IPH Limited (IPH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IPH Limited Fiscal Year '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Dr. Andrew Blattman, MD and CEO. Please go ahead.

Thanks, Andrea. Good morning, and welcome to the IPH results presentation for the year ended 30 June 2023. My name is Andrew Blattman, I'm the CEO of IPH. And with me today, again, is John Wadley, our group CFO. And thank you all for joining us for today's presentation and for your interest in IPH. Before commencing the formal presentation, I first want to acknowledge and thank all the IPH executive team and our Board for their support and, of course, all of our people across our expanding group for their contribution during the year. I also want to particularly acknowledge our team in Canada, and as this is the first full year financial results where Smart & Biggar being part of the IPH Group, thank you for your terrific contribution this year. And of course, I want to welcome the team at Ridout & Maybee in Canada who, as we announced earlier today, are joining Smart & Biggar. So moving on to Slide 3 content. In today's presentation, I will provide an overview of the operational highlights of the year. John will discuss the financial results in detail, completing an update on our cyber incident in the last quarter, before handing back to me to provide some commentary on our key markets in terms of filing activity and to review our operations. I will conclude with some comments about our ongoing strategic focus and how we are building a stronger platform for growth. That will include some detail on our latest acquisition, which we announced separately this morning. In this context, and as I've just mentioned, we are very excited to announce that we have consolidated our presence in Canada with leading IP services firm Ridout & Maybee to join Smart & Biggar. This is consistent with our growth strategy and supports our vision to be a leading IP services group in secondary markets. I'll talk a little bit more about this transaction later in the presentation. And as always, of course, we'll be happy to answer your questions at the end. So moving to Slide 4, about the group. Just to recap, we continue to expand. As mentioned, we have today announced our agreement to further consolidate in Canada. And in May, if you might have missed this one, we've enhanced our Asian network offering by establishing a new office in Manila in the Philippines. So we're truly one of the world's largest IP services group in secondary IP markets with around 1,300 employees operating across 10 IP jurisdictions, now servicing some 26 countries. In terms of the year-end review, I guess our results, to me, reflect the resilience in our business, which comes from having exposure to an increasing and diverse number of jurisdictions. The addition of a significant IP jurisdiction through our Canadian operations, now with increased scale, highlights this diversity and underpins the strength of the IPH business. With this in mind, let me step through some of the highlights for our financial results for financial year '23 in Slide 6. We delivered a strong underlying result for FY '23, which demonstrates additional shareholder value we continue to create through our acquisition and integration strategy. Of course, in FY '23, that included the acquisition of Smart & Biggar in Canada. As a result, we delivered a significant uplift in underlying earnings for the group with enhanced returns to shareholders. Underlying EBITDA was up 28%, with the final dividend up 9%. The financial performance of Smart & Biggar has exceeded our expectations during the year, and I'll discuss this performance a little later in the presentation. John will shortly detail the impacts of the cyber event and some disruption in our Asian business, which has impacted earnings in the second half. However, we remain convinced of the significant opportunity in the Asian region. We've been there for a while now, built a very strong business, which has grown exponentially over the past few years, and we're uniquely placed to continue to leverage our growth opportunity. The acquisition of subsequent integration of Smart & Biggar has progressed well. And as I mentioned earlier, its financial result has exceeded our expectations at the time of the acquisition. Of course, one aspect of the rationale for this transaction was the potential for IPH to participate in further growth in industry consolidation opportunities in the Canadian IP market. And consistent with our strategy, we are pleased to announce Ridout & Maybee joining Smart & Biggar. Total purchase consideration for that transaction is approximately CAD 65 million, and I'll give some more color to this transaction later in my presentation. Moreover, we continue to further progress complementary acquisition opportunities in Canada, with another opportunity being actively pursued. Finally, but importantly, we continue to work on progressing our sustainability agenda. We stepped up our actions this year, which include enhancing our greenhouse gas emissions measurement and reporting direct and indirect emissions of our international operations, including our member firms. So in summary, I'm pleased with our performance this year. Strong underlying result, improved returns to shareholders, Smart & Biggar performing ahead of expectations, further consolidating our presence in Canada with the Ridout & Maybee acquisition, and further acquisition opportunities under active consideration. I'll now hand over to John to step through the financial results in detail, together with a recap on the cyber incident.

