NAOS Ex-50 Opportunities Company Limited (NAC) Earnings Call Transcript & Summary

Good morning. My name is Sebastian Evans. I'm the Chief Investment Officer of NAOS Asset Management. Obviously, welcome to our investor update and Q&A session for quarter 2 of FY '25. Obviously, already into February. It feels like an eternity for me anyway, Q2 of this financial year. Just touching quickly on the disclaimer or miss a disclaimer. That's right, you miss a disclaimer. That's -- obviously, for anyone who hasn't been on these calls before, we will refer to a number of investments and stocks. Obviously, this is not advice in any way, shape or form and is not tailored to your own specific needs. So please seek external advice that is suited to you. Finally, just the acknowledgment of country. Obviously, I would like to pay our respects to Elders past, present and future and we pay our respects and recognize their continuation or continuing connection to lands, waters and communities. Just maybe I'll touch on NAOS, but just to give a little bit of housekeeping. At the end of this presentation, you will have the ability or actually the ability throughout the entire presentation to ask questions. If you do want to ask a question, there's a question box probably most likely, hopefully, on your bottom right corner. If you enter your question in there, I will see it, and then I will answer it verbally over or at the end of the presentation. If I can't get to all the questions, most of you who know me will know that I'll probably either send you an email or give you a call afterwards if we do run out of time. You'll also receive the opportunity to answer a short survey at the end of the webinar, if you so feel inclined to give us some feedback on how we can improve these webinars. A little bit of structure. Obviously, I'll start quickly on, I suppose, Q2 that was going through some macro events and I suppose our perspective. Now many of you would know, we're very privileged to have Darc Rasmussen today to present. Darc is a very qualified and distinguished Director of Objective Corporation, Gentrack and more recently, Urbanise Group, which we're a major shareholder of. He will be giving a short presentation on the strata market within Australia, where Urbanise obviously operates. And then to finish off, Robert Miller will run through a number of our investments and some key highlights or key events, maybe some lowlights as well that occurred through Q2 of FY '25. And I'll touch on a brief outlook and how we see things going into Q3 and potentially Q4. Now for those of you who do not know NAOS, obviously, we're quite a concentrated investment firm. We focus on investing in emerging companies, both public and private. We hold or we manage quite concentrated investment portfolios. So our portfolios generally have 8 to 12 investments in each. So some investments can be 25% of the fund's value and then obviously, they can decrease from there. And we take quite large significant minority shareholdings. So 10% to 35%. We have Board representation on 5 or 6 listed investments and a couple of private businesses as well. So we're not activist, but we like to partner with people who have plenty of skin of the game and are proven and obviously, a high probability of compounding capital over the longer term. These charts just look at the portfolios as one group, so all 3 portfolios put together. I think what I want to get away from this or want people to get away from it is we are very true to label. So if you look at the market capitalization buckets, we focus on the smallest companies in the ASX. So you can see that most of our exposure is between $50 million and $250 million market cap companies. Obviously, this has been the area more recently that's been under a significant amount of pressure, but that's where we think most of the inefficiencies lie. And therefore, the long-term potential to outperform is significant. But you can see by our industry exposure, we're actually quite diversified. So we're diversified across -- go back, sorry. There it is. So we're diversified across a number of industries. Most of our businesses are profitable. So you can see we've got a large exposure to building materials, contracting, logistics, financial services, health care. So it gives you a very good feel of where our businesses operate and I suppose the industry dynamics that will ultimately drive their earnings forward. Next slide, please. This just gives more of a brief overview of who we are probably more from a qualitative standpoint. You can see there, we manage funds on behalf of 6,500 shareholders or investors. Obviously, it's an extreme privilege to do so. We run 3 listed investment companies and have 1 private investment fund. We've been operating since 2004 and launched our first LIC back in 2013. And directors and myself and my fellow directors and staff are some of the largest investors across all 3 of the LICs. I don't own 1 share outside of the NAOS LIC. So we're very much aligned to hopefully, the positive long-term performance of the NAOS funds. Just touching on, I suppose, gives a brief overview of our investments. So you can see the average profitability of each investment is roughly $25 million. So this was updated to the 31st of December. You can see there. So they're quite small businesses, but at the same time, they are very profitable, most of them. Our average holding period is now closing in on 7 years. So we are long-term investors. We believe that's a big competitive advantage relative to many of our peers. And surprisingly, not many people know this, but not one of our investments is within the Small Ordinaries Accumulation Index. So we're