Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening, everybody, and welcome to Gentrack Group Limited's Annual Shareholder Meeting. My name is Andy Green, and I was delighted to be appointed by the Board as Chair of Gentrack in November last year. Today, we are very pleased to welcome you as online participants through our virtual meeting platform provided by our share registrar, Link Market Services. Due to the current COVID-19 pandemic, we are holding a virtual meeting to assist in curbing the spread of the virus while still providing for participation and engagement amongst our shareholders. The Board are joining you from 6 locations in New Zealand, New South Wales, Queensland and the U.K. We have prerecorded my Chair's address; our CEO, Gary Miles' address; and the introductory messages from those directors seeking election or reelection. This is to minimize the risk of technical issues interfering with the smooth running of the event. You can vote and ask questions online. To vote, you will need to get -- click Get Voting Card within the online meeting platform. You'll be asked to enter your shareholder or proxy number to validate. Please then mark your voting card in the way you wish to vote by clicking for, against or abstain on the voting card. Once you have made your selection, please click Submit Vote on the bottom of the card to lodge your vote. Please refer to the virtual meeting online portal guide or phone the helpline on 0800-200-220 if you're in New Zealand or +64 99-67-7751 if you're outside New Zealand if you require assistance. I'll provide you with a reminder of these instructions as we progress through the meeting. I would encourage you to send through your questions as soon as you can through the virtual meeting website. This will allow us to answer these questions at the appropriate time of the meeting. Before we formally begin, I would like to introduce you to my fellow Board members who are not required to put themselves forward for reelection at this meeting: that's Fiona Oliver and Darc Rasmussen. Fiona joined the Board as a Nonexecutive Director in February 2019. Fiona is an experienced Director and Audit Committee Chair with executive level experience in asset management, funds management and private equity. Fiona is a specialist in the investments, the capital market and mergers and acquisitions. Fiona holds degrees in Arts and Law from the University of Auckland and is a qualified solicitor in New Zealand, New South Wales and England. Darc Rasmussen was appointed as a Nonexecutive Director of Gentrack in 2019. Darc is a seasoned enterprise software professional with over 25 years experience, successfully building Software as a Service and cloud-based businesses across global markets. His career covers senior leadership positions at Infor, SAP, IntraPower and Integrated Research. He was CEO of Integrated Research between 2013 and 2017 and led that company through a business transformation that delivered strong profit and shareholder value growth. Darc is currently a Nonexecutive Director at Objective Corporation. Gary Miles, Stewart Sherriff and Nick Luckock during our formal business of the meeting. Gary Miles will provide a brief introduction of our management team in his CEO address. Also with us today are Jason Doherty from our outgoing auditors, KPMG; Grant Taylor from our incoming auditors, Ernst & Young; and Toby Sharpe from our solicitors, Bell Gully. I'd like to take this opportunity to thank Jason and KPMG for the audit work that they have done for Gentrack for many years, and I would like to welcome Grant Taylor and the Ernst & Young team on [indiscernible] Gentrack. Now on to the formalities of the meeting. The Company Secretary has confirmed to me that the notice of meeting is being sent to shareholders and the other persons who are entitled to receive it. The company's constitution prescribes its quorum requirement of 3 shareholders having the right to vote at this meeting. This requirement has been met. Details of the proxy voting are shortly available on screen. I'd like to thank our shareholders for their level of participation in today's meeting. My fellow directors and I intend to vote all discretionary proxies we have received in favor of the resolutions as set out in the notice of meeting. The directors and then their Associated Persons, as that term is defined in the NZX Listing Rules, are subject to voting restrictions in relation to Resolutions 2 and 3. Gary Miles and the Associated Persons, as that term is defined in the NZX Listing Rules, are subject to voting restrictions in relation to Resolution 5. Gentrack employees that may be issued some of the equity securities approved under Resolution 6 and their Associated Persons are subject to voting restrictions in relation to Resolution [indiscernible]. The financial statements for the 12-month period to 30th September, 2020, together with the auditor's report, are set out in the company's annual report. The annual report was made available on Gentrack website in December. Let's move on to the agenda. The order of events for this morning's meeting will be as follows. The Chair's address followed by the CEO's address, then we will conduct formal business of the meeting which includes the resolutions of the meeting set out in the notice and general business. Voting on all resolutions will be conducted by way of a poll. You will be able to ask questions online through the virtual meeting website. I encourage shareholders who are attending online to send their questions through as soon as possible. Instructions on how to submit questions can be found by clicking on the link in the Notice of Meeting. So now we'll move to the first agenda item, which is my Chair's address, which as I said is prerecorded. Joining Gentrack has been a real pleasure. The Board have thought carefully about the future of the company after a disappointing period and strengthened the management team and the Board to create the best conditions for the company to create value in the exciting and fast-moving markets in which Gentrack operates. I look forward to supporting the world-class leadership team that we have recruited to create sustainable value for shareholders. Gentrack is well positioned to support our customers in delivering the cleantech revolution. Our aspiration is to lead the transformation of the energy, water and airport markets. As we look back, our financial year to 30th of September, 2020, presented the business with many challenges, not least the global uncertainty that has affected our customers and the market opportunities that exist in both the utilities and the airport sectors. Our people have proven their resilience and ability to adapt quickly, ensuring that we continue to service customers and to support them with our mission-critical technologies. Conditions remain very tough for our people in the northern hemisphere with strict restrictions on movement and many employees juggling work and home schooling in far from ideal conditions. I'd like to thank all our people for their continuing efforts and dedication. As we look to the future, we see significant opportunities available to the business, both in our current markets and in adjacent markets. Our customers in utilities and airport face many challenges. Helping solve those challenges represent real opportunities for your company. Our CEO, Gary Miles, and the team are evaluating the strategies needed to return Gentrack to its position as a global technology leader. The results for the year show an underlying EBITDA of $12.1 million, down 51% on financial year '19, of the back of lower financial '20 revenues coming in at $100.5 million, a 10% decrease on financial year '19. Despite the decline, our annual and recurring committed monthly recurring revenues for the year have increased by 4.9% and 18%, respectively, reflecting new utilities business in Australia and the U.K. The net growth in meter points for existing customers in those regions. It also reflects new airport business won in the year in Australia, North America and Europe. We are pleased to report a $12.2 million increase in net cash at 30th of September, 2020, over the same date last year, marking a really strong year in cash generation. Costs were down by $3.2 million in the second half over half 1 '20, reflecting the impact of the cost-out program that was begun in March 2020 as well as COVID-19-related cost reductions across the business and other savings measures. The group recorded a statutory NPAT loss of $31.7 million for the full year, including an impairment charge of $34.5 million, primarily related to goodwill impairments in both the Blip and the utilities business, reflecting the uncertainty in the current outlook. In the light of the NPAT loss, the Board took the difficult decision not to pay a final dividend. As stated at the half year, COVID-19 had no operational impact on the business in half 1. The full year results, however, were impacted by global economic events with some delays in utilities projects and more significant delays in airport programs. We're continuing to work closely with our customers to understand their challenges and support initiatives to assist the COVID recovery and ongoing hardship program. The utilities business achieved a 4.3% increase in annual recurring revenue in financial year '20, with overall revenue of $81.8 million for the year, declining by 7.3%. This was due to the completion of prior projects and some customer losses, driven by supplier insolvencies, consolidations and competitive activity, particularly in the U.K. In Australia, we have seen key billing and customer management projects started in the year and successfully put live, contributing to our increased annual recurring revenue, but also to a subsequent decline in nonrecurring revenues. Veovo recorded revenues of $18.8 million, down 20% on financial year '19, capping off a tough year for the airports industry globally, with revenue from many airports being reduced by over 80% as COVID-19 travel restrictions were implemented. Airport operation systems remain an essential service to the aviation industry, which has enabled Veovo to remain profitable in the year. Pleasingly, our Veovo team completed numerous projects throughout the year in Europe, North America and Australia. I would like to thank all our customers, shareholders and employees for their ongoing support and continued commitment to the Gentrack business. Your support and passion for Gentrack and the future of the sectors we serve will enable us to create sustained value for the future. I recognize the very disappointing shareholder returns over the last few years. Your Board is committed to renewing the company and setting it on a course to sustainably serve the needs of all its stakeholders. We believe there is a strong opportunity to return to consistent profitable growth and significantly improve returns to shareholders. Great. Well, I'm now delighted to introduce our new CEO, Gary Miles. Gary has an outstanding track record, and we're delighted to have him join us. Now we'll move to the CEO's address from Gary Miles. Again, that's a prerecorded video.

