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

Thank you for standing by, and welcome to the Kelly Partners Group Holdings Limited HY '20 Results Briefing Conference Call. [Operator Instruction] I would now like to hand the conference over to Mr. Brett Kelly, Executive Chairman and CEO. Please go ahead.

Good morning, everybody. It's a very nice morning in Sydney, very sunny morning. And I hope everybody's had a moment to look at our results deck that we've shared this morning. I'm pleased to report that things are moving according to plan. And I think that's here in the deck. I just, very quickly, whip through some of the key pages and then take some questions. On Page 2, we've got this format KPG in 10 seconds and doing a lot about investor meetings, we've been asked -- well, we've been told investors have a short amount of time, we could be telling the story in 10 seconds. The story of the business is quite simple. It's growing strongly, and it has for nearly 14 years. Our EBITDA margins are up 20% plus revenue growth, EBITDA margin is back to 30%. Underlying NPATA growth at 50%. And the physical assets, last year at this time, we had a one-off event in the [ CBD ] acquisition, which was an accounting entry, wasn't a cash flow entry, and that should now be obvious to people in reviewing our foreign policy as a public company. From a balance sheet perspective, there's a 41% return on equity and our net debt to underlying EBITDA remains very, very conservative. Cash flow is up 15%. Our cash flow conversion is 100%. I would just draw your attention to these little gray boxes at the bottom. On average, our people build is over $200,000 per person for full time equivalent. Our firm's EBITDA margins were at 32.9%. That's after we pay the partners on average about 12%, I think, in these numbers. So there's about 45% EBITDA margin before partners. And our lockup is at 62.8 days, which is really, I think, as good as anyone in the industry. Cash at bank sits at $4 million, and we think we're in quite good shape. Page 3 is a very important graph. Our business is not a new business. It's a new business as a public company, we'll be 3 years as a public company in June. Those big green numbers indicate that we've doubled the business 4x in a row, and we expect that we can continue to do that in the foreseeable future without having to do anything particularly crazy. The reason that this is important is that the business has a habit of doing certain things, and those things that it does well have a habit of delivering consistent results over time. And I'm very confident in our people and our team and the systems and the way we approach what we do. On Page 4, we published a 5-year growth plan about 6 months ago. I think it was the first time we've made it public. But it just makes it clear how we've grown the business over time. We don't like to share too much for our competitors to understand what we do, but we do want our investors to be fully informed. And so we have an existing group. We aim to grow organically at 5% plus per annum and then we aim to expand our business through tuck-ins to existing sites, acquisitions of new marquee sites or the establishment of new greenfield sites and then add new services. We've put a target group there that shows that we can grow this business significantly over time. In the context of large accounting firms or accounting firms generally, that would be a significant economic entity and when you consider that we are just Sydney-based with one office in Melbourne and just focused on private business owners, there's obviously a huge opportunity to grow over time. On Page 6, we want to be Sydney and Melbourne's first-choice accountants and advisers for private business owners. That mission has never changed. We think we've got good momentum. I expect that we are -- we certainly are the only group of any size, probably nationally, that has that single focus. Our strategic pillars are to challenge the status quo. We do that through looking after our people better and looking after our clients better with unique IP and structured system. The actual structure of our ownership of these businesses on a 51-49, 10-year partnership model is completely unique and invented by us to our industry, although this type of approach has been successfully deployed in other industries in Australia and globally. In my growth point of view, we'll see that our centralized management function gives us an opportunity to attract firms that want help in growing and are sick of the burden of running these things by themselves, and this specialist accounting services team really has deep operational expertise in our industry. And then from a performance point of view, if we can continue to perform, as we always have, then people are attracted to bringing on a winning team and people are obviously very important to our business, be that our partners, our future partners or our clients. On Page 8, our industry is very, very large in the pillar or in the sector that we are focused. It's $12.2 billion of market opportunity, smaller private practices. There's over 10,000 of those firms, no one has ever made a significant play in that space. Our industry, like others, the participants are largely concerned with size. They just want to be huge. We want to be very profitable, very unique and very effective in competing in our space, very focused on our strategy. And so by continually focusing in these smaller private practice space, to these SME clients, with a unique system and process and central management team, that we believe we have an advantage, and we believe, over time, we can continue to prove that. We draw parallel to the insurance broker market, which is a very similar recurring income style market. Major players have been able to get hold of a significant chunk of that market. We think, over time, with a similar model of AUB, we can do the same in this sector. On Page 9, we're the 24th largest accounting firm in Australia. And we believe the opportunity continues to remain enormous. Importantly, we don't seek to be a big four firm. We don't seek to be a next 4 firm, what we call big four wannabes. We don't want to be a national mid-tier firm. We want to be our own unique team, and we think we're doing a pretty good job of that. On Page 10, we do have, we believe, significant differences that give us a competitive advantage, and our aim is just to quietly prove that over time. Page 11, we are executing a 5-year plan. It's not Afterpay. It's not Facebook. It's not tech or sexy, but we think stronger and growing cash flows and stronger and growing dividends and approvable recurring income stream. We'll probably become very attractive over the next decade as many Australians seek to retire and the scramble for retirement income will be unparalleled, and so we think income streams are going to be bid up over time. From an investment case point of view, on Page 13, it's a very simple plan that we're trying to execute. We've been sticking to this same plan for a long time, and we'll continue to report back as to what we're doing. We're trying to improve the earnings power of our businesses. We're trying to increase our earnings through tuck-ins. We're trying to participate in the growth of our businesses through organic growth and our 51% interest. We'll repurchase KPG shares, while ever they remain significantly undervalued. Unfortunately, when we see today's share price, for example, there seems to be a [indiscernible] in the sort of 2 months pre-reporting that share price falls off a lot, but we are in a blackout. We can't do anything about it. It's quite frustrating. And we'll make an occasional large acquisition. We'll be very careful about those acquisitions because we believe that transformative acquisitions often transform businesses in a negative direction. Our business model is outlined on Page 14. We think it is valid, and it makes sense, and we expect to continue to prove that out. But I would draw your attention to the fact that we have, at number three, 7,500 client groups and growing, and we believe that the trust we have with those client groups will, over time, result in more business. In terms of network expansion, on Page 15, we added the Melbourne office, which is very exciting. At the time of the IPO, a lot of these schedules, where you adjust in one city, the good news is Sydney is a massive city that's continually growing. So we're not too focused, too concerned about not being everywhere. We're really doing what the clients desire but we do love Melbourne. We see Melbourne as a very large, deep and exciting opportunity. So we have managed to partner with Paul Dobson and his firm, great business, great guy. And we are very excited to be in now the Melbourne market with opportunities to grow. And we've also added the Blue Mountains, which was outlined in our areas to grow in our previous presentation. We see going to places where other people don't go, where there's above-trend growth, as being the heart of what we've done for a long time and to be a continuing balanced strategy. Page 16 outlines existing offices. Page 17, places we're continually looking to grow in terms of location. 