example, having the opportunity to say, stay with a friend for a couple of weeks, sleep on a mate's couch in their parent's house. And to a lesser extent, it might be those who were finding more creative ways of getting a roof over their head, for example, in a student library or other sort of functions associated with [ TAFE and ] University. But as you can imagine, with the pandemic and the various restrictions associated with that, the prospect of having a friend agree for you to sleep on their couch became very different when you were talking sort of 6 to 12 months rather than one week. And so what we have seen certainly anecdotally, and the expectation is the research will support as we move forwards, is an increase in those number of young people who perhaps some are knowns to them and perhaps some are knowns to the adults around them at University or TAFE or Year 12, are doing everything and anything to get through the various societal processes that enable them to become self-sufficient. Be that sleeping in a library while they get through their last subject at university, or be that sort of hanging out till late hours at a local cafe or library, so as to be able to get their homework done and turn up to the last couple of weeks of Year 12. And so it really is through the introduction of a more outreach focus in addition to what we've always done. So proactive outreach that seeks to engage educators, university students, well-being coordinators, young people themselves upskilling around identifying those on the precipice of homelessness and seeking to do a lot more at that sort of early intervention space, rather than waiting until a young person is absolutely in crisis and then obviously requiring a lot more support.

So if I can, I mean, obviously, you've helped more than 1000 young people access homeless services. But what is the other sort of key cause behind homelessness? I mean, we read a lot about it, but what do you see and what do you address as those sort of, that couple of key themes, really causes?

Yes. Look, it's fairly widely accepted that the 3 main causes. There are obviously many, many layers, but the 3 main causes that seem to be present in those who are either at risk or homeless are mental health, family violence and what's described as sudden unexpected and unsupported changes to one's circumstances. And of course, the challenge with that is that while it may be some time before the research world catches up on the exact impacts of something like COVID on our collection of homeless youth, but also homeless adults for that matter, what has certainly been collated already is demonstrating significant spikes in mental health presentations across their lifespan, not just increased presentation, but certainly increases in the significance of first presentations. Sadly, it has seen, I would dare say, what would be highly unreported still, but certainly increasing family violence call-outs, and that's in a time when those of us in the field clearly recognize those numbers will not be accurate by the very fact that there are obviously barriers to those seeking help in situations where restrictions are in place. And in terms of significant changes and unexpected changes to one's circumstances, unfortunately, I think we've seen a sort of global example of that. So unfortunately, it does stand to reason that those 3 main underpinning factors are also going to be situations that our DSA research will show has resulted in a significant increase in homelessness and risk factors associated with homelessness over the last 2 years as well.

Thank you. Thank you, Eamonn. So we've got a number of questions now that are being submitted. And if anybody else would like to submit, please do. If we don't get through all of them today, we will come back to you afterwards. But thank you Eamonn, it's amazing the work you do. It's incredibly inspirational for you and the team as well. I think my first question will go to Bill, and this is from Louis. What opportunities are you seeing in the small to mid-cap space at the moment, Bill?

Thanks, Louis. It's a great question. In terms of the sector as a whole, when you think about the valuations, it's interesting to compare them to where the large cap relative to the mid small caps are, they're at almost generational lows in terms of the relative valuation. You think about the mid-small cap space. And when I talk mid smalls, I'm talking multibillion cap companies. So they're still pretty sizable businesses. It's just that you're competing against the trillion dollar companies of Apple and Microsoft overseas, that's the relative size of them. So that the Russell 2000, which excludes those mega caps, it's trading at a P/E we saw in the early 2020s, so back in the doomsday scenarios. I think that's kind of -- remember, I talked about recession and a lot of it's being priced in, and it feels like that's a bit of the case there. But Caroline, where we see the opportunities in terms of our positioning, it's around those businesses that are benefiting from secular growth, say data growth that's 5G, Industry 4.0, that's not going to change anytime soon. It's probably going to accelerate from here. So companies that are benefiting from that. And if you've followed me for some time, I've been investing in the 5G thematic for several years now, and that hasn't changed and actually it's getting stronger. As machines are talking to machines now, that thematic is actually getting stronger. The second one is kind of a function of what's going on today with supply chains. We're seeing opportunities with businesses that are helping with supply chain. You think of JXO. Flex Manufacturing, which is one of the largest contract manufacturers globally. They have a fleet, manufacturing fleet around the world, helping customers, helping clients with their supply chain. They have 10,000 people sourcing components and helping put them together for their customers. So we're seeing the opportunities in those, irrespective of the market in terms of the data growth, and because of the market and supply chain. So that's where we're seeing the opportunities there. And when you think about today, there's quite a high probability recession being priced into a lot of the names. I'm with Mark in terms of the valuations. Though I like to -- I don't want to pay a lot of money right now for names. You've got to keep it quite close, high cash flows, great valuation support. And that's why if you look at the names, you feel fairly comfortable that you're getting that in a lot of names. So we're seeing some decent opportunities irrespective of what's going on with the headlines right now.