Thank you, Andrew, and good morning, everyone. Just to reiterate the strong result of the 28% increase in our underlying EBITDA for FY '23, which reflects the Smart & Biggar acquisition as well as foreign currency tailwinds. The Australia - New Zealand business held up well in the second half, considering the cyber incident. The FY '23 results should also be reviewed with an understanding of our foreign exchange impacts. The average Australian U.S. dollar for FY '23 averaged $0.673 versus $0.726 in the prior year. As we have previously advised, a $0.01 weakening in U.S. dollar equates to a $2 million reduction in service charge revenue. As also indicated in February, our results include FX gains recorded in our P&L, i.e., those derived by the revaluation of U.S.-denominated cash and receivables as well as banking receipts at a more favorable rate than booked. For FY '23, this was a $3.3 million gain compared to a $6 million gain in the prior year. You'll notice that the statutory results in FY '23 includes a number of one-off items. I'll address these in a subsequent slide. Underlying NPAT has grown by 20%, with underlying diluted earnings per share up by 16% to $0.436 per share. Our ongoing strong financial position and continued cash generation has enabled a further increase in the final dividend, which was up 9% to $0.175 per share and 35% franked. Moving to Slide 9, being the like-for-like revenue and EBITDA. The like-for-like basis eliminates the impact of acquisitions and the foreign exchange impacts I discussed earlier. We've not included Smart & Biggar into this analysis as yet, given this was the first year of their contribution to the IPH Group. Looking first at Australia and New Zealand. There was a slight decline in revenue of 1%, with EBITDA down 5% on the prior year. This is actually a slight improvement on the results of the first half where you might recall that revenue was down 3%, with EBITDA down 6%. This slight improvement was despite some disruption of the cyber incident during March and April. In addition, the cyber earnings were impacted by increased salaries and higher investment in business development. In Asia, our Singapore hub continued its solid performance with increases in both revenue and EBITDA. However, this was offset by the impact in the second half of one of our large clients exiting China. This is not unique to IPH. A number of corporates have been derisking their supply chain reliance on China and seeking to base their operations in other locations. And we've also seen that Hong Kong continues to be impacted by geopolitical events, which has resulted in a decline in patent and trademark revenue in our Hong Kong business. There was also a decline in translation revenue. All up, that resulted in like-for-like revenue from our total Asia business being up 4% for the year, but steady at the EBITDA line. This short-term disruption in China/Hong Kong has impacted the second half result. Our Asian business continues to represent an outstanding growth opportunity for the group. We successfully addressed short-term periods of volatility in the past, and this is demonstrated by the fact that our Asian business has grown strongly, generating circa $14 million in EBITDA in FY '14 to over $50 million this year. Taking a look at Slide 10 and the cyber incident. I'll provide a quick update. As most of you are aware, in March, we detected that a portion of our IT environment had been subject to unauthorized access. Fortunately, we had a well-developed cyber response plan ready to go, and we were able to immediately enact this plan and also implement our business continuity plan. As we announced to the market, a limited set of data was downloaded by an unauthorized third-party during the incident. This data set originated from the Spruson & Ferguson Australia business and primarily contained data relating to a small number of clients of Spruson & Ferguson lawyers and certain finance corporate information. We reviewed the downloaded data set and worked with Spruson & Ferguson lawyers to directly contact affected clients. We recall, we previously announced the expected financial implications of this incident. The FY '23 results are consistent with that announcement. Business disruption in March contributed to a service charge budget shortfall of approximately $4.4 million in Spruson & Ferguson Australia and Griffith Hack. In subsequent months, Griffith Hack and Spruson & Ferguson collectively exceeded budget by approximately $1.5 million. We do not expect any further backlog of filings for our firm. In line with our previous announcement, we incurred $2.8 million pretax in non-underlying costs in FY '23 in regard to this event. We conducted a comprehensive post-incident review to identify further learnings and opportunities to strengthen our cybersecurity measures and ensure the strengthening of controls. We have not experienced any known loss of client relationships as a result of this incident and now completed a review of regulatory requirements associated with the issue. While this is an unfortunate incident, we were pleased with the rapid and comprehensive response from our team in managing this issue. Looking at Slide 11 and the underlying results. It shows the calculation of the underlying result, which is on a consistent basis with prior periods and reconciles these to reported statutory results. There were a number of adjustments to statutory results in FY '23. The items which represent a significant difference from the prior year include: a remeasurement of deferred consideration. This relates to a fair value gain on the settlement of the earn-out for Smart & Biggar due to changes in the IPH share price; costs relating to business acquisitions of $10.7 million, this is primarily related to the Smart & Biggar transaction and the progression of other opportunities including that announced today. Restructuring expenses include $1.7 million for the IPH Way project. As we previously announced, total spending for this project is expected to be $6 million by the end of FY '24. I mentioned cyber-related costs on the previous slide, which were in line with our previous announcement, and IT SaaS implementation costs were $0.8 million. We previously announced that from FY '23, we now include share-based payments expense in our underlying EBITDA, unless specifically relating to a non-underlying item. For FY '23, share-based payments expense was $6.1 million, $1.6 million was incurred in non-underlying business acquisition costs, representing payments to vendors. FY '22 accounts have been restated to include $4.8 million in share-based payments in underlying EBITDA. The underlying effective tax rate was 26.8%, reflecting an increased proportion of the results recognized in tax jurisdictions. Moving on to Slide 12 and the cash flow step. Reviewing the cash flow statement, cash conversion remains high at 88%. We amended the cash conversion calculation methodology from previous periods to more accurately reflect the rate of cash conversion. We've removed the effects of nonoperating activities from the calculation and the prior period comparatives have been restated. You will note that the increase in working capital in FY '23, 3 main components of this: cash payment of make-good provisions expensed in prior periods relating to our focus on reducing our rental footprint; normalization of Smart & Biggar's net asset position post the acquisition; and larger work in progress balances at year-end for Spruson & Ferguson and Griffith Hack, resulting from the cyber incident. Slide 13 and the balance sheet. Main movements in the balance sheet have been caused by the acquisition accounting of Smart & Biggar. These include customer relationships will be amortized over 10 years, and also goodwill and the Smart & Biggar brand name, these will not be amortized, but subject to impairment testing. Our increased borrowings following Smart & Biggar transaction have resulted in an interest charge on an annualized basis of circa $24 million. Net debt at the year-end was $284 million with leverage of 1.8x, which remains within the group's indicated target range of 1.5x to 2x. Slide 14 on foreign currency. As noted earlier, the group benefited from the strength of the U.S. dollar versus the prior year. The group's exposure to U.S. dollar remains broadly the same post the Smart & Biggar acquisition as we invoice a vast majority of our clients in Canadian dollars. Now the U.S. dollar invoicing is now a small proportion of the overall group's invoice. I'll now hand back to Andrew.

