IPH Limited (IPH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IPH Limited FY '22 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Dr. Andrew Blattman, Chief Executive Officer. Please go ahead.

Thanks, Sari. Good morning, and welcome to the IPH results presentation for the year ended 30 June 2022. My name is Andrew Blattman, I'm the CEO of IPH. And with me today, as always, is John Wadley, our CFO. And thank you for, of course, joining us for today's presentation and as always, your continuing interest in IPH. You will have seen we launched a number of announcements with the ASX this morning. And in addition to our FY '22 results, today, we've also announced Canada's leading IP agency firm, Smart & Biggar, will be joining the IPH Group. So it's a big day for us. It's exciting and a transformational day in the 8 years -- almost 8 years of IPH's history. And together with Smart & Biggar, we've expanded the IPH network beyond Asia Pacific for the first time into another significant secondary IP market. This provides an excellent platform for IPH to participate in further growth opportunities. And we'll talk more about this in the course of this call. So moving to Slide 3, in terms of the contents. I guess, we'll have 2 components for our presentation today. Firstly, I'll speak to the FY '22 results. I'll provide an overview of the operational highlights for the year. And John will discuss the financial results in more detail. We'll then present the details of the acquisition of Smart & Biggar. John will then discuss the financial aspects of this transaction. I'll conclude with a summary of our priorities for FY '23. As I said, we've included the full presentation to both our FY '22 results and Smart & Biggar joining IPH on the ASX and on our website. Given time constraints, we will refer to some of these slides on today's call, but you can, of course, reference those presentations for full details. So moving to Slide 4 and 5 to highlights. So let's step through some of the highlights for our FY '22 results. We delivered a strong result in FY '22. Once again, this demonstrates the power of the IPH network, which delivers ongoing organic growth in Asia. Meanwhile, we continue to deliver synergy benefits from the integrations we've undertaken in Australia and New Zealand. On an underlying basis, we reported a significant increase in earnings with underlying EBITDA up by 11% to $137.4 million. Underlying NPAT was up 14% to $86.7 million. This has come from solid organic growth and cost synergies captured from integrations but also assisted by currency benefit in FY '22, compared to a foreign exchange loss in the prior year. We continue to harness our network, which has again resulted in increased case referrals into our Asian hubs, up 4.5% for the year. We experienced continued momentum in patent filings across our Asian network outside of Singapore with our filings up 9% across key Asian jurisdictions. China again stand out, patent filing growth of 15%. Our robust financial position and ongoing excellent cash flow generation has enabled a 3% increase in the full year dividend to $0.305 per share, 50% franked. So in summary, very pleasing FY '22 results. Not just the numbers, but also in the progress we're continuing to make to strengthen the network, which is enhancing our client and employee offering, and generating increased returns to shareholders. That strategy has been further delivered with today's announcement that Smart & Biggar will be joining IPH. And as I say, we'll talk about this in a few minutes. Closer to home, we continue to leverage our domestic offering with the successful integration of Spruson & Ferguson Australia with Shelston IP. This integration is delivering synergies as planned and the combined firm to strengthen its position as the largest IP firm in Australia. As we always say, our people are central to our success, and we made a record number of principal promotions in FY '22, including a 50% increase in female principal promotions compared to FY '21, a particularly pleasing result. So in summary, I'm very pleased with our progress. It's been a good year and capped off wonderfully well with this announcement this morning. So very strong financial results, good progress on our strategy and a transformational transaction as we take IPH to the next stage of its evolution. I'll hand over to John, and he will step us through the financial details in...