completely index unaware. As I said, we do have 8 Board seats. So we are active in regards to the way we invest and we do like to partner with our investments. So our ownership stake, we have 10 investments where we own more than 10% of a particular business. Next slide. So touching on the performance quickly. Obviously, we started to -- I'm trying to think Q1, obviously, started very well and then it fell away significantly from there. The way I would shape Q2 is we are starting to see some signs of progress, which is pleasing. So I know people look at the performance of NAC and NSC, and obviously, they read negative 1% and negative 4%. Pleasingly, NCC outperformed the benchmark for a quarter. But I do like to touch on, if you look at December, NCC was up 13%, I think outperformed by 16%. NSC outperformed by roughly 4% from memory and NAC outperformed. To give that some more context, I think it's the first time we've had 2 positive months across some of our funds in a very long time. And pleasingly, you look at yesterday and the way the market fell away very aggressively, our funds are actually flat on a day like that. So we're actually seeing, for the first time in a long time, I would argue, quite a significant change in the market. Pleasingly, that's flowing through to some positive performance on an absolute level. And then I think, hopefully, over time, that will lead to some significant outperformance on a relative level as well. But I will go through later in the slide on what we're seeing in the small-cap space, but probably more specifically to us, the micro-cap space, which has been in the doldrums for a number of years now. Next slide, please. So the Q2 overview, I suppose, if you were to put it on the slide, looking back, it was a rather eventful, if not one of the most eventful quarters we've had for some time. Obviously, Donald Trump voted in as U.S. President inaugurated later in January. The Federal Reserve cut by 100 basis points, 50 basis points each time they cut. But interestingly, the most recent one had a more hawkish outlook, and I will touch on that. AGMs were held for most listed businesses along with trading updates. Trading updates have been quite, I would say, dynamic, mixed depending on the sector they operate within, but there are some consistencies across a wide group. Touching on New Zealand, we've got some large New Zealand exposures in our funds. If you look at some of the economic data coming out of there, it's been -- horrific is quite a strong word, but I would say it's been extremely poor. So they're back in recession and quite an aggressive recession when you look at some of those GDP figures that they've released across Q2 and Q3. Domestically, obviously, all the talks on inflation and interest rates. Clearly, inflation here is falling, obviously assisted with some large subsidies in relation to electricity. And then saying that the Aussie dollar continues to fall aggressively against the USD. So the USD has obviously been on an upward trajectory. That's probably accelerated more recently with the way interest rates are expected to move in the U.S. along with some of these tariffs that people have been talking about coming out of the U.S. And the flow into speculative investments has -- it really picked up towards the end of calendar year '24. Obviously, that's changed in January and probably February, but we did see a lot of liquidity flow into the likes of Bitcoin, technology stocks, geared ETFs. If you look at the size of some of these things in the U.S., they are very, very significant. Next slide, please. And I think this is probably one of the most notable events or something that changed across Q2, and that was what people expected or where interest rates are expected to go in the U.S. I think when I started last calendar year, calendar year '24 on interest rate trajectory in the U.S., there was consensus they wouldn't move down sharply. Clearly, they have moved down. But as I said, the outlook now is much more hawkish, especially with Trump as President, high net debt-to-GDP levels in the U.S. The trend is no longer down. And as you can see here, if you're looking to get into the housing market in the U.S., you're paying a mortgage rate of over 7% for a 30-year mortgage. So that makes us not overly attracted to be a homeowner in the U.S. or a new homeowner at the very least, and that will have ramifications. But it does really set the scene on how the U.S., I suppose, is shaping up going forward from an interest rate perspective. Next slide, please. But as many people have said and a lot of commentators do touch on more recently, there's no doubt that the world's largest economy has remained extremely resilient. GDP growth over there compared to here has been a magnitude of 3 or 4x higher. That economy continues to track at a very healthy rate in regards to GDP growth, and that's why you're seeing a flow of funds continue to move into the U.S. and why valuations and share markets remain at record highs in the U.S. as well. But I think, again, I think this is worth touching on because a lot of people have been talking about interest rates and I suppose the trajectory for earnings in the U.S. But it is worth touching on that from a debt perspective, debt has almost never been higher in the U.S. Why is that important? It's important because if you want an exposure to a U.S. government bond, what you will command from an interest rate perspective to take on that debt will be higher compared to what it would have been if the debt-to-GDP levels are lower. So for Trump to enact many of these policies that could potentially be inflationary or increase government debt as a percentage of GDP, there