Thanks, John, and I'm now on Slide 15, the market update. And over the next couple of slides, I'll provide an update on filing activity for the year, the first one being Slide 16 in Australia and in terms of patent filings here. Overall, the total patent filings in FY '23, ex-innovation patents, which are now, obviously, a thing of the past, decreased by 3.3% compared to the prior year. IPH's Group filings decreased by 7.8% for the year. That relative decline to the market is broadly consistent with our disclosure for the first half. And FY '23 does represent a full 12 months of the integration of Spruson & Ferguson and Shelston IP, while the prior year included only 7 months when the 2 firms were integrated. You'll recall that we have previously noted the disruptive impact of member firm integrations on filing activity. And FY '24 will be the first full year comparison of the integrated Spruson & Ferguson Australian and Shelston IP business. Our group filings did begin to stabilize in the second half compared to the market, and both Spruson & Ferguson Australia and Griffith Hack pleasingly recorded improved filing performance in the second half. Another point to note on this slide, during the period, we received over 800 patent cases being transferred to Spruson & Ferguson Australia from 2 significant clients. Whilst these aren't necessarily reflected in new patent filings, they have already been filed, they include a multitude of pending applications filed across multiple jurisdictions, thereby providing a good pipeline of ongoing revenue opportunity. In terms of slide 17, Singapore, as many of you recall, there's always a delay in obtaining final data, which is why we've referenced calendar year December 2022 data. The Singapore patent market increased by 1.2% for the calendar year. One of the top corporate filers, which also happens to be an IPH client in Singapore, had a significant reduction in the filings, of course, reflecting the nature of individual filing patents of clients. And as this client was a client of IPH, IPH was strongly impacted by the decline than the rest of the market. So including this top corporate client, IPH filings decreased by 2.7% in calendar year '22. However, if filing from this group is excluded, IPH grew nearly twice the rate of the market in calendar year '22. Excluding this group, the market increased by 3.8%, while IPH filings were up by 7.7%. Based on the preliminary data for the first 4 months of 2023, IPH has outperformed the market and has increased its market share to 23.2% compared to 22.7% in for the corresponding period in 2022. So again, a very solid result in Singapore and maintaining a market-leading position there. Slide 18, in Asia. Looking now at the Asian filings, as we already called out, IPH filings were lower in China primarily to 1 significant client exiting operations in the country. Indeed, while our China filings were lower this period, longer-term filing growth in China was solid. Our compounded annual growth rate in filings is 18% since FY '18. During FY '23, we experienced some patent filing decline of 2% across our Asian jurisdictions, which compared to a strong prior year. Filing growth in Indonesia and Malaysia was offset by the decline in China. IPH continues to be attractive to large clients, to multiple large clients, increasing filings across a number of jurisdictions in FY '23. Expanding in Asia and pursuing growth in ANZ, we are very conscious that we need to renew and sharpen our focus on generating organic growth in the business, and that includes Asia and Australia and New Zealand. In Asia, we have established a new team in office in Manila, which expands our presence to 7 offices in the region. Close to the home, and as already mentioned, the integration of Spruson & Ferguson Australia and Shelston IP did cause some disruption. Whilst to some degree that is to be expected in integration of this scale, we do recognize that we need to do more to improve organic growth. In response, we've commenced a number of specific business development initiatives to drive new revenue. These include specific business development plans for Practice Groups and fee earners, client plans for our top 30 to 50 clients, a specific program with incentive plans rewarding the sales activity, and a new client relationship management system to enhance client interactions. We already started on these initiatives. We had a minor disruption due to the cyber incident in the last quarter, where our teams and their resources were focused on managing that. However, it's now full speed ahead of these programs and it's, of course, very important to drive organic growth. Moving to Slide 20 and 21, little bit on our strategy. 21, Smart & Biggar performance exceeding expectations. Well, we're pleased with the performance of Smart & Biggar since we took ownership last October. Revenue since October of CAD 87 million was ahead of the annualized pro forma revenue at the time of acquisition, and earnings were ahead of expectations. Legal services revenue was just under 30% of the total revenue. The synergy expectations that we outlined at the time of the acquisition remain on track. We have identified initial synergies of CAD 3 million since acquisition, and we have a clear pathway to realize the AUD 4 million to AUD 6 million synergy over the first 3 years, as we previously advised. The addition of Smart & Biggar means we now have an even broader international offering across our network, which is an important development and a key differentiator as we pitch for global work. This network effect, as I call it, contributed to around 220 international client referrals between Smart & Biggar and the IPH offices in Asia Pacific in FY '23, which is a good outcome. The integration of Smart & Biggar is progressing well with IPH operational capabilities now in place encompassing a number of areas. Our 3-year strategy targets profitable client growth and strong national alignment as part of the IPH Group, and we're well on track there. Of course, Smart & Biggar provides us a strong platform to participate in further consolidation and growth opportunities at Canada. And today, we announced the next chapter of this with the acquisition of leading Canadian IT services firm Ridout & Maybee, which I'll address on the next slide, Slide 22. We are very pleased to announce the continued execution of our growth strategy with Ridout & Maybee joining Smart & Biggar in Canada. This acquisition brings together 2 leading Canadian IT firms and the highly qualified and experienced IP teams to one combined firm, which will operate under the Smart & Biggar brand. Ridout & Maybee is a well-known Canadian IP firm with more than 30 high-quality IP professional staff that have offices in Toronto, Ottawa, and Burlington. In 2022, the firm filed more than 2,800 patent applications and 1,000 trademarks for their clients who include large multinational corporations, universities, government agencies, start-ups, all the way through to individual vendors, a very similar client profile to other member firms in the IPH Group. The transaction is expected to be underlying EPS accretive in the first full year of ownership. The transaction structure and consideration achieves ongoing alignment between vendor partners and IPH. And we achieved that through the issue of IPH shares to endorse minimum term employment agreements, which are generally for 4 years. Slide 23 is a summary of the transaction. And financially, as I say, consideration is CAD 65 million, which is approximately AUD 74 million. That includes an upfront cash consideration of CAD 45.5 million and issue of IPH shares to a value of CAD 19.5 million. Those shares will be escrowed for 2 years. Ridout & Maybee's pro forma adjusted EBITDA for the 12 months to December 2022 was CAD 8.2 million, approximately AUD 9.4 million. Ridout & Maybee is expected to add approximately 25% to Smart & Biggar's underlying EBITDA, including cost efficiencies of approximately CAD 2 million, expected to be achieved over 3 years. We will fund the consideration from our debt facilities. And following the transaction, our pro forma leverage ratio will be 1.8x. We'll also take the opportunity to reinvest AUD 1 million, AUD 1.5 million expected synergies to strengthen the group's operating model, reflecting the increased geographic scale and scope of the business and what we hope will be future requirements. Slide 24, commitment to sustainability. We remain committed to operating in a sustainable business, and we stepped up our commitment this year. We refreshed our sustainability strategy that has led to the identification of the core strategic priorities, which we have identified on this slide. We continue to make solid progress there. I won't go through each of these in today's presentation, but they're detailed in our sustainability report, which has been released with our annual report today. Also from our people, a core focus for IPH in Slide 25 remains on attracting, motivating, developing and retaining our people across the business. During FY '23, we made 76 promotions across all our member firms, including 7 principal appointments. Over 2/3 of the promotions in FY '23 were women. We're committed to developing our people and training leaders for tomorrow. In FY '23, 26 leaders completed their Bespoke People Leadership Excellence program. That makes over 240 leaders. 240 leaders have now completed this development program since we launched in FY '21. On Slide 26, just a couple of comments about AI and IP, which, of course, is very topical now. And in fact, if you go back another 10 years or so, it was very topical in the academic research and it more recently has been a strong driver of patent filings, including the many of our own firms [indiscernible] that has now caused a significant area of interest in the corporate environment. While businesses are currently adapting to the potential impacts of AI, what I would say and what we've seen for generations in this business is, whenever there's a change in technology, the one constant is the ongoing requirement for IP protection, which suits us. However, AI will, of course, change the way we protect innovation. We expect AI will enhance and contribute to efficiencies in the administration of IP, where they're streamlining the patent process and even we've seen the commercialization of patents through infringement opportunities or commercial partnering matching. We are assessing the impact of AI in the patent translation process. Machine learning is continually improving. However, translation quality is highly variable. We do expect AI translations will improve. However, the technical nature of what we do in the context of patent applications still require an expert review. AI is obviously an area we'll continue to mind very carefully. So you'd be pleased to know it's my last slide. It's our summary and priorities. And our priorities are focused on generating organic growth across our network and those complementary growth step-out opportunities in Canada and other core secondary IP markets. As I indicated earlier, an immediate priority is to drive filing growth and organic revenue in Australia and New Zealand. I already outlined some business initiatives there. We are implementing in this regard. We are also focused on restoring growth in Asia. We can continue, and we will continue the integration of Smart & Biggar to ensure we fully leverage the revenue earnings and strategic opportunities this acquisition provides the group. And of course, we will commence the integration of Ridout & Maybee and Smart & Biggar to further leverage that opportunity. We continue to progress complementary acquisition opportunities in Canada. We believe there are a number of further consolidation opportunities to expand our market share in a material manner, each in the region between 4% to 7% patent market share. We have announced Ridout & Maybee's acquisition this morning, and another opportunity is being actively pursued at present. We're also continuing to pursue other acquisition opportunities elsewhere and remain involved in discussions. And underpinning all of this is our continued focus to operate in a disciplined manner to generate further shareholder value. In closing, I'd like to acknowledge the hard work and contribution of all our people across the group. Many thanks to all of you for your continued interest and support. And over back to our moderator, Andrea. John and I will be happy to take any questions you may have.

