Kelly Partners Group Holdings Limited (KPG.AX) Earnings Call Transcript & Summary

[Technical Difficulty] 2025 AGM for Kelly Partners Group Holdings Limited. I am Brett Kelly, Founder and CEO of KPG. It is now 9:02 a.m. Sydney time, and there being a quorum present, I declare the meeting open for business. I confirm that the meeting has been properly constituted. The company considers it appropriate to hold the 2025 AGM as a virtual meeting in a manner that is consistent with the Corporations Act 2001 and the company's constitution. In opening the 2025 AGM, I would like to introduce the Board of Kelly Partners Group Holdings Limited and other individuals who are in attendance: Mr. Stephen Rouvray, Non-Executive Director; Mr. Ryan Macnamee, Non-Executive Director; Mr. Paul Kuchta, Executive Director; Ms. Ada Poon, Executive Director; Mr. Kenneth Ko, CFO; Mr. Jeshan Velupillai, Partner of BDO; Mr. Ron van Driel, Director of BDO; and Mr. Tim Aman, Partner of BDO. There are no apologies for today's meeting. Being a virtual meeting, I would like to thank you for joining us via the Zoom webinar platform. You will see at the bottom of your screens that the Zoom webinar contains a Q&A function. The function can be used to submit questions or comments. When you submit a question or comment, please start with which resolution it relates to so that it can be addressed at the appropriate time. Questions which relate to the general business of the company will be collated and addressed after the close of the formal business of the meeting. The agenda for today's meeting will be as follows: Kenneth Ko and myself will provide a corporate presentation update, after which we'll proceed to the formal matters to be considered at today's AGM with opportunity for questions relating to the formal business. And finally, there will be an opportunity for questions and discussions, including on the corporate presentation. Well, great to see everybody, and we have prepared a very quick update presentation that we are pleased to share with you this morning. The business continues to prosecute its mission, values and vision, its strategy and in a clear and settled structure with much vigor and energy, and I'm incredibly humbled by and pleased with our teams across all offices for their massive efforts in moving forward clients and making a positive impact in their communities. The business again this year has grown its revenue by 25%, as you can see on that front slide, which is consistent with an average revenue CAGR of approximately 30% over the 19-year history of the firm since 2006. We're very pleased that the free cash flow per share and the return on invested capital continues to be very strong and in line with our long-standing approach to what we're doing. To Slide 2, we shared with you for clarity why we exist, which is to help our people, private business owners and the communities we work in be better off. Be better off means healthier, wealthier and wiser. Our values, we want the best for others. We do what we say, and we work as one team looking for the best way to do what we do. In terms of vision, we want to be the first choice employer for great talented people in the industry and we want to be the first choice firm that founders who've built tremendous firms think of when they're thinking about the succession and the future of their business. For our clients, we want to be their first choice accountant to business owners -- to private business owners in any market within which we operate. In terms of our strategy, we've shared consistently that in Australia, we're looking to be a top 10 firm, and the 2024 results will be out soon enough -- or 2025 results will be out soon enough in The Australian Financial Review that will indicate that we are close to or may well have achieved that target. We are not looking to pursue size for its own benefit or for its own sake, and we never have. What we are seeking to do is continue to grow the opportunities within the business for our best people, and it's that motivation that drives us to continue to grow the firm. In terms of globally, we want to see our Partner-Owner-Driver system working across the U.S., U.K. and Ireland to deliver outcomes for young professionals and all professionals that want to be better off in those markets. And we are making some great progress towards that end as we speak. The advantages that the business really operates from is business -- our group business model, our Partner-Owner-Driver system and our central progress team. This is all a system that's been refined in a critical activity network over nearly 20 years. And I'm very pleased to see the growing strength and self-reinforcing in a flywheel sense of those advantages. Our structure is worth understanding. Any business may have a strategy to do things. But unless it's got a structure to capture those efforts, it really is not going to be as effective as it otherwise would be. I'm often asked anywhere we go, what's the difference between our Partner-Owner-Driver model and a traditional roll-up. I think we explained that very well in this slide, and I'll leave that to people to consider. In the middle of that is our progress pyramid, which is the way that we think through the core operations of an accounting group or accounting firm, local firm. In terms of locations, we have 35 businesses located across Australia, the United States, Philippines, Hong Kong, India, U.K. and Ireland. And to think that our small 4-person team started in June 2006 has been able to continue to grow in this way to a team of 700 people across these locations is gratifying, but we haven't finished yet and we're not easily satisfied souls. So, we're very excited about where we are and what lies ahead. On the next slide, we're emphasizing that we're becoming a leading partnership platform. It's not hard to be a leader in an exercise other people aren't pursuing. It's one thing to be a platform. It's another thing to be a platform that seeks to develop partnerships. We think the lost art of relationship building and partnership building is really where we're strong, and we know that our Partner-Owner-Driver model is particularly unique in aligning the interest of all stakeholders right through our organization. In terms of team members, office locations, partnerships, our Great Place to Work score, all of these good numbers, ultimately, they are numbers that we should feel very pleased with. But what I'm most pleased with is the quality of our people that drive these results. Specifically for our shareholders today, there's now 25,000 active client groups with 95% tax and accounting that's recurring income streams with strong 4.7%. We're targeting 5% organic growth. Our historic average growth rate is 4.7%, and a very strong NPS. For shareholders, there's been 29.8% revenue growth per annum since 2007. Current return on equity at 30.5%, a strong 5-year average. Cash conversion is nearly 100% at 99.8%, and more than 1,000% TSR since IPO. On Page 7, for your reading pleasure when you get a moment is KPG in 10 seconds. I think, again, lots of good information. On Slide 8, what we're emphasizing is that the business is a business system that has a flywheel and knows how to grow. It's doubled -- the business has doubled 6 times in a row on average every 3 years. And it's not a straight line, although we've used a straight line there. That's what's available in PowerPoint. But really, the business grows and then it consolidates and it grows again and