is an argument, quite a strong argument that interest rates in the U.S. are probably done falling for the time being. Next slide. Looking at calendar year '24 and equity market returns, I think it is worth touching on this because it was a stellar year for some equities at least. The ASX 100 returned almost 12%, even though it actually fell in Q4. So it really shows you how strong those first 3 quarters were. The Small Ords underperformed its large counterparts, but again, up 8.4%, even though it was down 1% in Q4. And some of the sector movements were, quite frankly, I've been doing this for almost 18 years now, were extraordinary. So financials, extremely strong in the Small Ords driven by the likes of Zip. Zip at one stage looked like it was going out of business, but it's seen itself go from $0.30-odd to almost $3 at one stage. Health care, really driven by biotechnology. People continue to seek exposure to biotechnology stocks. And obviously, the Chemist Warehouse reverse listing through Sigma has been stellar to date. And then obviously, gold due to all the uncertainty around the globe, seen a lot of outperformance in that sector. But at the same time, there have been a number of sectors that have been under significant pressure, the standout, obviously being lithium and rare earths names with many of them down 50% to 80% given the oversupply situation in regards to lithium and lack of demand. But if you overlay this against the U.S., Australia was left well and truly behind. So the S&P up over 23%, NASDAQ close to 30%. If you look at the Magnificent Seven that everyone talks about these days, the Magnificent Seven were up almost 70% for a calendar year, which is extraordinary when you look at the size of some of these businesses like Microsoft, Tesla, Amazon. These are returns that people simply haven't seen before in stocks as large as the ones that we're talking about today. Next slide, please. Looking at this table, we use this in our road show, but I've updated it again considering calendar year '24 has finished. And I think it is worth touching on. Obviously, CBA share price, again, at a record high last week. If you look at the 1-year total return, up 42% relative to they're expected to grow their EPS by negative 0.29%. So the valuation CBA has increased by over 40%, even though the earnings has gone backwards or is expected to go backwards. And that applies across all of the banks. So NAB up 30%, Westpac up almost 50%, all the EPS profiles that are negative. When you overlay the fact that these businesses are some of the largest businesses in the ASX, you can see why the ASX produced such a stellar return as it did. And in our view, a lot of this does feed on itself, the flow of passive money, ETFs get larger, many fund managers are benchmarked against such indices such as the ASX 100 or the ASX 20. So as these businesses become larger in regards to their weighting and continue to outperform, fund managers are forced, in essence, to gain an exposure to these businesses and keep up with their weighting. So as we've seen here, many of these businesses have continued to perform well and truly into February. Next slide. So before I pass over to Darc, I'll just suppose give our NAOS perspective in the last 2 slides. And we've probably got a slightly different perspective maybe. But clearly, many of our businesses entered a downgrade cycle 2 years ago. What we're hearing and what we feel based on some of the evidence and conversations we had pre-Christmas, we feel like the downgrade cycle should subside in February. We expect to see many emerging companies start to see the benefit of cost-cutting initiatives that they took 12 months ago. You'll see the benefits of those. Customers are starting to get back into a normal trading environment, a routine ordering cycle, which does help businesses. It allows them to plan and be more efficient. M&A is becoming more attractive as vendors' expectations adjust and the pricing environment becomes less volatile as the competitive landscape becomes more rational. So I think, obviously, everyone went through COVID. Some people made an awful amount of money through COVID. We then had the effects post-COVID. And I think 4 or 5 years later, we're now starting to see some signs of where we were pre-COVID and business is starting to react normally, but in my view, more efficiently, which should lead to EPS growth, hopefully, in the short to medium term. Next slide, please. And from my perspective, I think the macro environment for once should be beneficial for many emerging companies, hopefully, many of our investments. Clearly, a lower risk-free rate becomes or pushes investors into places like emerging companies. They want to seek exposure where they can get a better dividend yield, more EPS growth relative to what they're receiving at a risk from a risk-free rate or a term deposit. The stabilization in inflation allows businesses to effectively manage costs. Many of our businesses have fixed cost base. You look at the Big Rivers of the world, the MaxiPARTS of the world, they have fixed costs, which they need to leverage. If inflation starts to become -- subside at the very least, it allows them to manage those cost bases more effectively and hopefully grow margins from what probably is a low base over the last 2 years. And as I touch on that third point, M&A is becoming more active. We've seen some of our businesses more recently. Dropsuite received a takeover bid last week. Ahrens Group, how you pronounce it, took a stake in Saunders, which is one of our largest investments. We are seeing more M&A in the space of emerging companies, and we think that will only continue as businesses become