Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening, everyone, and welcome to this special meeting of Gentrack Group Limited shareholders. My name is Andy Green, and I'm delighted to be attending this special meeting as the Chair of Gentrack Group Limited. I've got here, Gary Miles, the CEO, with me; and also John Prigent, our CFO, in our London office. As with our last Annual Shareholder Meeting, we have taken the decision to conduct a virtual-only meeting, and this is considered appropriate giving this meeting a special shareholder meeting to consider a single item of business. We're convening the special meeting to ensure the long-term incentive arrangements where our people are in place as close to the start of the financial '24 year as possible. Today, we are pleased to welcome you as online participants through our virtual meeting platform provided by our share registrar, Link Market Services. You can vote and ask questions online. To vote, you will need to click Get Voting Card within the online meeting platform. And 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 help line on 080-0200 2020, if you're in New Zealand or + 64-99-67-7751 if you're outside New Zealand and you require assistance. I'll provide you with a reminder of these instructions as we progress through the meeting. I'd encourage you to send your questions through 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. [Operator Instructions] Before we formally begin, as I say, I'm attending this meeting from Gentrack's London offices, but I'd like to introduce you to my fellow Board members. Fiona Oliver and Stuart Sheriff, who are attending from Auckland in New Zealand. Nick Luckcock and Gary, who is here; and Darc Rasmussen, who's attending from Africa. In addition, as I said, we have our Chief Financial Officer, John Priggen here. Also available on the call are Grant Taylor from our auditors, Ernst & Young; and gain Jablin from our solicitors [Bell Gully]. The company Secretary has confirmed to me that the notice of meeting has been sent to shareholders and other persons entitled to receive it. The company's constitution prescribes a quorum requirement of three shareholders having the right to vote at this meeting. This requirement has been met. On that basis, I'm pleased to formally declare the meeting open. Details of proxy voting are now available on the screen. I'd like to thank shareholders for their participation in today's meeting. My fellow directors and I, other than Gary Miles, in respect to the resolution due to his interest in that resolution intend to vote all discretionary proxies we have out in favour of the resolutions as set out in the notice of meeting. The order of the events for today's meeting will be as follows: I'll make a short introduction and address when I have a shareholder discussion and then we'll consider and vote on the ordinary resolution, and we'll do that by way of a poll. You'll 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. We'll now move to the first agenda item, my chair's introduction address. The purpose of today's special meeting is to agree a new long-term incentive scheme. We currently operate a senior management long-term incentive scheme under which each participating employee including our CEO, Gary Miles, is offered performance rights. With each performance right, representing a right to receive 1 ordinary share in Gentrack once the applicable vesting conditions have been satisfied. In 2021, shareholders approved the issues of three chances of performance rights to Gary and the final tranche was granted in October 2022. The Board is now proposing to issue further performance rights to Gary along with other members of the senior management team. And we have worked hard to align the terms for those awards with shareholders' interest. Firstly, by using both on earnings per share performance for hurdle and share price appreciation performance for hurdle as well as a continuing employment requirement, of course, and also by ensuring participants must retain at least 50% of shares that have been issued to them on vesting for a period of 12 months. The Gentrack share price would need to be -- need to increase significantly from the price when the meeting was called and to reach $10 for the share price appreciation hurdle to be satisfied for all of the performance rights. In order to provide participants in the proposed offer performance rights with confidence of what they will receive over the next 3 years, we have proposed that the performance rights for the financial years 30th of September '24, '25 and '26 are all awarded to the initial recipients selected by the Board in one tranche rather than on an annual basis. However, vesting of the performance rights will be measured annually in each of those financial years, according to the vesting conditions described in the notice of the meeting. There will be a cap on the number of performance rights that can vest on the first vesting date. For financial year after the year ending 30th September 2026, we intend to reissue a right scheme at the appropriate time as is usual practice to ensure continuity and talent retention. The Board's view is that the terms of the proposed Board of performance rights to the CEO and other members of the senior management team is there to drive exceptional business performance over the upcoming 3 financial years. We've removed any tenure only component of the scheme and the introduction of both a share price appreciation performance hurdle and an EPS performance hurdle, which both need to be met. Means vesting of all the performance rights is directly related to share price increases, aligning management reward with shareholder value, while at the same time, ensuring continuing commitment to the growth targets set by the Board and our current earnings guidance. On this basis, the Board recommends shareholders vote in favor of the resolution to approve the issue of the performance rights. So I'll now open the floor for shareholder discussion. You may ask questions through the virtual meeting website. Are there any questions from shareholders in attendance online.