it consolidates, but there's a rhythm to the growth of the business that can only exist in the presence of a business system. And so it's exciting to see where that goes from here. On Slide 9, we've shown the progress over 5-year periods. We early on showed people a start-up phase, a foundation, a build phase and an accelerant. We're really at the end of that 5 years come June 2025 of that acceleration phase, and we're pushing into this next 5 years. Now, we haven't shared this slide before on Slide 5, and I emphasize that these are estimates, they are projections, they're not a forecast or guidance, but there's a logical continuation of the growth of the business over the last 19 years, what will be 20 years in June. If we can continue to operate within the system that we've developed and with the rhythm that that our flywheel has been pushing forward at, then certainly, what I look forward to seeing happen is a continuing compounding of that growth. This slide is really as much for our teams internally and all our stakeholders to understand that if we just continue to prosecute the argument in a gentle but vigorous energetic way that we believe that we can build a global organization for Australian private business owners that want to go somewhere that we aspire to. And to be the type of business that we want to be, we're looking to grow to this type of size, which, if it is size that is giving great opportunities to our best people, then it's a legitimate activity to pursue. So, unless we continue to prosecute our clear mission and values, then I'm very excited about what I think Kelly Partners can become, which is Australia's global accounting firm. Now again, the best place to compete is a place where no one else is playing. There is no other Australian firm that's been grown since inception that can lay claim or seeks to lay claim to being a global business. We are populated in an industry in Australia with firms that carry the labels of foreign-owned firms. And so as somebody born in Australia, passionate about Australia and its future, I'm excited that our teams are building really key and core infrastructure for the future of Australia, our kids and their kids. Australia needs a global accounting firm. It needs a global bank, and it needs a global law firm. We can't do anything about those other 2 things, but we can play where we play, and that is to build a global Australian accounting firm and that's pretty exciting. Anywhere I look in the U.S., there are Australians leading all sorts of institutions and organizations across every industry. That's the same in all parts of the world. And so I'm excited to see Kelly Partners take its place amongst those people that are pursuing things that I think really are in the national interest. On Page 11, performance, again, a bunch of numbers, revenue growth, EBITDA growth, successful programmatic acquisition strategy. You'll hear me, I get embarrassed talking about our own good stuff, but try to just quietly keep banging away doing it. But you can see that we have a programmatic acquisition strategy and more than a strategy, we have nearly 20 years of consistently delivering based on our systematic approach in that space. Strong return on equity, strong return on invested capital and really great cash conversion, which speaks to the discipline and energy of our people. In terms of performance, it is a secret goal of mine to have a compounded annual gain in book value of 35% for 20 years. We're at 35.4% after 19 years, and I'm confident that we'll get to June next year at more than 35%. The reason I think that's interesting is, if you imagine that we over the next 20 years on a per annum basis, and the business will become a significant and institutionalized organization. Now, I have no intention of doing half as well. I'm hoping we can do even better. But the efforts continue, and they continue in exactly the same ethos and practices they have since inception, which makes me confident that we can do okay over time. On the next slide, Kenny has whipped up the adjusted book value versus KPG, ASX and ASX 300. This is kind of worth a read. But most importantly, you'll see the amount of shares we bought back, the valuations at which we bought them back and how well we've done from that exercise. What we're trying to show here is that we've grown the business with $18 million of external/internal capital. In U.S. dollars, it's, say, $12 million. That's a microscopic amount of capital, and it shows a lot about the discipline with which that capital has been deployed and the effectiveness of our system to get a return on capital. On Page 14, you'll note that since the IPO where we had, I think, 45,400 shares, the total share count has decreased since the IPO, while we've grown revenue by 4.5x. And that isn't always apparent to people, but what I think is worth understanding. In terms of capital allocation, we shared this slide to demonstrate that we understand what capital allocation is and how to do it. and do it effectively. And we think that it's a scorecard for our shareholders to really understand and think through. You'll see us that consistent with this understanding over the long term. What I would say is in 4b, where we've made an occasional large acquisition and we've defined that as over $5 million in revenue, that number now is probably much larger than $5 million and you will see us do more of these larger acquisitions, not because we seek to, but we are being approached by more and more larger firms, which is interesting in and of itself. On Slide 16, it just demonstrates this consistent pattern of programmatic acquisition. The value of those firms over that period of time, not only have we increased the number of deals we're doing on average each year, but the size of those deals is also -- dollar value of those deals is also increasing. On 17, 28% of our firms now qualify, that 7 out of our 25 firms as top 100 firms in their own right. The #100 firm in Australia is AUD 7 million last year. Recently, we updated our annual brand study. We wanted to demonstrate the brand impact in Australia, how strong the brand is at this point. We are some 38 years on average, younger than our top 20 competitor firms, but our brand is very materially stronger with our target client base, which is really helping the business in every sense. On Slide 20, as our return on invested capital remains very strong, from '21, we continue to make additional investments now. I am asked from time to time, hey, Brett, how much more are you going to invest beyond the 9%? We're really leaning into using our internal capital to grow the business. It's the cheapest form of capital and the returns on making additional acquisitions and growing the business are our highest source of return. We have more than $300 million of potential partnership opportunities in our lead database currently. And we are doing everything we can to grow our team and to deploy our internal capital to take full advantage of the position that we find ourselves in. We're not squeamish on that at all. You've seen over time, it's grown and we've squeezed it back. But we are in a very, very large global market where we are very advantaged, and we are looking to take full advantage of our position at this time. So, I'm going to hand over now to our Chief Financial Officer, Kenneth Ko, who's been doing a great job running around Australia and the world, helping us move the business forward. Over to you, Kenny, to share the financials.