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

I've just got a few questions on R&M, the new business. Can you kind of give us some insight into the breakdown, I guess, of its business, particularly its margins, it's, say, agency work compared to any litigation work?

Thanks, Marni. Look, it's litigation is smaller than what Smart & Biggar has. It's probably more in the context of what we normally have in IPH Group companies elsewhere, so sub-10% litigation revenue. And it's a business which, like all patent attorney businesses in secondary markets, receives a lot of its work from -- or in this case, across the border, I mean, in the U.S. and certainly from Europe, and Japan, in a similar sense, to nearly all of this, we receive most of our work from the primary market filers. They have got small offices in Burlington, which is outside of Toronto, and another office in Ottawa. But most of the work is still internationally incoming. There's quite a nice opportunity, I think, in some of the clients they had that we'll be able to hopefully leverage into IPH's Asia Pacific offerings as well, and that's what we like about it. But they are, as I said in the announcement, they will come into Smart & Biggar from day 1.

Understood. And just on the margins of this business and how it can add to Smart & Biggar, just with the different mix?

So well, there's a couple of things. One of them would be the different mix, but I guess it's a company that's probably operating within the 20 percents in terms of its EBITDA margin. It's always a little bit difficult to estimate a private business like that because it's a totally different structure. But it is -- we'll be operating the 20%, and we've identified there that there are synergy opportunities in this business. We would hope to improve that in bringing that within the Smart & Biggar structure.

Okay. And just another one for me. It's just going back to the result. And obviously, the market share year-on-year in Australia has declined. Can you give us any insight into potentially where that's going? Or are you comfortable that you'll be able to capture that back given the business development initiatives and investment underway in cycling of clearly easy comps moving forward?

It's a fair question, Marni. And I was pleased, I think I mentioned in the result that we had second half in Griffith Hack and Spruson & Ferguson stabilizing. We had a -- Spruson & Ferguson had significant client wins in the second half as well, which, as I say, were new filings, but transfer of portfolios, which is a good sign that we're heading in the right direction in BD. We need to do better, but I think the FY '24 will be an interesting comparison because it's the first full year comparison to the integrated business of Spruson & Ferguson and Shelston IP. So it's got a clear air there, and we'll be able to judge how we are progressing, but we're certainly not for lack of interest, Marni.