Thank you, Andrew, and good morning, everyone. I'm referring to Slide 7, the financial overview. And just to reiterate the strong results of an 11% increase in our underlying EBITDA for FY '22, which reflects the continued organic growth of our Asian business as well as an improved EBITDA contribution from the Australian businesses as a result of business integrations. As we have called out on the slides and also as we pointed out at the interim results in February, the FY '22 results should also be reviewed with an understanding of the foreign exchange impacts. The average AUD-USD for FY '22 averaged $0.726 versus $0.747 in the prior year, and this effect was more pronounced in the second half. As we have previously advised, a $0.01 weakening in the U.S. dollar equates to a $1.9 reduction in our service charge revenue. As also indicated in February, our results include FX gains recorded in our P&L, i.e., that is derived from the revaluation of U.S.-denominated cash and receivables as well as by banking receipts at a more favorable rate than booked. For FY '22, this was a $5.9 million gain compared to $200,000 loss in the prior year. You will notice that the statutory results in FY '22 includes a number of one-off items. I'll address these in a subsequent slide. Underlying NPAT has grown by 14% with underlying diluted earnings per share up by 12% to $0.395 per share. Our ongoing strong financial position and continued cash generation has enabled a further increase in the final dividend, which was up 3% to $0.16 per share and 50% franked. Taking a look at Slide 8 in our like-for-like revenue and EBITDA. The like-for-like basis eliminates the impact of acquisitions and more importantly, for this year, the foreign exchange impacts I discussed earlier. Once again, Asia was the standout for the group with double-digit increase in like-for-like revenue and EBITDA as a result of filing growth and continued increase in client referrals. There's a slight [ decline ] in like-for-like revenue in the ANZ business. We called out previously some short-term disruption from the integration of Spruson & Ferguson and Shelston IP, which was announced in September 2021. Revenue was also impacted by significantly reduced filings by the largest filer in the Australian market, which impacted IPH Group's total patent filings in FY '22. The prior year's results in ANZ also included revenue and earnings related to a significant litigation matter, which was not repeated in FY '22. Revenue of this type is of a different nature to the annuity style revenue from our patent and trademark [indiscernible]. Despite the decline in revenue, like-for-like EBITDA has shown growth as a result of integration-related cost reduction. Group-wide revenue increased by 2% and EBITDA grew by 2% on a like-for-like basis. Increase in corporate costs reflects the consolidation of various business support functions into the corporate office in FY '22 and a foreign exchange loss of $0.48 million compared to the gain of $1.9 million in FY '21. Let me look at Slide 10 and our underlying results. Slide 10 shows the calculation of the underlying result, which is on a consistent basis with prior periods and reconciled these to reported statutory FY '22 results. As I mentioned earlier, there were a number of adjustments to the statutory results in FY '22. The others which represent a significant difference from the prior year include costs related to business acquisitions of $3.7 million, primarily Smart & Biggar transaction. I mentioned the integration of Spruson & Ferguson Australia and Shelston IP, which is resulting in earnings accretion from synergies. The associated one-off costs associated with this integration includes a noncash write-down of the intangible value of the Shelston IP brand of $4.6 million. The write-down in office fitout and exit of the lease related to Shelston IP of $2.4 million and restructuring costs of $1.4 million. We also announced the sale of WiseTime or Practice Insight earlier this year, which will result in a profit uplift from FY '23. Costs included $2.2 million for the impairment of the carrying value of the WiseTime asset and related sales costs. IT SaaS implementation costs. These are previously capitalized but now expensed under the change in accounting standards interpretation for $1.9 million. Finally, accounting charges for the share-based payments of staff incentive plans are $4.9 million. As we have detailed in the results presentation released to the ASX in first slide in this presentation, consistent with market practice, we will no longer include share-based payments as a nonunderlying expense but include it in underlying EBITDA from FY '23. Amortization of acquired intangibles has marginally increased to $22.8 million as a result of the finalization of accounting for prior acquisitions. The underlying effective tax rate was 26.7%, reflecting greater proportion of results recognized in lower tax jurisdictions. Moving on to the cash flow statement. In the cash flow statement, cash conversion remains strong at 100%. Strong cash flows resulted in a reduction in leverage to 0.3x net debt-to-EBITDA, which also continues to support a higher dividend payout, which is reflected in the payout ratio of the full year dividend of 87% of cash NPAT. Of course, the strong financial position has enabled the group to fund the strategic Smart & Biggar transaction, primarily through debt facilities and cash reserves, which I will discuss shortly. As I'll also detail shortly, post the Smart & Biggar transaction, our leverage ratio will be below 2x. On the next slide, we talk about share-based payments. As mentioned, these share-based payments expense will be included in underlying EBITDA from FY '23 onwards, reflecting market practice. I'll remind you that the group operates 2 plans, an executive LTIP based upon a 3-year EPS compound annual growth rate as well as one for the IP practitioners, whereby half of their annual STIP is paid in shares, which are then locked for further 2 years. I'll now hand back to Andrew to discuss that acquisition in detail.