Thanks, Brett. Just going through these slides, which were presented in the FY '25 results presentation. So, I'll really quickly just flip through them. And any shareholders can also refer to the results call for a more detailed version of these slides. So, these are the financial highlights for the FY '25 results. As Brett indicated, our revenue of $135 million for the year increased 24.5% on the prior year. Our margins of the operating business at 28.3%, and our underlying NPATA for the parent at $9.1 million, representing a 13% increase on the prior year. In terms of income statement, as I've covered before, I just wanted to highlight there that our Australian businesses are generating operating EBITDA margins of 30.8% and those other items I've covered previously. This slide is very good in presenting the different EBITDA margins of the different cohorts in the established and growth and subscale accounting businesses as well as our other complementary businesses and our global businesses, which are -- we obviously just recently have partnered with those businesses in those global markets and are working with them to improve the margins of those businesses. In terms of our balance sheet, very strong. And again, our lockup is maintained at 58 days with a very low amount of WIP days of 7.7 as of 30th of June 2025.

Kenny?

Yes?

Kenny, just on that, just to add some color, we're seeing in the U.S. market, competitor groups are geared on a net debt to underlying EBITDA at 4.5 to 6.5x. So the business is very conservatively positioned from a balance sheet debt perspective. But we could do quite a lot more to dramatically grow the business from here. There's a lot of balance sheet firepower versus our peers.

Yes. Thanks, Brett. That's right. And as Brett said, our net debt to underlying EBITDA as of 30th of June was 1.42x, which increased slightly on the prior year due to the debt we used to complete the in-year acquisitions. As Brett indicated, strong return of equity measures there for the group of 38.8% and 31.9% for the parent. And that's that. The debt and equity liquidity slide shows as at 30th of June 2025, we still hold significant headroom in terms of our debt facilities as well as cash on balance sheet. And on the right there, there's a table showing the movement of the debt across the period and primarily, again, relates to us taking debt out to complete the 6 acquisitions that we completed during the year. In terms of cash flow, cash flow increased by 23.3%. Our free cash flow increased 7.2% because of an increase in the scheduled debt reductions. As I previously indicated, we're paying debt down at a 5-year period from drawdown. So the debt repayment increased as we put on debt, but we like the accelerated debt repayments and keeps us disciplined in managing our cash flows. And our cash flow conversion for the period 2025 is 99.8% and consistent with our 85% to 100% conversion ratio. And the last slide here is the parent and NCI waterfall, just showing the proportion of the NCI and parent net profit before tax and how it reconciles to the parent net profit after tax in the financials. And I'll leave everyone to look at that. That's it for me, Brett. You're on mute, Brett. I think it might be the resolution slide, slides next.