The next question comes from Scott Murdoch of Morgans.

Just firstly on Asia, if we can. Can you, I guess, just provide a few more details on the Hong Kong/China impact in the second half. Just more specifically, I guess, these earnings or the run rate of earnings that we're seeing reflect the full impact? Or are we yet to see that full impact go through? I think John said there were short-term disruptions, but a loss of the client there or client exit feels more permanent. And just the second part to the first question, just the strategies you're deploying to rejuvenate growth in Asia that you called out?

Sure, Scott. So yes, as you saw, it was very much a second half impact because it declined significantly from our first half in Asia, which has been tracking along well. So I think your commentary is right in terms of -- for that Hong Kong impact at least a wash through. There would be certainly an impact of that in the first half of FY '24.

I guess, in the second half, is it a full impact in that second half or potentially the client loss was light in the half, is kind of the direction of my question.

Yes. So that did happen late in the half. And so I'd say that, that impact would be in the first half of next financial year as well equally.

Okay. No problems. And just I guess that feels a bit permanent with more to come in the next half, you're saying. And just the second part to the first question around the strategies that are being looked at to rejuvenate growth in Asia.

Yes. Look, we've got a full-on program there, Scott. It's hard to get a feel for what the market looks like in China in real time, because really, our market is always primary players coming in. And ultimately, I think that the Chinese market is too big to ignore. There has been some disruption given the -- post COVID and where the world finds itself in respect to China in the last 6 to 12 months. But in terms of clients decoupling some of their supply chain concerns away from China, but ultimately, the economy is too big to ignore. So we still see our significant filers in that space will continue to file into China. So we're confident that it's still very much an opportunity for us, and we want to remain there.

Okay. Just a little bit more color in Australia, I guess. The second half revenue performance was actually quite good with respect to sort of flat filings half-on-half. Just interested in any insight into, I guess, the composition around pricing growth push through and maybe potentially there's some currency impact there. And equally, the cost growth is high or higher. And obviously, you're deploying those strategic initiatives you've talked to. So just interested in what type of cost growth are embedded with the new growth strategies.

Yes. Probably saw 3 aspects to Australia in the second half. I guess, one, salary costs coming through, which come through immediately. Yes, we had price increases, but given the fact that we have a significant proportion of the book on corporate clients, direct clients with extended pricing agreements over 2 to 3 years, getting that roll through doesn't happen in one year. And then we had, in the last quarter, a ruddy cyber incident, which took the sting out of us for a couple of weeks. Although we did see some of it coming back towards the end of the second half and John indicated the impact on the cash conversion, where the billings were heavy in June. But now I hope that we can get our sauce -- I think we are. We're back fully operational there. And I like what we're seeing in the context of the second half filings compared to the first half and the stabilization and still slight growth upticks in the Spruson & Ferguson Australia and Griffith Hack in that context. So I'm confident, but there's more work to do.

The next question comes from Elizabeth Miliatis of Jarden.

Firstly, just on the Canadian market share that you've got currently. Now it is sort of sitting around 23% on my estimates, plus a potential further acquisition that you've already called out. Where are you wanting to get to that over the medium term? And where do you see yourselves? And then from a margin perspective, just there is a fairly big differential between Smart & Biggar and Ridout. And maybe how should we think about the margins across the industry in Canada? Is it closer to the 35% or the 20%?

Look, it's good questions. And I guess in terms of market share, I probably have us a little bit lower than 23% with the Ridout & Maybee opportunity onboard. And we're always to be careful on competition scenarios, but I think this 25% to 30% would be some headroom left for us there. What we can see, I guess, as a comparator is when we integrated Baldwins into AJ Park 4 or 5 years ago, whenever that was, it was middle of COVID, kind of lost track time of time, might have been into 2020. And the impact on the AJ Park's margin was material in bringing that in, because essentially the opportunities in an integration, the margin expansion, are very high compared to moving a stand-alone business. So I think there's a lot of opportunity there. They've got good quality clients. The client mix is what we like. This synergy, to our eyes, will be small, hopefully. And the integration and the upside of additional high-quality IP professionals coming into Smart & Biggar is a great bonus for us. So we're confident that the margins will continue to expand in Canada for us. And then it's hard to get to an Asian margin given the operating leverage we have there, but still we think there's an opportunity to take it beyond 30% in Canada.