There's a lot of big headlines at the moment. I agree with you. Actually, Bill, I've heard you speak a lot about ESG. And one of the questions that we have from Helen actually is for you. And it's, how do you actually approach ESG in your investment style?

So ESG is really important, and it's actually a function of investing to my value. I've always invested this way, and it's just that now we've got the ESG nameplate above it. So it's actually suited my style quite well. So the way we incorporate it is that it's part of our analysis with the stocks that we look at. And it's easy, look at the negative screen, which is really easy, alcohol, tobacco, mining, gaming, that type of thing. So it's a really easy screen to do, and I think a lot of people do that anyway. The harder ones and the more not as tangible are -- we watch animal cruelty, we watch human rights. And the companies are great at putting sustainability reports out. So we really watch and make sure that our companies are adhering to best of practice in all of that. So that's the first sense. We have a negative screen, which we put in place. I think when you think about it, though, the minimum test for us is that the company does no harm. So that's an easy -- that's a minimum test. The ultimate scenario is that they're doing good, say doing recycling like AZEK does composite -- or plastic recycling in the U.S. Companies that are helping us move to net zero. TKH is a great example of that. I've got a number of names. Flex owns the largest solar tracking business globally as well, along with their contract manufacturing. So companies that are enabling that. And when you think about it, just companies that are making our world a better place at the end of the day. So we really like to own them. And we're not an impact fund, so to speak, but we're very ESG-aware. And I think that's important from the cost of capital, where capital flows and we're very focused on that environmental and social aspect of that. So it's a really deep part of what we do, but it's actually been part of it since I have been investing, really based on my values anyway.

Excellent. And the next question goes to Mark from Ian. I know you have the ability to short stocks in your long-short funds. What parts of the market are you more cautious on?

We're usually pretty cagey on talking about our shorts, but I'm happy to give a couple, I guess, high-level things that we're pretty cautious on. As Bill and I touched on at the outset, I think the last couple of years have been very reminiscent of the dot.com boom and a lot of those unprofitable tech stocks have really had a reckoning. So one of the things that we've been short is the non-profitable tech basket, which Goldman Sachs very kindly packages up for us. One of the -- to give you a bit of context for how extreme the valuations are in that part of the market. Between 2017 and 2020, that index went from about 100 to 150. And this part of the market was already very expensive pre-COVID, in our view. Now based on cash flows, earnings, all sort of typical fundamentals. As a result of COVID in the following 12 months, it went from 150 to almost 500 in the space of a year, where people were extrapolating one-off events from COVID and saying hey, this technology is going to be massive now or this e-commerce business, which is loss-making, is going to be a juggernaut because of COVID. So the valuations went through the roof. And these companies are not being priced off earnings or cash flows don't forget, they were being priced off sales. So it's -- so they were on a few things 15x sales, they're now on 35x sales. So from our perspective, that part of the market is a joke. It's fallen 50% just in the last few months, so it's fallen from roughly 500 in that index to around 250. But bear in mind, 250 is still 60% higher than where it started pre-COVID. And pre-COVID was not cheap. So even though it's down 50%, we still think there's a lot more downside in that part of the market. It's incredibly [ spitty ]. There's a lot of people promising things that are just not even close to reality. The cash flows are at best 5 to 10 years out. It's very hard to predict what the world is going to look like in 5 or 10 years in such a dynamic part of the market as technology. The second part that we're cautious on is the -- some of the U.S. consumer stocks. And the reason we've been shorting some stocks in that part of the market is, again, they've had this one-off event, COVID hit, governments gave massive stimulus, the Fed made zero rates, everyone had money to spend, you couldn't spend it on services, so you had to spend it on goods. Within goods, you had to spend it online because the shops were closed. So effectively, you had these companies where the share price has gone up 500% on the back of a one off event. COVID is not going to be with us as a dominant lockdown theme for the next 100 years. This is a once in a 100-year event. So areas of the market, and we saw it with Peloton, we saw it with Shopify, we've seen it with Williams-Sonoma and Logitech are some of the stocks that we shorted previously. We've now got a new bunch of shorts that have that sort of consistent theme, that they had some sort of one-off benefit, and we think their share prices are going to collapse as they start to normalize both their sales and margins.