more confident on the outlook. And then finally, consumer spending has been a big one. Many retail stocks have been under pressure. It has been very dynamic and probably quite polarizing, but as rates continue to be reduced, consumer spending confidence does increase. And you would have seen with the retail sales figures out for December, they were stronger than what people expected as many consumers start to bank that rate cut rightly or wrongly. So with that, I'd like to introduce Darc, who obviously I touched on at the start of these slides. Darc is a Director of Objective Corporation and Gentrack, both have been stellar performers for us and many investors over a very long period of time. More recently, became the Chair of Urbanise, again, which we're a large shareholder in and obviously has been instrumental, I suppose, in revitalizing that business. Darc is going to touch on the strata space within Australia. I suppose some of the nuances of that awfully large industry, but probably rather unloved industry. And then at the end, I'll touch on -- if anyone does have any questions for Darc, we can touch on those prior to the end of the presentation and prior to me going through my questions. So without further ado, Darc, I'll hand this over to you.

All right. Thank you very much, Seb. Good morning, everybody. Darc Rasmussen as introduced by Seb. Thank you for the opportunity. As Seb mentioned, I'm involved in a couple of other businesses. My career has really been one of identifying industries with strong tailwinds for change and legacy technology and taking advantage of that. I was fortunate to be able to grow $1.2 billion business from essentially start-up for SAP using that strategy. And as we look to the Australian strata market, well, and just anecdotally, by the way, Gentrack in the global utilities industry is a very similar dynamic. Legacy technology, but industry macro trends have now driven and are driving a massive technology upgrade across that industry. So a good segue into the Australian strata market dynamics. And yes, next slide, please. Really looking at it from 3 simple perspectives; what are kind of the underlying growth drivers for the industry, what are the industry challenges and change dynamics, and then what is the inflection point opportunity that is triggered as a result of that, as I've seen so often across many other industries. And as any good investor, I'm sure look for industries that have tailwinds and then look for the companies who can use those tailwinds to drive above-average growth opportunity. So if we look at the organic growth, kind of the do nothing, a rising tide lifts all ships. Essentially, the strata industry is about managing dwellings such as units and communities. We know that we have a significant housing shortage in Australia that is going to be further exacerbated by population growth. Australia is one of the only developed countries in the world that is seeing relatively high population growth. Many of the others are declining. That inherently drives an increase in dwellings. As you'll see there, 13% across the next 5 years, but a disproportionate increase in growth across the strata managed because it is that multiunit dwelling that is necessary to be able to solve for the problem, high density in highly urbanized environments. So simple growth dynamic there and one that I think we can all get. But I think what is missed with the strata industry is that there is another massive component to it and one that is intricately intertwined with the industry and that is the strata banking market. So on the next slide, you'll see that across the strata industry, there are about $10 billion worth of funds deposited with the banks. That number is based on all of the data that we've been able to get visibility to and go bottom up. Anecdotally, banking industry insiders are telling us that, that number is actually somewhere between $15 billion to $20 billion, but we wanted to look at it just based on the data that we've got visibility to. And those deposits, obviously, there's also transactions in the industry, payments of strata levies, payments of suppliers. And that transaction flow, there's about $20 billion that is occurring on an annual basis. And that whole financial management is intricately linked to what strata managers do. It's a highly complex process where one strata manager may be managing on behalf of their body corporates, thousands of bank accounts, thousands of bank accounts that have to be reconciled on a daily basis, but even more complex to that, the fact that they have to not just reconcile the bank account, they have to reconcile it to the unitholder who made that payment. So there's multiple levels of reconciliation involved there. And unlike other industries, it's actually a many-to-many transaction flow as opposed to -- in other industries, it's basically you make a payment, it's received by the recipient and that's kind of it. Here, the body corporate manager is managing this in a many-to-many environment. And that creates enormous complexity as well as enormous interdependency between the banking solutions, which if they're going to service the market, have to be in place and the strata managers. And 20 years ago in Australia, one bank kind of figured this out. They built something and they've more or less owned the industry since on a near monopolistic base. But the reality is that the profitability of those funds is almost double the average profitability of banking funds in other market segments. So the net interest margin, which is the key profit indicator for the banks across all other deposits is about 1.7%. In the strata market, it's 3%. This makes this