19 shows that we do have a differentiated offer for a client that really is a very high-quality offer, and that now is not available, we believe, at this level of quality from a focused private business owner-only firm anywhere else. 20 shows that our complementary businesses continue to make some growth. They're small, and they certainly have no more exciting economics and accounting firms, but they are good businesses to be that help our clients and they are growing. On Page 22, in terms of operational highlights, there continues to be strong organic growth. My aim has always been to grow much stronger -- much more strongly than GDP growth. My view is that as baby boomers all seek to retire at the same time, many of them who own accounting firms will be looking for somebody to buy them, and that will be us, as the most experienced, best track record buyer in the market. But we also believe, on the other side, as investors continually look for income and interestingly, an ethical source of income, that over time, if we can prove ourselves as a public company, we'll become a more attractive place for people to invest. And in the meantime, while people have questions, we'll continue to look to get hold of some of our own shares, if they're [ special ] as they are today. Network expansion, other services, developing people, systems and processes are outlined. Moving to the financials on Page 24. I think they largely speak for themselves. I'll take questions if people have questions when we go to Q&A. But these businesses need 2 things to happen really to perform at their best. They need to grow their revenue. And you can grow that by -- you can grow that organically, which is very important, and you can grow by acquisition. And like most things in life, I think, it's best if you do both of those rather than just one. And there's certainly no significant firm in our sector that's ever been grown other than by pursuing both of those strategies at the same time. And then on the balance sheet side, you just have to look at the efficiency of the balance sheet, in particular, management and cash flow around lockup, which is WIP, work-in-progress plus debtors. Our lockup is by far, I think, the best in the industry, certainly, that you can get hold of any information that's reliable. And our return on equity, I think, continues to remain excellent. We are still a very small business, largely economically irrelevant as a public company. So we don't have any delusions about that. But we do believe that over time, we can prove up in public why talented partners and team members should join us, and why other firms who are looking for a better way to operate and realize value in their businesses should join us. And that's really the attraction of being public. To speak to that, we continue to have a very large and very actively engaged pipeline of acquisitions that mean that we can't see any time where we would be scratching around with some -- looking for some deals to do that was an excellent deal. So that's very exciting. Income statement on Page 25. Underlying EBITDA margin has got back to where we wanted at 30%. It was affected last time by an accounting entry. Page 26 indicates that our margins are nearly 2x that of the industry and clearly outlines where we see impact of acquisitions on margins. It's hard to grow and run at our benchmark 32.5% or 35% and grow continually through acquisition at the same time, but hopefully, a clear reading of our numbers can, over time, show growing EBITDA and then growing NPATA. Balance sheet on Page 27 is conservatively geared, I think -- very conservatively geared. But again, we're very aggressive about growing the business within our very limited circle of confidence, which is accounting firms. So we'll just stick to our [indiscernible]. Page 28, we always think cash flow is a highlight in our business. This is a very capital-light business that is, I think, very well operated through our partner -- our driver model, our partners are keen to see the cash, and we know how to teach and define it and manage it effectively, and that's largely around engaging with the right clients and making sure that they pay in the right way. Our borrowings are outlined on Page 29. I just draw your attention to our effective gearing. If you think of this $295,000 per partner, it's less than the working capital contribution that large firms would make and partners would make. And that debt is personally guaranteed at the sub-level by those partners, which makes them pretty attentive and excited about growing their equity value by paying down their debt aggressively. On Page 30, our aim has always been to grow our dividend at 10% a year. We've done that for the first 2 years or 3 years. We expect that, that will continue. And really, it did outplay that if we continue to pay quarterly dividends and grow those dividends in line with growing earnings that, over time, the share price will look after itself. Our property strategy on 31. We want to make sure that our partners who could buy property, if they were not a Kelly Partners business, in fact, can buy property so that they're not disadvantaged by being part of our business. But we've come to believe that we will look to get those properties outside the KPG structure because we'd like to get the capital back into the business where we can get a better return through acquisitions. And we didn't see when we -- when we did our last roadshow, we didn't see any particular support for that involvement on property from our shareholders. So we've heard that feedback, and we'll act on that in the next few months. We think we can find very good uses for our capital, particularly around the acquisition pipeline that's in place. There's a bunch of appendices for your interest. Page 33 makes very clear -- a very strong alignment between our people, partners and management. We do still own 59.3% of the headcount, which, we think, is important. There's good institutional support, which we're very pleased with and some retail shareholders. There's a clear outline of operating cash flow and attributable NPAT to underlying NPAT rec. I draw your attention to Page 36. The reason that this is very important is that our model has been the same since inception. We have always had a 51% or 50.1-plus percent interest in all of the businesses within which we've operated. There is one business where that's not the case, where that business has opened less than 6 kilometers from another office, and we allowed that office to have a direct ownership so that we had a look-through ownership of that business. But this is an operating model that we invented in our industry and have applied in a unique way, which, we believe, delivers very strong differentiation and competitive advantage to us and our partners who are the 49% owners in these businesses. And I think that's obvious now, nearly 14-year-old business, and I think it's become more obvious over time. There's an outline of our central services team, which we are investing in to grow. We've really strengthened that team and made -- and we've made clear here that we have the capacity to run now with the team that we have up to at least $80 million in revenues with a run rate of about $50 million. There's an outline of how we've transformed businesses in the past on some of those other slides. And importantly, there's a disclaimer. So without taking any more time, that's a quick 20 minutes. I appreciate there's a big turnout on the call today. It's at least twice what I've seen in the past. And so I appreciate people's interest. And if there's any questions, anyone would like to ask, then myself and Justin Sweeting, our CFO; and Ken -- Kenneth Ko, our Finance Director are here to answer any questions.