My name is Gary Miles. I'm the Chief Executive of Gentrack. I would like to welcome you all to our Shareholders Day, and thank you for your continued support. Today, there is a clear and compelling job to be done. The world has woken up to the fact that energy and water must be cherished. Great technology companies will play a leading role in solving this challenge. It is my belief and aspiration that Gentrack will be one of these companies. This is a journey about clean tech and a story about growth. We are going to help transform this industry, and we're going to grow and be one of the leaders in this space. So if growth and cleantech are compelling for you, then you're in the right virtual room, and I would like to once again thank you for your support and being with us on this journey. So what tools do we have to launch ourselves effectively against this challenge? First of all, we have great customers in some of the world's most dynamic utility markets. Our customers support consumers and they support industry. We -- some of our customers are challenger brands that come into a deregulated market and start to take consumers and corporate customers away from the incumbents by high automation, great customer experience and cleantech. We also support some of the major incumbents that need to transform into the cleantech era, into the cloud to be more agile and to do this at scale. This makes us, in many dimensions, a multi-play provider. This is far from trivial. We do this well. The second major tool that we have to launch on this journey is we have approximately 500 executives that know this industry very, very deeply. The collective know-how cannot be underestimated. So how do you harness this great customer base and the dynamic markets and this collective know-how to grow. So first of all, it's about having a very high-functioning management team. I will start by talking -- introducing my own background to you. So my last role, I was on the leadership team of a $4 billion revenue public business that supplied customer information system, similar to those of Gentrack, to the telecommunications industry, a company called Amdocs, the clear market leader in telecommunications worldwide. At Amdocs, I served the role of Chief Marketing Officer, Chief Technical Officer. I ran several lines of business and several hundred million dollar book of business. Prior to that, I founded and ran 2 technology companies, also in the B2B space. I've been on this journey. I understand what needs to be done to succeed and lead, and I look forward to doing it here at Gentrack. The most important aspect of success is the leadership team, and I pride myself on attracting and motivating a high-performance leadership team. I would like to talk to you about this team now. James Williamson runs our Veovo airport business. James is a seasoned executive from the airlines industry. He runs a tight ship, and he knows how to service customers well. The business is taking a bit of a setback with the pandemic, we know this, the industry knows this. We are committed, James and myself and the Board and the rest of his team, to come out of this pandemic even stronger than the competitors. If you look at the core utility business, I have Allan, Paul and Mark, who are the general managers who lead the customer success, profitability, co-innovation and business. This is not a sales function. It's a general management function. We have a matrix organization, where Melina is our Chief People Officer and the culture that we aspire to and the reskilling and talent acquisition that we do. Lacey, who is running our strategy. James Spence, who is an executive. He's a public company's CFO. He's also been the CFO of energy suppliers. He knows this industry inside and out, very transparent and capable. We have Loukas Tzitzis, who has recently joined us as our CTO. I asked Loukas to join us because he knows how to leverage the cloud, modern tooling, AI. He can develop in a cross-jurisdictional environment, and he moves very fast, and he's done this 4 times before. And then we have Zeev Berkowitz, who is our Chief Operating Officer. And there are a handful of people on the planet with as much experience as Zeev in major enterprise transformations and industry transformations. I'm super excited about the team. We're working well together, and we're moving fast. We are mostly moving fast around some of the turnaround elements to increase throughput and customer care and focus. We are accelerating our investment in technology. Today, the best product wins. So we're a technology-first company, and we're accelerating this and our people journey. How do you attract, reskill and motivate the best talent in the industry. So I would like to reiterate in closing, this turnaround is underway. It's happening very fast. It will take time. That's what happens when you have a large customer base and you're doing many new things with new technologies. There are also some supplier failures in the U.K. This has been a trend in the past few years and it will probably continue, which provides us a headwind to growth. We have a very strong Board, many of which you're meeting today. They are supportive of the business and what we're achieving and helpful in our strategy and execution of it. We have an excellent management team. We are committed to being open, credible, dependable and transparent with all of our stakeholders. We have large aspirations, and we're excited about the opportunity. We will share more about how we're going to execute against our strategy with the Strategy Day in calendar quarter 2. So we look forward to seeing you there, I hope. Once again, I'd like to welcome you on this journey. Thank you for your support. It's going to be exciting, and we look forward to seeing more of you. Thanks.