market extremely attractive to the banks. It's a source of very cheap funds and one that really has been running under the radar for a number of years, but it's now really surfacing. So how do all of those factors come together and how is the industry performing? I'll give you a little bit of a perspective on that to understand the industry challenges and dynamics. So we saw earlier that on a kind of do nothing basis, the industry is growing. But if you look at the average profit margins over the past years, the industry has seen a dramatic drop in profit margins. And moreover, the percentage of salaries as to total revenue has risen dramatically. Underlying that, there's basically been 0 improvement in productivity across this industry. If you look at the number of lots managed per FTE 10 years ago, it was 365. So per full-time employee in a strata management business, that business is managing 365 units, unchanged. So why has this industry not seen productivity improvements over the past years? Why are the profit margins falling? There are a number of drivers behind that, but there are 2 core platform pieces to it, and that's what I'll show on the next slide. So as I mentioned at the beginning of the presentation, we've seen industries with legacy technologies that sit there unchanged and then get to an inflection point and suddenly change. That's a massive growth driver for companies, for the right companies with the right solutions coming in to those industries. And if you look at the strata industry, 60% of the software utilized within this industry is still running on DOS, Windows, on-premise-based systems. I was frankly surprised to see an industry that still had that profile. And if you look on the banking side, 100% of it is running on technologies that was built over 20 years ago. When we look to how do we drive profitability, how do we drive productivity increases? These are 2 fundamental pillars for this industry. That lack of automation creates manual processes, lack of efficiencies and an inability to scale. One of the things that I should have mentioned earlier around the falling profit margins is that for many businesses, in fact, for most businesses in this industry, adding more customers to their business actually means that their profit margins drop. Much of this industry is experiencing negative marginal returns. It's that bad. And it is driven by this lack of automation. It's driven by the lack of modern processes, and it is driven by the inability to work from home or offshore, more simple functions. The industry is complex. It requires individuals who understand all of the compliance requirements around building safety, fire, water and the whole strata regulation around financial management and the management of the funds that they hold and trust on behalf of their customers. It's very complex and needs qualified people. But those people come into the industry and they experience legacy technology, they have to do incredibly cumbersome manual processes. And the only way to retain them is by paying more money. And some strata managers are literally trying to buy their way out of that problem as you saw with the graph earlier on. And the ability of these organizations to service customers is antiquated. Customers today don't judge the strata industry by what each of the strata managers provide in terms of their service capability. They judge by the experience that they have across all of their services in their everyday life. And so the strata industry today is simply not meeting the customers' service expectations. So the opportunity for the industry and what we see smart operators doing is moving to, number one, simplifying the processes of the industry that are antiquated, modernizing that, automating work as much as possible and providing them staff with the capability to focus on what is complicated and important, moving functions to customer self-service, which customers expect and obviously decrease the cost to the strata manager. And the really smart strata managers that are doing this and are successful have plans then to consolidate across the market, acquire less profitable businesses that are not able to modernize fast enough. And so a core foundation of that is, number one, having software that is modern, cloud based, agile, flexible and fit for purpose, tightly integrated with a modern banking solution that can help reduce and automate those very complex and labor-intensive functions across then to ultimately delivering their customers with self-service capabilities. So in a nutshell, and I don't know how I'm doing on time, but that was a very quick review of where we see an industry that is really playing out very similar to scores of industries that we've seen over the past couple of decades. And surprisingly, this one is still lagging. The reality is that the inflection point is coming and is frankly here because those profit margins are not sustainable. The negative marginal returns mean that essentially players in the industry are unable to grow and take on the additional units that they otherwise would. And many of the solutions that they're using are actually being sunset. For example, many of the banking solutions that they're using will not exist in 4 to 5 years. They will be completely phased out. So there's a confluence of factors here that really bring this all together as an inflection point for the industry that can be absolutely taken advantage of by players with the right solutions and the right capabilities across both strata management and the banking financial services arena. So I'll pause there. I don't know how I did on time, but happy to take questions as it relates to this.