Excellent. The next question that's come in from Luke is, what are some of the key themes that are shaping your investment portfolios currently? I mean obviously, you've answered a little bit of that. But yes, I think we'll be interested more in terms of the thing that you're looking at most strongly, as it were.

So I might focus on the longs. Essentially, when we build our portfolio, it's all bottom-up company-specific research that puts the stock into the portfolio. But if you step back and you look at our portfolio at a high level, you'd see 4 or 5 key themes that are really what's going to drive the success or failure of our performance going forward. The first one is the reopening trade, which I spoke about a little bit with Qantas. But we like companies like Webjet, Airbus, Safran, essentially companies that are going to be getting the benefit of this inflection point in travel, particularly in Australia and the U.S., where we're seeing it very clearly. If anyone saw the comments from the CEOs of any of the big 4 airlines over the last week, every single one is saying this is the strongest conditions that I've ever seen in my 30-year career. The head of Delta, the head of American, the head of United, they're all saying the same thing. Second theme is U.S. online sports betting. So one really exciting sector and one opportunity that we think is truly exceptional is, in the U.S., state by state, they're opening up and legalizing online sports betting. And Australians know sports betting better than most, because we've been doing it for a long period of time and we are world's best practice at gambling. But in the U.S. it's a new thing, and people haven't cottoned on to essentially, people shifting their gambling habits from casinos to sports betting. And we're seeing iGaming as well as part of that. So we think that Entain and Flutter are going to be the leaders in that space. They have about 60% market share between them. And they're also the leaders in terms of doing much more appropriate betting restrictions than what we're seeing from other players. So they are at the forefront of having bet limits, of having much more socially conscious ways of making sure that you don't get the problem gamblers doing that. So a lot of stuff they've been doing proactively in the U.K , there's going to be some regulations coming out later this year in the U.K. along those lines, but they've already preempted it and gone firmer than what the regulations will probably go. The third one is energy. Obviously, everybody would know that people are starting to drive to work again. People are starting to fly again. Demand for oil is now higher than what it was pre-COVID, but supply just hasn't responded. So we think that companies like Santos and Cenovus, which is a Canadian listed oil stock, will be beneficiaries. And then the last one is those companies that will be beneficiaries of higher interest rates. Now for most companies, higher interest rates are a clear negative. But for a company like QBE where they've got an investment portfolio that's going to benefit from higher bond yields, we're trying to find those companies. So it's a bit of an eclectic mix of themes, but I think there's still plenty of opportunities in the market. Even though we're not excited about the market overall, we think there's plenty of themes and opportunities that are presenting.

I think that's really interesting. I mean actually, I've got quite a lot more questions for both of you. But I think we're going to Eamonn now. This is a question from Chris: how do you think we, as a community can secure a better future for young people? And the next question that's along that line is from Emma: and what are some of the key shifts you've seen in young people at risk as a result of the pandemic?