Good morning, John, and thanks very much for that. I'll now move on to the second part of today's presentation, starting from, I think, Slide 13. As I've indicated earlier, we're pretty excited about this whole transaction. We're excited to announce what I think is and others, Canada's leading IP agency firm, Smart & Biggar joining the IPH Group. For those of you who have been following IPH for a while, you'll appreciate that our strategy has been clear and consistent from the time we first listed almost 8 years ago. And that is to be the leading IP services group in IP secondary markets. And today's announcement is very much consistent with that strategy. It's a significant acquisition for IPH. It's our biggest since listing and one which expands our presence beyond the Asia Pacific for the first time. Smart & Biggar is highly complementary to IPH. They have a leading market position in Canada, #1 patent filer, high-quality professionals, an exceptional reputation and a rich heritage, this is a 130-year-old firm. They will become the first IP agency firm in Canada to join a public and listed IP group. The Canadian IP market is very similar to Australia in terms of its size, governance and its legal system. Indeed, Smart & Biggar is very similar to current IPH member firms, which again highlights the complementary management and transaction. We believe this will be a very positive outcome for all our stakeholders, including our clients, people and our shareholders. The transaction is expected to be underlying EPS accretive at approximately 10% in the first full year of ownership. And it gives us a strong platform to participate in further growth opportunities in Canada. Briefly, we expect the transaction to complete late next month. Slide 14, transactional summary. As I just said, this is a compelling opportunity for all of our stakeholders. Let's dig a little bit deeper into Smart & Biggar. They are Canada's leading IP firm by number of patent filings, filing over 6,200 applications a year, over 1,800 trademarks in 2021. They're a full-service IP firm servicing large multinational corporations, universities, start-up companies and Canadian entrepreneurs. Their revenue for the 12 months to 30 June 2022 was CAD 88.4 million, which is AUD 96.3 million. I'll just draw your attention to the note on this slide. The way Canada records revenues on a different basis to IPH. And therefore, it's not a completely direct comparison. Slide 15, realizing our vision. As I said earlier, we've been clear and consistent about our strategy, and we've lived it for the last 8 years. It continues to be the leading IP services group in secondary IP markets. And today accelerates our plan to realize this vision. IPH is now truly one of the largest IP services groups in secondary IP markets. And our presence has been expanded to be in Asia Pacific to include the North American aspect of Canada. We are the #1 patent filer in Australia, New Zealand, Singapore and now Canada. We are the #1 filer of trademarks in Australia and New Zealand. Combined with Smart & Biggar, we will have more than 1,200 employees and operate in 9 jurisdictions. As you can tell, I'm very excited about the future. And as I like to say, we're only just warming up. I'll now hand over to John to discuss the financial details of the transaction.

I'll spend the next few slides starting on Slide 16, providing some of the transactional funding and key metrics. The consideration for the transaction is CAD 348 million or AUD 387 million. That represents a multiple of approximately 10x pro forma adjusted Smart & Biggar EBITDA for the 12 months to June 2022. Pro forma adjusted EBITDA is calculated or is adjusted for partner salaries and an estimate for leases captured under IFRS 16. The consideration comprises an upfront cash consideration of CAD 241 million, an initial issue of 5.3 million new IPH shares to the value of CAD 41 million escrowed for 2 years. This represents 2.4% of existing shares on issue and a deferred issue of new IPH shares up to a value of CAD 66 million further escrowed for 2 years. Deferred earn-out consideration is payable depending on Smart & Biggar's earnings in calendar year 2022 or calendar year 2023, outperforming agreed thresholds, broadly in line with its pre COVID earnings levels. The earn-out will be payable at an amount of 11x the excess earnings up to the cap of CAD 66 million. Additionally, there's a potential for further share-based payment of CAD 2.4 million to certain nonvendors contingent upon the same conditions as the earn-out, including continued employment. Let me look at Slide 17, financial impact and funding. First of all I'll highlight is the accretive nature of the transaction. It's expected to deliver underlying EPS accretion, approximately 10% in our first full year of ownership. As we have demonstrated with other transactions we have completed, we should generate cost efficiencies. We expect to deliver cost savings of approximately CAD 4 million to CAD 6 million over the first 3 years. As we have also demonstrated previously, these transactions also provide IPH with a platform to pursue growth options and that includes further potential consolidation opportunity. Transaction consideration will be funded by our debt facilities, cash reserves and issuing new IPH shares to the vendors. We have agreed to amended debt facilities with our existing bank finances as part of the transaction. Our total debt drawn post transaction will be approximately $390 million. Following the transaction, IPH's pro forma group leverage ratio will be 1.8x. At completion of the transaction, we intend to enter into interest rate hedging for the equivalent of AUD 350 million of our drawn debt with varying maturity profiles. As a result of the higher level of facilities and the uncertainty in debt markets, we think this measure is prudent and this will provide greater certainty of our interest rate expense in the near term. As I mentioned earlier, we will issue 5.3 million new IPH shares, about 2% -- 2.4% of our existing shares on issue to the vendor. These will be escrowed for 2 years. Additional new IPH shares are expected to be issued in the first quarter of calendar 2023 or first quarter of calendar 2024 if the earn-out consideration is achieved. These will also be escrowed for 2 years. Looking at Smart & Biggar financial performance on Slide 17 (sic) [ Slide 18 ]. Table on the left provides a summary of Smart & Biggar's financials for the 12 months to 30 June 2022. On this table, we've shown adjustment for partner salaries and also an add back of lease costs, which is in line with IFRS 16. That gives us an adjusted EBITDA of CAD 34.4 million for the 12 months to 30 June 2022, which is consistent with the 10x multiple I mentioned earlier. I'd also note that Smart & Biggar has a larger proportion of IP legal revenue than IPH, which can be subject to greater variability. Finally, I would like to make the point that Canadian IP services market experienced similar growth to Australia and is a mature IP market. I'll now hand back to Andrew.