Okay. And just a second question on the cyber incident. It seems like you've reached out to all your clients. Is it safe to assume that we shouldn't see any disruption from a client perspective going forward, and any potential headwinds have been seen already? Or is it potential for us to see a bit more movement there?

Look, I think these episodes take a while to wash through. But I was very pleased with how our group responded to it and getting on the front foot with the communication to the client and having that cyber response plan that we had in place. If I can be pleased with the cyber incident, I was pleased with our response to it. And then I'd be confident that the client impact is largely as described, which has been minimal. But we need to do better in cyber and that we spend a lot of time in review of where we are from where we've been, and we'll continue to provide more resources there. And I think I might have made a mention in reinvestment in the business as well. And part of that will be some more investment in cyber.

The next question comes from for Apoorv Sehgal of UBS.

Now I did jump on the call a little bit late, so if something got covered, please accept my apologies. First question, just on the cyber impact, you said $1.5 million of the $4.4 million was recovered by year-end with no further backlog expected. I'm just wondering why the balance of that $4.4 million wouldn't sort of maybe come through in first half '24?

Sure. So when we talk about those numbers, it's a relatively inexact science. So the demand number that we reported in March of $4.4 million behind budget, and then, for the remaining quarter, we were $1.5 million ahead. Now that's likely to be a mix of those cyber revenues coming through, but also a mix of what the underlying business was doing. So that's why we can't come out and exactly say x amount was related to cyber. So in terms of the question about what's still in the pipe, I guess. So the filings which were there, had to be filed by certain dates. We're confident there's no backlog in files which needed to be filed. What you did have probably is the professionals needed to do an amount of rework like on annoyingly scale, which, obviously, if we're doing rework, we couldn't re-charge that time to the client. So it's really that time revenue, which has been lost, and obviously, you can't recover time.

Okay. And then second question, just in terms of Smart & Biggar synergies. The CAD 3 million that you've identified as initial synergies, is that basically the number you're hoping to achieve for FY '24?

No, that's still going to come through over the next year or 2.

Okay. But is $4 million to $6 million sort of in aggregate over the course of the next few years?

Correct, yes. For the initial outline.

The next question comes from Sam Haddad of Petra Capital.

First question, just on your assessment of the acquisition for Ridout & Maybee. In terms of the commercial dyssynergies, just you touched on it briefly. Just given what we sort of experienced in ANZ, can you give us more comfort around, give us more color as to the detail why you believe that there's not going to be a material issue in terms of integrating those 2 brands?

Well, I guess, we've learned a lot in acquiring and integrating patenting businesses in the last 9 years, Sam. You've watched that journey yourself, I think, as you've been there from the start looking at the stock. And I think the interesting thing to note in this transaction is that Smart & Biggar will be the standalone brand and Ridout & Maybee will move into that. These are similar businesses in terms of the quality of the staff. The client base is excellent. The staff are excellent. And the dyssynergy in terms of client crossover, we're very comfortable with. A big part of the Smart & Biggar client base, and certainly part of the litigation aspect of Smart & Biggar is pharma. And that's just the case across all of IPH really. The pharma exposure -- we're on the innovative side of pharma and the Ridout & Maybee story matches that. So there's less opportunity to have a large opportunity with generics. So we like that. We like the geographic exposure and we like the caliber of the firm. It's an 1893 business. It's not a fly-by-night business. it's been around a while, and that coexisted with Smart & Biggar in that space, most of it driven by international incoming work. They have a couple large -- one particular large domestic client in common. And our experience in that circumstance, as reflected by the AJ Park and Baldwins, when you have a significant domestic client in common, you bring the 2 firms together, the client outcome has only improved. So we'd like to see something like that similarly happen in Ridout & Maybee coming in the Smart & Biggar. So we're confident. We've taken some learnings from the last 9 years doing this. And hopefully, we're getting better at it, Sam, and we're certainly going to do our best.

No, that's helpful. I was only asking the question on the back of [indiscernible] you called out last 6 months ago that the commercial dyssynergies were larger than initially expected. So I just wanted to double check that.

Yes, yes.

Second question, the IPH Way, you previously called out synergies of $5 million to $6 million from FY '25 onwards. I didn't see that in the PAT this time. Could you -- [indiscernible] do we start to see that come through in '24?

I think we should start to see some of those come through in the last quarter of '24. And then we're not shying away from our initial estimates. So then now the majority will come through in FY '25 and onwards.

Okay. So the initiative is underway in terms of CRM and the case management system integration, that's all on track and delivering synergies as expected?

Yes. So the CRM and whatever you referenced there is probably a little bit different to what the IPH Way is. But yes, the IPH Way is underway, and we're certainly hopeful of, as I said, $0.5 million circa in the last quarter.