Great. Thank you, Ken. I really like this photo. It was from our shareholder briefing in Omaha 2 years ago, I think, now. And it's a fun photo at fun times. Now moving on to -- I think I now hand over to Steve Rouvray, our Non-Executive Director, to move to the formal business as set out in the notice of meeting.

Thanks, Brett, and good morning, everyone. The notice of meeting was distributed to all registered members on the 24th of October 2025 and is to be taken as read. Voting on all resolutions will be conducted by poll. For the purposes of the poll, I appoint Nigel Bulling of Computershare Investor Services for the company's share register, who have examined and prepared the summaries of proxy forms received to act as returning officer and to conduct the poll. Shareholders in attendance via Zoom that have already submitted a vote by proxy should note that your votes will already be counted towards the poll. You do not need to lodge another vote unless you wish to change your proxy instructions. Shareholders in attendance that have not submitted a vote by proxy and wish to vote on the resolutions being put to the meeting today can do so by following the instructions provided in the letter to shareholders. On your screen, there are instructions for how to log into Computershare's online voting portal. Please note that the online voting portal is now open and will remain open until the poll is declared closed. If you are eligible to vote at this meeting, a vote icon will appear on the voting platform. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to press a submit or enter button as the vote is automatically recorded. Your votes must be submitted prior to the poll being closed for them to count. All undirected proxies or open votes that have nominated the Chair of the meeting as their proxy will be cast in favor of each resolution in the Notice of Annual General Meeting. Your Board strongly recommends that you vote in favor of all resolutions. Are there any questions on the voting process? Okay. I don't think there are any questions. So, proxies have been inspected and all those validly lodged have been accepted. We will now proceed to the resolutions set out in the Notice of Annual General Meeting. The first item of business is to receive the company's annual financial report for the year ended 30 June, 2025. The financial report and the reports of the Directors and the Auditors are now laid before the meeting. There will be no vote on this item and is a discussion item only. The company's auditor for the 2025 financial year is BDO, represented by Jeshan Velupillai and Tim Aman of BDO, and they are present to take questions relevant to the conduct of the audit and the preparation and content of the internal auditor's report. So, I'll ask if there are any questions or comments on the financial report or reports of the Directors and Auditors or any questions or comments on the management of the company or any questions relevant to the conduct of the audit and the preparation and content of the auditor's report to be put to the Auditor? I don't believe we have any questions in relation to those things at present. So, we will move to Resolution 1, the adoption of the remuneration report. Resolution 1 is as follows: to consider and if thought fit, to pass, with or without amendment, Resolution 1, adoption of the remuneration report as an ordinary resolution: that for the purposes of Section 250R(2) of the Corporations Act and for all other purposes, approval is given for the adoption of the remuneration report as contained in the company's annual financial report for the financial year ended 30 June, 2025. If you wish to discuss this resolution, please submit your questions via the Q&A. The proxies received in relation to this resolution are shown on the screen. And I now put the motion to vote. Shareholders can vote via the Computershare online portal. I don't think we have any questions in relation to that. So, I will just hand back to Brett to put Resolution 2 to the meeting. Brett, could you put Resolution 2 to the meeting, please?

Yes. I'm just trying to see it. There it is. To consider and if thought fit, to pass, with or without amendment the following resolution as an ordinary resolution: that for the purposes of clause 13.3 of the constitution and for all other purposes, Mr. Stephen Rouvray be reelected as a Director of the company.

Brett, if you could just put the resolution to a vote then.

I've got the long script. Shareholders in attendance that have not submitted a vote by proxy, have you done all of that already, Steve?

Yes. Now, we're on Resolution 2.

Not that clear on my script, my friends, but I'll put that Resolution 2 to a vote.

Are there any questions for the Q&A?

I don't believe.

No question on this resolution?

No.

Okay. We'll move on to the Resolution 3 then. Resolution 3 is as follows: to consider and if thought fit, to pass, with or without amendment Resolution 3, the reelection of Mr. Paul Kuchta as Director as an ordinary resolution: that for the purpose of Clause 13.3 of the Constitution and for all other purposes, Mr. Paul Kuchta be reelected a Director of the company. If you wish to discuss this resolution, please submit your questions via Q&A.

Steve, we do have a question from a shareholder on this resolution.

Okay. Yes, I did see that. Sorry, which -- okay. Yes.