Thank you, Darc. In regards to your questions, as I said, if you do have questions, we'll take them after Rob finishes and you can obviously type in the question-and-answer box on the bottom right corner. Hopefully, they're coming through. And with that, Rob Miller is quickly going to touch on some of the highlights for Q2 in regards to some of the investments that we hold, and then I'll come back for an outlook and the Q&A, question-and-answer session. So thank you.

Good morning all. Thanks for joining us today. And obviously, thanks very much for Darc for taking the time to give us his insights into the strata industry, which hopefully, that came across in the webinar. You can see he's got deep knowledge in this space. And yes, he's obviously got a very strong track record in other industries where we've seen tailwinds. So we're certainly very pleased to have him involved with the Urbanise business, and we hope the investors get a sense of that today. I'll just quickly, as Sebastian mentioned, quickly touch through some of the slides on what happened within the portfolios over the last couple of months. First, with BTC health, which is our medical supplies and distribution business. And from my understanding, the last remaining pure-play medical supplies distribution business that's left on the ASX. They had a very, very busy quarter and it continues the period of late where they've really done quite a remarkable turnaround of that business, and they are certainly hitting their stats with respect to signing new deals, new agreements. We saw them sign a very big ECMO deal, which is one of their products with a children's hospital out of Melbourne. In the last quarter, we've seen their replacement pumps for -- which is their replacements for their ambIT pumps, which was a part of their business that was actually seeing a discontinued product. The replacement pumps have now been given full reimbursement, which is a very crucial factor, which should allow for a seamless transition, hopefully, of old pumps to new with respect from the customer base. Secondly, they entered an agreement with Corcym, which was -- saw them effectively buy that business, which -- and take -- assume all the stock and inventory that is associated with that business and it should be profitable from day 1. It's another key prong in, I suppose, this portfolio they've got in the cardio space that already adds to what they're doing in that space. And effectively, you're going to similar customers and doctors and hospitals and whatnot and selling a similar type product that's complementary to what we already do. So the immediate profit contribution that this should have to BTC is very pleasing to see. Finally, they have updated at the AGM that they've had a very positive start to FY '25. So we'll look to see what happens at the results there. Secondly, coming to MOVE, it's probably fair to say that some of the noise around this business and some of the internal movements have somewhat settled down over the last quarter, which was pleasing certainly from our point of view. The legacy Atlas Wind ship has been sold. That Oceans division now is running on a rental model, whereby the maintenance and I suppose all the liability of that ship is actually with the owner of the ship, and MOVE is certainly just running that as a leasehold, which we think is a far better risk profile for the MOVE business and obviously, the management team do as well. As mentioned, the kind of leadership changes have somewhat settled down. And with respect to what's happened there under the interim CEO, Paul Millward, he's put in place -- starting to put in place his own team with a General Manager of Freight and Fuel and obviously, the warehouse business as well, which have been recent appointees under his guidance. We certainly seen a bit more stability at the Board level now as well and a plan that's now being executed on that's seeing, I suppose, 2 factors in our opinion that are driving hopefully future performance is obviously a cost base rationalization, which we think Paul's got -- has a track record of delivering on if you look at his past experiences. But also you saw in the updated provided at the AGM in October is that they're actually seeing gross margin improvement. So we think they're actually running their business smarter. An example of that might be doing less in terms of the number of truck routes they do from one point to another, albeit what they're doing is they're consolidating and actually running them as a far fuller truck, which obviously improves your margin per truck because you're not running backhaul, which may or may not be profitable. So I think that's a very key point that we're seeing both cost base improvement and margin improvement. And if you simply looked at what they've done with respect to the update from the AGM, if you annualize that 4 basis point improvement versus Q4, you would get an $11 million EBIT improvement across the business, all else being equal. We certainly don't believe that is going to be the case with respect to all else being equal, but it does show you the inherent opportunity here where they've provided guidance to the market or targets to the market with respect to profitability into FY '26. And we think little incremental points