Thank you, Gary. Ladies and gentlemen, we now come to the formal part of the business, matters requiring resolution, which are all outlined in the notice of meeting. You may ask questions on each matter being put to shareholders through the virtual meeting website. Now moving on to the resolutions. I propose to call a poll on each of these resolutions. As I mentioned, shareholders will be able to cast their vote using an electronic voting card provided on the website when you registered. To vote, you will need to click Get Voting Card within the online meeting platform. We ask to enter your shareholder or proxy number to validate. Please then mark your voting card in the way you wish to vote by clicking for, against or abstain on the voting card. Once you have made your selection, please click Submit Vote on the bottom of the card to lodge your vote. Please refer to the virtual meeting online portal guide or use the helpline on 0800-200-220 if you're in New Zealand or +64 99-67-7751 if you're outside New Zealand if you require assistance. Voting will remain open until 5 minutes after the conclusion of the meeting. Results of the vote will be announced by the stock exchanges. Each resolution set out in the notice of the meeting is to be considered as an ordinary resolution. And as such, must be approved by a simple majority of the votes cast by shareholders entitled to vote and voting on the resolution. The outcome of proxy votes will be displayed for your information after voting on each of the resolutions. Let's move to Resolution 1. Resolution 1 concerns the appointment of Ernst & Young as auditors of Gentrack and auditor remuneration. The Companies Act 1993 requires Gentrack to appoint an auditor and provide the fees and expenses of an auditor appointed at an annual meeting can be fixed in the manner determined at that meeting. Details of the proposed resolution are outlined in the notice of meeting. The Board unanimously supports this change. I now propose that the Board is authorized to appoint Ernst & Young as auditors and fix the auditors' remuneration. Are there any questions for the Board concerning the motion from shareholders in attendance online?