Thanks, John. I'm moving to Slide 19 in terms of vendor alignment issues. Let's make some early comments about the integration of Smart & Biggar into IPH. As you will recall, IPH has a long and we think a successful track record of acquiring, integrating businesses into the group. And in doing so, generating earnings accretion. Smart & Biggar's leadership team has an outstanding international reputation, and they are well known to us. We will appoint one of their senior people to the IPH Group leadership team, recognizing, of course, the scale of their business. One of the benefits we have found in the last few years of being a public listed group is how we can reward staff with equity ownership opportunities to align performance with shareholders. This is something that's simply not easily achievable through private firm structure. As part of that, Smart & Biggar's eligible principal and professional staff will join the IPH group incentive plan providing opportunities for IPH equity ownership and alignment of all of the Smart & Biggar's professional staff on an ongoing basis. We will, of course, leverage our existing international network to expand the offering available to Smart & Biggar's clients. We will have clear alignment with Smart & Biggar's vendors. Vendor partners may be entitled to earn-out consideration payable to the extent Smart & Biggar's adjusted earnings for calendar year '22 and calendar year '23 outperform agreed thresholds broadly in line of its pre COVID-19 earnings in calendar year 2019. Partners will receive IPH shares as part of the upfront and potential earn-out consideration and these will be escrowed for 2 years. Smart & Biggar vendor equity partners will generally enter into full year minimum term employment agreements as part of this transaction. So final slide, summary and priorities for FY '23. Let me conclude some final comments. IPH is now one of the largest IP services group in secondary IP markets with an expanded international platform. We will consolidate and grow our position in core geographies, including Australia, New Zealand, Asia, and of course, now Canada. We will continue our investment in business development initiatives to support our member firms to achieve growth targets. The acquisition of Applied Marks last July has enabled us to build our digital services function, and we look to harnessing this expertise to generate growth and efficiencies through our teams and clients in each of the regions we operate. The future landscape of IP is changing, and we are investing ahead of the curve by ensuring we have the digital expertise and capability to respond to these challenges. Our balance sheet remains strong. We'll continue to assess growth opportunities in adjacent areas of IP to complement the core IP services. And of course, we will continue to operate in a disciplined manner with a focus on generating further shareholder value. In closing, I would like to acknowledge the support of the IPH board over the last few years of this transaction, including our past Chairman, Richard Grellman, and most importantly, the hard work and contribution of all our people across the group. We look forward to welcoming the staff of Smart & Biggar to the IPH network when the transaction completes. We see significant opportunities ahead with them as part of this team. Many thanks to all of you, for your continued interest and support. And Sari, over to you for questions, and John and I are happy to take a few questions in the context of this call.

[Operator Instructions] Your first question comes from Marni Lysaght from Macquarie Capital.

I've just -- I do have a lot of questions. I might try and amalgamate them into one given the guidance. I'm just kind of interested to understand, I guess, just from we're thinking about this business, any seasonality? And kind of what did pre COVID look like? And how do you get to the pre COVID levels? Could you talk through the impacts of COVID and even potentially the recent inflationary pressures on the business -- in the economy on the business?

Sure, I can talk to that. In terms of the agency part of their business, I think their seasonality reflects pretty much ours and it's generally even spread across the year, perhaps a little tiny bias to the second half as a result of those North American summer holidays in July and August, as we've experienced here. Where probably there's a little bit of difference in -- perhaps seasonality is the wrong word, I did describe in the presentation, is the variability of their legal revenues. So as opposed to the rest of the IPH Group, where legal revenue might be circa 3% to 5%, Smart & Biggar business is approximately 30% of their business. So they do get a little bit more variability in that revenue stream.