Yes. Look, I mean, in terms of what can be done as a community, I mean, this is probably a really good example of exactly what the answer should look like. And that is that recognition that it's a case of it being a community challenge, and it's a case of the -- I suppose the levers required to address it already exist. So for example, I've sort of sat here and listened and tried my best to understand most of what's being said but it's not my area of expertise. And what I have to offer in this space, in my space is obviously my training, my expertise and my experience to provide direct support to youth homelessness. But what groups like FGX have been able to do is to take those who their expertise and their excess of knowledge or their excess of resource might sit outside a space that can most benefit through direct engagement of our youth, but is instead finding a way to have that common sort of approach. So it's really situations that allow for multiple year solutions. Situations that allows services and organizations like mine to have the confidence to proceed forward with what our expertise tells us as the best approaches. But in general, I mean, opportunities like this also serve to continue to educate and upskill in relation to some of the precursors to homelessness starts to shift some of the myths around, I suppose, what sorts of outcomes we should be expecting for our young people. So there's no specifically simple answer. But certainly, anything that serves to take the strengths that already exist within our community and at least in part, channel them towards balancing out the playing field or providing the same access and the same opportunities to our young people, is certainly the right direction to be heading. As far as the pandemic goes, look, as noted before, I think we've certainly seen implications in relation to how, to date, young people might have avoided the final fall off the cliff into homelessness. But I think equally so, we're seeing, obviously, withdrawal of societal safety nets such as schools, such as face-to-face university, such as ready and easy access to medical and all the rest of it, we are unfortunately seeing that first presentations are more significant than perhaps they previously would have been. And of course, what that means is we've got a situation whereby the hopes of providing earlier intervention become increasingly challenging. A; because it's been hidden to a point of crisis and B; because a number of the avenues that might otherwise have identified at the point of early intervention haven't been functioning at full capacity. But I dare say, the degree of impact will be seen over the next 6 to 12 months.

And we've just had another question in and this is for you as well, Eamonn. Actually, I'm really interested in your answer to this, is do people approach you directly? Or do you network to find them? And how do you give them support?

Yes. Look, it's a great question, and Lighthouse in particular, the answer is varied. I mean we very much have a no closed door policy. And therefore, we may receive a number of inquiries that ultimately can't be fitted within our service. But nonetheless, we seek to create very warm handovers to services that can support. But rule of thumb is that we may have young people themselves approach us. In relation to younger children, very much that would come either via government services such as child protection or even through schools, TAFEs and universities. And some of the time, it's also through existing home listeners services. So services that may identify a young person for whom the intensity of their support won't be sufficient, but who know Lighthouse through reputation can provide a longer and more intensive approach. As I said though, all of those functions are fantastic, but certainly, the gap in that service, and the reason for our sort of increased direction is that it ultimately relies on it being apparent to the average member in the community or the sense that, that young person is, in fact, requiring support, hence, the reason we seek now to sort of conduct more proactive approaches. To not necessarily overidentify, but certainly to recognize that population who aren't coming to attention and coming to our doors at this stage.

Excellent. Mark, we have another question for you from Glenn this time. How are you positioned in terms of offshore exposure from Australian stocks? And do you hold more or fewer ASX companies with higher leverage to offshore markets than you did 12 months ago?

So in terms of our offshore exposure, at a gross level, that means the total of our longs and shorts. We never have more than 30% of our positions overseas. In terms of, I guess, what the question is getting at, how much of our long positions or how much of our companies that we're buying are based overseas, it's roughly half. So essentially, half of our positions are Australian companies, half of our long exposure is international companies. The overall net long of the portfolio, so effectively how positive we are on the market, how much market exposure we have, has reduced very significantly over the last few months, reflecting my views about the market outlook. And the composition of our international has also changed. So we were much more positive on the U.S. market if you can look back 1 or 2 years ago, than what we are today. So we've been reducing market exposure to the U.S., partly through putting on some of those shorts that we were talking about before. And also finding better opportunities in parts of the world like Europe, where many global businesses that just happen to be listed in Europe have sold off very aggressively because of their concerns about Ukraine, because of their concerns about China weakening and obviously, Europe is a key exporter to China. So we've seen some anomalies where you have these great global businesses that just happen to be listed in Europe and have sold off, we think unfairly. So there's a lot of moving parts under the surface, but essentially, the Australian versus international relativity has been relatively constant.

And I have a question from Kathy to both you and Bill. What has been the most notable contributor to your portfolio in the recent period?