We have 1 question on this resolution, Andy.

Okay. We have a question. Thank you.

The question is from Bruce Parks of the New Zealand Shareholders' Association, and it's as follows. KPMG's fees for audit and other work are a significant item. Has the Board considered putting audit services out to tender? If not, will it look to do so?

Yes. We did put the audit out to tender, Mr. Parks. And we replaced KPMG with Ernst & Young based on both the quality of their proposal and on the fee proposal that they put forward. Are there any more questions?

There are no more questions on this resolution.

Okay. Well, in that place, we'll move on to voting. Could you now please select for, against or abstain for Resolution 1 on the voting card? [Voting]

Okay. The outcome of the proxy votes are now available on the screen. Moving on to the Resolution 2. Resolution 2 concerns the directors' remuneration pool. NZX Listing Rule 2.11.1 provides that no remuneration must be -- may be paid to a director in his or her capacity as a director unless approved by an ordinary resolution of shareholders. Gentrack's current director remuneration pool was approved by shareholders in 2017 and the maximum fees payable to the directors have not been increased since then. The Board proposes to increase the maximum fees payable from NZD 450,000 to NZD 800,000 per annum and unanimously supports this change. Further details are outlined under the notice of annual meeting. I now propose that for the purposes of NZX Listing Rule 2.11.1, the aggregate maximum remuneration that may be paid to the directors of Gentrack Group Limited per annum is increased from NZD 450,000 to NZD 800,000. Are there questions for the Board concerning the motion from shareholders online?