like what they've provided show us they're on the right track there, especially with, you look at the industry as well -- sorry, the economy over there in New Zealand, it's definitely bottomed out, albeit we aren't seeing the huge signs of improvement yet, but the stage is set for a better 2025 there than certainly 2024 and 2023. Coming to the next slide, please, Hancock & Gore. So we've touched on this one a little bit of late, which is a reasonably new one within the portfolios, the listed investment company, which is how it's structured, but the catalyst for us was the acquisition of Schoolblazer, which is the U.K. direct to e-commerce version, I suppose, of a school uniform business over there, which on its own has had a significantly -- significant revenue growth over a 20-year period starting from scratch. It's been quite a success story. We generate a lot of cash flow along the way and have taken -- effectively have changed the market over there. And we see there's no reason why this can't be extrapolated here to the Australian market to start with, which in meeting management over the last little while, I expect the Australian market to be probably a decade behind what the U.K. market is at the moment. Given the success of Schoolblazer and what they've had over there, certainly, the opportunity is here to have success as well. And with respect to that, they've created a stand-alone division within the quarter for all of their uniform companies called global uniforms division, appointed a CEO, they've got a high-quality Chairman of that business in place. So they've effectively siloed this operating business within the parent company, and we think that gives them optionality going forward and certainly optionality not only in terms of how they look at that from a -- whether it should be divested or otherwise, but also from an M&A point of view, it makes it a lot easier having that under one uniform division. And we've certainly seen that in place and the integration and synergies that they can hopefully get from the Mountcastle and Schoolblazer businesses combining. They've talked about that being a focus for FY '25, and we're expecting an update there next week at the AGM. So coming at Urbanise, I won't touch on that too much given Darc's comments earlier. He's talked about the industry and the backdrop there. But what I would say is probably the key point here from the last quarter was the AGM approvals that we saw for the new long-term incentive plan in place for the Board and senior management. This is a bit of a change from what they've had in the past. They've actually gone to what's structured now as a share appreciation rights process that they put in place, whereby there's certain share prices that are required to be hit for them to effectively be provided with the shares and they are at $0.45, $0.65 and $1.05. So clearly, the latter 2 are materially higher than where the share price is today, that's over a 3-year plan. So we think the fact that they've, I suppose, been asked the market and our shareholders and received approval for such a structure shows that they're very much aligned with shareholders and how they think about the future. It's exciting to see. And hopefully, some of the comments from Darc today alluded to that as well. Next slide, please, [ Ange ]. Just the last 2 I'll touch on. AMA Group, which is the largest smash repair business within the Australian market, a company we've known well over a long period of time from many years ago. We were an investor and it certainly fell on its sword to some degree over the last 5 years, got too heavily indebted in our opinion. But certainly, that turnaround has been complete -- or sorry, the capital turnaround has been completed with respect to the balance sheet reset, which did occur within the Q1, which was a key catalyst for us to really have a look at this business. Their Q1 results were in line with expectations, and we're actually seeing them delivering operating cash flow, positive for -- in terms of the core business now. That trajectory continues, which is great to see. What I did see from some of their comments in the AGM was significant improvements still to come with respect to their AMA Collision business. It's worth pointing out, we did some site visits down in Melbourne over in December to look at some of their operations. And they've got 2 core operating businesses; Capital S.M.A.R.T, which is a very well-run corporate business that has seen significant improvement already. And they've also got the AMA Collision business, which is far earlier in its turnaround trajectory. And not to say that they are the same businesses, but we do expect that they can continue to improve their margin profile over the medium term. And certainly, if you look at what they've provided to the market with respect to guidance for FY '25, it's an improvement in EBITDA margins and they've got some targets out there for the longer term, which based on if this business can generate kind of mid-single-digit organic revenue growth, undertake the improvement initiatives. We think there's plenty of runway here where they are a dominant player in the market and should be able to continue to take share over time. And finally, on Webjet, which again runs a slightly different