But just on that, Sam, the cyber incident took our focus off IPH Way briefly in that last quarter, but we're getting back on track now.

The next question comes from Russell Gill of JPMorgan.

Just 2 questions. Firstly on the synergies and then secondly, on your cash flow. On the synergy front, just full clarification because you made comments in the R&M acquisition about synergies being reinvested into the business and also comments about reviewing your operating model. With the IPH Ways synergies and also the Smart & Biggar 4 to 6 days, just to clarify, those will be net synergies that, I guess, fall to the bottom line to shareholders and won't be reinvested back into this operating model?

So the IPH Way and the moving synergies or the Smart & Biggar synergies, they will be, yes, dropped to the bottom line.

Okay. Great. And then just on that, you mentioned in the slide preso, 220 referrals. Is it possible to quantify, I guess, the revenue synergies or quantification of business case uplift you're seeing from those referrals?

These are primarily scenarios where, say, a client in New Zealand for AJ Park might be filing applications into Canada. Now we have to get bids to the client. Of course, that's in the best interest of it to be in the hands of Smart & Biggar, but that's a fairly easy conversation when you're putting them in front of the #1 player in Canada with a whole stack of awards behind their name. But each of those -- it sets off this -- not the beauty of the business, it sets off this track of ongoing revenue. You've got the filings, which might be anywhere between $1,500 and $2,000 in it, but it sets off the train of recurring revenue that comes with the examination of a patent on trade bank application. So it's not huge upfront, but it starts off an ongoing relationship. And hopefully, the next filing these clients have, they'll also come in to Smart & Biggar. So it starts off the relationship, and it's a good story there. The bigger opportunity, as always, is taking some of the large corporates and some of our -- look, we have some large domestic corporates in ANZ, particularly in New Zealand, and we think there's opportunities to have them exposed to our operations, not only in Canada, but also in Asia.

Great. And then, John, maybe just on the cash flow, I appreciate the WIP uplift because of the cyber incident. Are you expecting that WIP to, I guess, unwind through FY '24? And therefore, what sort of cash conversion we should be thinking about both for '24 and I guess from a normalized '25 onwards?

So the answer to the first part is yes, we expect that to unwind from Spruson & Ferguson and Griffith Hack. We've always tended to track around the 90 to 100 mark. So I expect that to continue. We've always been a very strong cash-generating business. I expect that to have a long-term run rate.

The next question is a follow-up from Marni Lysaght of Macquarie.

Just another one for me. I'm sorry if it's already been asked. I'm just juggling between a couple of calls this morning. When you head to the U.S. WIPO database to kind of get the title PCT filings from the U.S., it's kind of -- if you were to look -- and I totally appreciate that the database is subject to certain delays in the actual filings being recognized, but can you kind of -- how do you triangulate, I guess, the growth that you're all seeing across Singapore, Canada, with kind of the trends of originations out of the U.S. being kind of flat or slightly negative?

Yes, look, these are interesting questions, Marni, and the nature of what we do as a secondary market provider is always subject through that lens. And then we only ever get Australia, and we only get 16% to 17% of PCT applications filed in the U.S. because we only get the core technology. So they don't file the full patent suite. So it's a case of -- say, we get 16% in Australia, it might be 10% or 12% in Singapore or even less. But again, it's a core technology. So that's what makes it fairly resilient in these secondary markets because a technology company will always protect resilient -- the core. And so we don't really see big dips in the patent filings even under particular economic circumstances. Now no business is recession-proof, but we're fairly resilient in that way that given that we're only ever dealing with the core or the jewels of the crown, they normally be come through.

Yes, that's clear. And just a second follow-up from me. Can you kind of give us any indication for forward share-based payments expense? Because you've done that for us in previous results.

That's an excellent question for John, I'm sure.

It's about $6 million for next year. I think we had $4.8 million this year, plus another $1.2 million circa now non-underlying items. And then next year, with the additional staff, it's around the $6 million mark.

So $6 million, and that would all be included in the underlying results, nothing one-off in that nature in that $6 million for FY '24?

Yes.

The next question is a follow-up from Sam Haddad of Petra Capital.

Well, we might pick that up in a later conversation, Andrea. It sounds like we've got a meeting with, I'm sure, Sam later in the week. So that comes to an end on the Q&A. It's as always, good questions, and thanks for your interest. At this stage, I think we'll probably sign off, so we can continue our roadshow. But we're pleased with the results, pleased to bring in Ridout & Maybee into the business, and looking forward to further opportunities there. And as always, thanks for your interest, everyone.

That does conclude our conference for today. Thank you for participating, and you may now disconnect.