Yes, Andy. We have questions on this resolution. The first question is from Bruce Parks. It's as follows. The Chair's proposed fee is completely out of kilter to that recommended by the Institute of Directors. The Chair's role is to manage the Board effectively and to provide leadership to the Board and to facilitate the Board's interface with the CEO. So it's a quote from the annual report. We are told in the report that Mr. Green brings transformation and technology leadership. Does the proposed increase for the Chair indicate he envisages an executive component to his role?

Thank you for that. No, there is no suggestion that I will be anything other than a Nonexecutive Director. This issue arises because the Board set out to search for a Chairman with real experience in the markets and technologies to support the strategy development process and support the development of a strong Board to help with the renewal of the company. The search was conducted very widely and a number of candidates came forward, all of which had similar salary expectation. That is driven mainly by the difference in salary expectations that you see in the U.K. versus New Zealand. I recognize this is a very difficult issue for shareholders. But I'm sure it is the right thing to renew the Board and to ensure that we have a strong Board with a strong executive leadership team to drive the company forward.

Andy, we have another question here on this resolution. It's from Bruce Parks. The question is, if an additional Nonexecutive Director is appointed, is the intention for this person to be New Zealand based?

No. I think that's unlikely. I think we have 2 New Zealand-based directors who are very competent and understand the market well. I think if we were to recruit another executive, it would -- another Nonexecutive Director, it would be because we wanted somebody who had contacts and experience in the market that we were growing into, such as Asia, but we have no plans to do that at this stage.

Andy, there are no more questions.

Are there any further questions? No further questions. Okay. Well, thank you. Please now select either for, against or abstain for Resolution 2 on the voting card. [Voting]

The outcome of the proxy votes are now available on the screen. Resolution 3 concerns the issue of transfer of equity securities as part of Nonexecutive Director remuneration. The current remuneration pool can only be paid to directors in cash. NZX Listing Rule 2.11.2 provides that a resolution authorizing director remuneration for the purposes of NZX Listing Rule 2.11.1 may provide that the remuneration may be paid in whole or in part through an issue of equity securities, provided the issue complies with NZX Listing Rule 4.7. Consistent with this requirement, Resolution 3 seeks shareholder approval to allow Gentrack to remunerate Directors in whole or in part through the issue or transfer of Gentrack equity securities in lieu of cash at the discretion of the Board. Further details relating to this resolution are outlined under the notice of meeting. The Board unanimously supports this change. Are there any questions for the Board concerning the motion from shareholders in attendance online?

There are no questions regarding this resolution.

Thank you, [ John ]. Thank you. Please now select either for, against or abstain for Resolution 3 on the voting card. [Voting]

The outcome of the proxy votes are now available on screen. Resolution 4 concerns the election of Gary Miles as Managing Director. Gary was appointed by the Board as Managing Director in October 2020 following extensive global executive search. As he was appointed by the Board, it's a requirement that Gary's appointment be considered by shareholders at the Annual General Meeting. With over 25 years of experience in leading and running B2B software and services companies, he brings added focus to the business on Gentrack's role in transforming energy and water markets with its technologies and expertise. Gary has already addressed the meeting in his CEO's address and talked about his role at Gentrack and his experience. Therefore, Gary will not be addressing the meeting separately on his proposed election. As Gary is a Gentrack employee, the Board has determined that Gary does not qualify as an Independent Director for the purposes of the NZX Listing Rules. The Board unanimously supports the election of Gary as a Director. I now propose that Gary Miles appointed by the Board as Managing Director on the 1st of October, 2020, be elected as a Director of Gentrack Group Limited. Are there any questions for the Board concerning the motion from shareholders in attendance online?