[Operator Instruction] Your first question comes from Wayne Sanderson from Phillip Capital.

Brett, congratulations. Good result. Just wondering how the wealth management strategy is coming along, please?

Wayne, we think that wealth management is about the worst business you could possibly invest in. And that the market is obsessed with the business of this crap. It's subject to massive regulatory interference and if anyone can tell me how the value of wealth management business will then be much smarter than I am. Other than that, our internal efforts to grow that business remain very strongly on track. But we've not seen anyone make a fortune for their shareholders in this space, and it's certainly not our focus. We are 100% focused on the quality of accounting firms as the best asset that we can possibly acquire and operate to great effect. And we'll just grow our wealth management business as a derivative of that business, as a support service to that business. So there is an outline of the growth of our complementary services in this pack, Page 20. And you'll see there that the wealth management business continues to grow. I think it's growing at 48% on the period. But I cannot say that I'm excited about owning wealth management businesses. I think the days of lazy trial commissions are over. We can't grow through acquisition because the assets are still dramatically overvalued. We pay dollar for dollar for an accounting firm and people want $3 per dollar for financial planning business. Their margins are lower than ours, say, 25%, we're doing 30%. And the key person dependence on a financial planner is much higher than it is on any of our chartered accountants. So this is not -- we are not enamored of a wealth management business. I've watched all the major banks, your Mac Bank, your Credit Suisse, the Big Four, et cetera, et cetera, does that much shareholder capital on wealth management businesses, but I don't intend to take on that adventure. The most Australians can't afford financial advice, and therefore, won't get any, but they can buy a book at the public library. Go buy one.

Thank you. There are no further questions at this time. This does conclude our conference for today. Thank you for participating. You may now disconnect.