Can I just add to this? From my perspective, this is a business that we're familiar with in the context. It's similar to the ones already in the group. It's an agency business with legal over the top. But the agency practice, its whole nature is recurring and that's the beauty of it. So -- and legal revenue that John talks about, what gives us the great confidence that is that the bulk of it comes through the agency practice in terms of the introduction to litigation-type clients. It comes through as part of the agency practice turning into litigation opportunity. So it's a style of business we're familiar with, albeit one a little bit more legal revenue.

That's understood. And just around the -- I guess, when we're looking at the earn-out or the deferred consideration, just around those pre COVID levels and the hurdles there.

Yes. I think we're -- I think we're all relatively comfortable that those can be achieved. They were a steady business as we are here. It is a mature market. Not a significant decline throughout the COVID period, as we saw in the IPH Group and like us, they're kind of coming out of that period.

Your next question comes from Michael Peet from Goldman Sachs.

Andrew, John, congratulations on the results and the transaction. Just a question around the sort of short and long term for this business. Just firstly, on the client mix, how much crossover is there with your clients in Australia and Singapore? And is there a benefit there maybe for clients that you don't file for in those other regions picking up that business when I'm thinking about the sort of IPH branding opportunity you're looking at? And then sort of looking down the track, would we expect further acquisitions in Canada if we're thinking about a 3-year time mark horizon?

Mike, thanks for the question. And look, I guess, Smart & Biggar is the #1 agency practice in Canada at 16% or so of the market. There will be, of course, some crossover in client base from the IPH Group. But there's enough opportunity there for us to, we think, deliver a team more into the network. And that's certainly the plan. Certainly, in the context of the domestic clients in Canada, the Smart & Biggar Group [ had 4 ], we'd love to introduce them into the network of IPH and certainly into Australia, New Zealand and Asia. We think that's a pretty good opportunity first up. So we'll be looking at that. That's all, of course, with the permission of the client. It's always how these things run. In terms of future acquisitions, who knows, Michael. Our experience is the first time is often the hardest and we've got away with that. And we're certainly open to talking to other firms, which we also know in this profession and have done professionally [indiscernible] for decades. But really, our focus in the immediate term is the successful integration and enjoying the benefits of business that I think the #1 player in Canada, we're lucky to have it, and we're looking forward to welcome them into the group. That's where our focus is initially.

Your next question comes from Scott Murdoch from Morgans.

Andrew, John, well done on the acquisition. Just a couple, if I can. Just a bit of clarity on the key person retention. Obviously, you've explained a bit there. But can I just clarify how many people and partners are involved in retention? And if that retention mechanism has anything past calendar year '23?

Yes. Thanks, Scott. There's -- I think there's about 28 managing partners in the -- that are equity vendor partners in the group. And generally, their employment contracts are 4 years. There's a few that may -- a couple may retire earlier given their age and stage. But really, we're wonderfully pleased to see they're agreeing the 4-year position showing their faith in the broader business, which is terrific. And of course, a transaction like this also gives opportunities to the next generation. And there's a few more partners that are coming into the business or principals as they are now coming into the business with a variety of retention positions. The other thing that we're doing a little bit different from the previous acquisitions we've done is bringing in the incentive plan immediately for all those professionals, principals and beyond. And that's a change for us and we like to align everyone as quickly as we can in a transaction of this nature. So that's -- I guess, that's a change. We're bringing incentive -- employee incentive plan of that principal group at transaction, which we haven't done before. We have -- as John indicated, it's a combination of cash and -- scripting the deal with more cash than we've done in the past, of course. And that scripts on a 2 year escrow too for those vendor partners. And -- but I'd say they are a majority of it, but there's a whole lot of new principals coming through that comes with these kind of opportunities and I've also got varying levels of retention agreements, let alone the employee incentive plan coming into those guys from day 1.

Okay. Andrew, if you can afford me a second question, otherwise, we're going to be going around circles here because there's a lot to get through.

Yes, we'll give you one, Scott. We'll give you another one.

Just on the performance of the business, I think John said that it's steady. Can I just confirm the 16% filings market share, has that declined or increased over the last 5 years? And also on the performance of the business, the IP legal revenue. John mentioned it was volatile. The number that you're presenting there, is that volatile on the high-end volatility or the low end of volatility?