So there are some questions from shareholders joining online. I'll go to the first question, and it's from John Ball. And the question is, I would need to know net profit for the year ending the 30th September 2023. The amount of increase or decrease from the end of the previous financial year and the amount of earnings per share.

John, I think you -- probably best place to answer that.

Certainly. So we're currently in the process of finalizing the accounts for the 2023 financial year. So the details of net profit and EPS are not yet available. Our guidance for 2023 which we provided back in May was that EBITDA would be around GBP 22 million. In the previous financial year, so the year ending the 30th September 2022, EBITDA was $8.1 million and net profit was a loss of $3.3 million. I'll move on to the second question. And this question has been received by Duncan Meller Johnson. If all performance rights were to vest, this would result in the issue of 9,437,000 shares, representing 9.28% of the current share capital of Gentrack. Assuming that a similar senior management incentive plan is implemented every 3 years. Has any compensation consultant or any other person calculated, how long it will take for more or less all shares of the business to end up in senior management's hands at the various hurdle rates?

Look, it's quite important to understand that you only get that level of dilution if the share price reaches $10. And that would be something that would mean that all shareholders were receiving a very good return over a 3-year period. And a normal more compound rate, you would -- this scheme is no more generous than the previous scheme that was in place. But because there is much more risk in it in the sense that no component, which is on tenure only, it also contains the opportunity for an upside. I don't think this is likely to be repeated. If it was, of course, we'll be talking about raising the share price up to $25 or something like that. And I think probably, again, something like that -- again, shareholders would find the alignment between their interests and this scheme attractive. But I think it's much more likely we've moved to some other type of scheme. This is a really important moment in Gentrack's history. It was in a really difficult situation when Gary and the team came in. They've done a really good job so far in turning it around and we're very keen to see them see the job out have this back as a seriously sized New Zealand company, and we think this scheme will allow that to happen.

So moving to the next question also from Duncan Johnson. Assuming no dividends, does the compounded retention of retained earnings automatically make the achievement of performance hurdles a lot less of a hurdle.

I don't think so. I don't think retained earnings affect the share price at all. I think what will affect the share price, if Gary and the team can turn this into a profitable business with good EBITDA margins that grow fast and has a prospect of continuing to grow fast. That's why share price generally has all those components in it, how profitable is the company, how fast has it been growing? And how fast do you believe it's going to be growing into the future. That's why we think this aligned so well at the interest of shareholders with the interest of management.

I have a question from Duncan Johnson. Have any members of the senior management team who will receive performance rights, never purchased any Gentrack shares with their own funds? If so, how many shares have they purchased?

Effectively so, I think, because I've taken money that they would do in previous employment and have those moved into Gentrack shares and a number of them also have paid the tax and kept all of the shares, paid the tax and cash, which is effectively that great, I don't know the numbers, but people have done those things.

We have a question in from Oliver [Amanda]. You've made much of the fact that Gentrack is effectively a U.K.-based company. If the plan vests in full, Gentrack's market capitalization in 2026 will be somewhere between GBP 0.5 billion to GBP 0.6 billion. The median FTSE 100 company has a market cap of around GBP 7.5 billion with the U.K. high pay center noting, median CEO pay of 3.4 million GBP in 2021, increasing to GBP 3.9 million in 2023. With LTI schemes worth 1.6 billion GBP, how do you reconcile that to the proposal, given that Gary will earn a similar level for a company around 7% of the size?

I think as we've talked this through with shareholders, it is all about exceptional shareholder value growth or not. I mean if we -- as I said, if we have shareholder value growth at around 15% or something like that over the period, then this scheme is no more interesting to employees and no more immune than the current one. Which benchmarks very well. If you -- if we do get to $10 as a share price, then I think shareholders will be extremely happy and management will do well out of it. I think when you look at averages, you're taking everybody who's not performing where those are performing. And I think if you look to those who were performing strongly and growing well, you would get completely different statistics in the way you do it.

Another question from Oliver Amanda. How aggressive do you believe the EPS hurdle is, given that it appears to be actually lower than the analyst consensus for forecast in 2026?

Look, I think the -- it's a challenging forecast. As you know, there's a lot of one-off revenue and one-off profitability in this year's numbers due to a number of insolvent U.K. customers. And I think these are challenging numbers. I would say also, as I said, for the share price to get to $10, then Gary and the team will have to deliver the profitability, deliver strong growth and show and have the market believing that strong growth is going to continue. And so it is a combination of the two hurdles together that I think that makes us a compelling plan for the executives to shoot for and a compelling and ambitious plan for shareholders.

Another question from Oliver, who's from the NZ Shareholder Association, I believe. Given that the current scheme has effectively expired, why has this been bought to shareholders so late?