Maybe I'll hop in. So this financial year, there's been 3 major contributors. And I think they're all very different as well. So it kind of goes to your comment earlier with [ Jake so ] and TTH. The biggest contributor is a company called WillScot Mobile Mini. I think it was actually one of the first stocks we actually talked about on an FTG webinar years ago. I've owned it for over 4 years now, and it's done really well and it's still a top 5 position. So they're one of the largest -- the largest owner of modular office leasing in North America, with over 45% market share. It's getting 20% pricing growth with that market share. It's really a leverage to the infrastructure spend in North America, which is starting to turn the corner, really hasn't got the funding package enabling things until next year. So that's another tailwind for the business as well. So I think that's one of the bigger ones. And the other one, it's along the lines of Mark's QBE, it's an insurance company called Assurant, actually the biggest company or biggest holding today. So they actually provide insurance for large consumer purchases. Think of your phone, think in your car. They do the track home loans in the U.S. to make sure they're up to date in terms of their insurance. They have a $9 billion float and some of the QBE are earning nothing. So compare that to its $10 billion market cap. It's got a good upside potential from that float coming through. But what it is really benefiting from is the trade-in of 5G phones. As people trade up, they typically will put an insurance package on because they're higher value. And what they're really doing now, and they're actually here in Australia, too, under [ Allegra ] brand, so they do a lot of recycling refurbishments of phones. So they're really strong in that circular economy angle as well. The final one is Option Care Health, I wanted to give a quick callout to that one. So they're one of those companies that make the world a bit of a better place because they provide -- they're the largest independent provider of at-home infusion services in the U.S. They cover 95% of the population. And it really helps patients, payers. You don't have to -- if you leave the hospital after a surgery, you don't have to go back to get infusion for antibiotics or immunoglobulin services. They'll come to your home and do it. And they've got the nursing fleet to do that. And secondly, the biggest part of the business is chronic. So you think of muscular dystrophy, you think of Crohn's Disease. You don't have to go to the hospital to get this done. You can get it done at home. And typically, it's 40% to 60% cheaper for the payer for them to do it at home, and the patient loves it as well. So those -- I guess those are the top 3 this financial year. And as you can see, they're quite different across the board as well. It's kind of the balanced approach we're trying to take.

I was going to hand over to you Mark. And then I think we're going to have to wrap up. So any questions that come in from now on, we will reply afterwards, if that's okay. But over to you, Mark, sorry.

So I'm going to copy Bill and also have 3 reasons, but this time we have different reasons. First 1, very company-specific updates. So company had a really positive piece of news. We have a very diverse set of investments. So a typical position for us is a very small percentage, where it might be 2% or 3% of the portfolio. And we have, in aggregate, about 80 positions on average, including long-term shots. So it's lots and lots of small company-specific wins tends to be the driver. From a top-down point of view, there were 2 major positives. First one is staying long some of those new energy stocks and some of the old energy stocks. So new energy, things like lithium and copper, which are critical in the energy transition to electric vehicles and that whole, I guess, new sustainable forms of energy. Both stocks have gone crazy over the last year, as people have realized there's a shortage of both lithium and copper. And the second area is old energy. We're obviously oil -- we -- about 18 months ago, we built our biggest sector net long to oil because we could see that as we emerge from COVID, there's going to be a shortage of oil. No one's invested in new supply. We've got demand that's going to accelerate very fast, partly because of the recovery from COVID as people start to drive and fly again, but also because the developing world is starting to get cars and motorbikes and starting to fly as well. So it's structural growth that I think people are continuing to underestimate, that will persist for longer. And the last one is the shorts that we had in those ultra-expensive stocks, the Pelotons and Shopifys and unprofitable tech stocks, and we had a very concentrated bet on those companies collecting. Peloton is down about 80%, Shopify is down 70%. The unprofitable index is down about 50%. So that has been a great contributor as well, and a nice offset in a falling market.

Excellent. Thank you. Well, thank you, everyone, for joining us today and for your support of Future Generation. Thank you to our speakers, Bill, Mark and Eamonn. I really hope you enjoyed their insights. And if you want to find out more, please let us know. Any questions, please contact us as well. And hopefully, I will see you all in May at our Future Generation Live presentation when we're going across the country. Thank you, everyone. Thanks very much.