There are no questions on this resolution.

Thank you, [ John. ] Please now select either for, against or abstain for Resolution 4 on the voting card. [Voting]

The outcome of the proxy votes will shortly be available on the screen. Resolution 5 is around the issue of performance rights to the Managing Director. Gentrack operates a senior management long-term incentive scheme under which each participating employee is offered performance rights, with each performance right representing a right to receive 1 ordinary share in Gentrack when it is exercised. In securing Gary's appointment, the Board has engaged a high-caliber leader who has the experience and energy to drive the transformation of the Gentrack business. Gary's remuneration package reflects that caliber with these performance rights being a key component of it. The key terms of Gary's issue of performance rights are set out under the notice of meeting. The Board, with Gary Miles abstaining, unanimously supports the issue of these performance rights to Gary and recommends that shareholders vote in favor of this resolution. I now propose that for the purpose of NZX Listing Rule 4.2.1, performance rights be issued to Gary Miles, Managing Director, on the terms and conditions set out in the notice of meeting. Are there any questions for the Board concerning the motion from shareholders in attendance online?

Yes. We have a question from Bruce Parks of the New Zealand Shareholders' Association, as follows. I suggest that this resolution is misnamed. There is, thus far, no performance, and we are being asked to approve a golden handshake. Should Mr. Miles turn this company around, shareholders will be content to see him rewarded.

That's a statement, not a question, but I will respond. I think it's very important to understand that Gary Miles had a very successful career. He was very well regarded by his previous employer. He had a very high expectation of continuing rewards under the schemes that he was engaged in. In order to attract him into the Gentrack position, it was important for the Board at the time to put together a package which ensured that he could move without feeling he was likely to lose out over the short term when he has to undertake the turnaround of the business and need some room to move before he can start delivering the performance that both Bruce and I hope and believe that Gary will deliver. Are there any other questions?

There are no more questions, Andy.

Thank you. Please could I now ask you to select either for, against or abstain for Resolution 5 on the voting card. [Voting]

The outcome of the proxy votes will shortly be available on screen. Resolution 6 concerns approval of an extension on a one-off basis by up to 1,500,000 equity securities of the 3% limit of equity securities that may be issued by the company in a 12-month period without further shareholder approval. The reason for this is there are a number of exceptional events this year. The first is the establishment of the Gentrack long-term incentive scheme. We consider it extremely important that our executive team are remunerated on the basis of the long-term performance of our shares. Second is the issue of performance rights within a relatively short time frame under the senior management LTI scheme to secure senior managers, not just Gary, but other senior managers, critical to the future set of Gentrack. Gary has laid out some of those individuals in his piece. And thirdly, we want to make sure there is room to issue shares rather than cash as part of the settlement to eligible employees for any award under the financial year '21 short-term incentive scheme in order to preserve cash for R&D. This means that we would need an one-off increase in the limit of 1.5 million equity securities to do those things. Further details of the resolution are outlined under the notice of meeting. So I now propose approval of an extension on a one-off basis by up to 1.5 million equity securities of the 3% limit of equity securities that may be issued by the company in a 12-month period without further shareholder approval. Are there any questions for the Board concerning the motion from the shareholders in attendance online?

There are no questions on this matter from shareholders.

Thank you, [ John. ] Thank you. Please now select either for, against or abstain for Resolution 6 on the voting card. [Voting]

The outcome of proxy votes will shortly be available on screen. Now move on to Resolution 7. Resolution 7 concerns the election of Stewart Sherriff to the Gentrack Group Board. Stewart Sherriff was appointed by the Board as a Nonexecutive Director on the 5th of October 2020 following the resignation of Leigh Warren. As he was appointed by the Board, it is a requirement that Stewart's appointment be considered by shareholders at the Annual Meeting. Stewart's credentials are set out in the notice of meeting. I now invite Stewart to address the meeting on his proposed election by his prerecorded video.