year-end financial year. They actually put out their results to market, which was their first half FY '25 results. Underlying cash EBITDA was slightly down versus the prior period, but I think it's worth pointing out if you got to dive a little bit lower and see how this business is truly operating. If you put that against the backdrop of domestic bookings being down, clearly, there is a consumer element to this business. Their domestic bookings were actually down approximately 10%, but the revenue mix of what they are achieving is actually improving. So we're seeing a bigger skew towards international airfares and also a bundling approach where someone might be booking a flight, but also booking a car hire and a hotel through Webjet, and that is a far higher revenue and a far higher margin profile. So we're not necessarily looking at the revenue profile as much. It's more about the margin that they're generating off that revenue. I think that they are seeing improvement there from a lot of initiatives that they're doing internally. And we're certainly reminded of some of the Mark Leonard comments from the CEO of Constellation Software when he talks about spinouts. And when they spun out of a company, when spinouts occur, I should say, you often see that they have a new sense of kind of a renewed lease on life and they're very focused and they band together and they drive a very, very strong culture. And we've certainly heard some rhetoric around that with respect to our conversations with the management team of Webjet. It's now got a solid focus from those who are running it. And we think there's a reasonably material improvement in the core operating business before they start to look at capital management initiatives, which if you look at the business, it's got $100 million of net cash. It's a strong free cash flow-generative business. There's opportunity there for M&A or other capital management decisions, which we expect to flow through to the market over the next couple of years. And with that, I will hand back to Sebastian.

Thanks, Rob. Obviously, thanks for that very thorough update on quite a busy Q2. So just before I take questions, in regards to, I suppose, the outlook, I'm obviously very hesitant to give an outlook, but I'll do my very best. And I think as I said or try to allude to anyway at the start of the presentation, we're very optimistic on the long-term outlook of all 3 funds. And I think some of the key reasons why we've become a little bit more optimistic of late is the AGM update given by many of our core businesses were promising. We've given you some names there. Obviously, Rob's referred to MOVE and Urbanise. But all in all, I think if you look at the majority or 80% of the investments, they either maintained, reaffirmed or issued guidance or made a commentary that we thought was very supportive of the long-term outlook. And we haven't seen that for some time. The hesitation wasn't there whereas in FY '24, obviously, it was. So we think that gives us some confidence anyway going into half year reporting season. Touching on that. Obviously, February brings with it half year reporting season. As I said, we expect the downgrade cycle to conclude. We think it will either conclude by obviously, business is showing an improvement in earnings for once after a long period of time or just a significant improvement in the outlook due to the supply or demand dynamics in their respective industries. And we feel very confident about that. The third point is corporate activity. Clearly, some of our businesses have been a little bit more active in regards to their neck of the woods. Obviously, BTC, which Rob touched on, they acquired the distribution rights more recently. That's a step change for that business, really puts them on the map. Didn't pay a lot for it. It was quite a clever deal in our view. As I mentioned, Saunders, I think it's not amusing, but at $0.70, $0.80, 3 months ago, you couldn't sell, you couldn't give Saunders away. And interestingly, it takes a family business, a fifth-generation family business in South Australia, Ahrens Group or Ahrens Group, it's a $300 million revenue contracting business. It takes a business like that to take a substantial stake in Saunders and now the stock is $1.05, 3 months later when, in fact, nothing has changed at all in regards to the Saunders story. And we firmly believe we'll continue to see more of that. COG made an announcement recently or they didn't announce, it was in the paper. EPY made the announcement. They will look to divest that investment, simplify their business. As I said, we will see more and more of this over calendar year '25. And that final point there probably ties into my last slide, which I'll go through, but there are numerous catalysts in calendar year '25 that really could make or break some of these businesses. And I suppose what it means for the NTA, of all the NAOS LICs, I think that's probably the most important question. That's what everyone is thinking about. It really comes down to valuations. Many of our businesses are trading on record-low valuations. If you look at Urbanise as an example, it's trading on an annualized recurring revenue multiple of less than 2, yes, less than 2, yes, less than 2, maybe 1.5. That's -- I'm not comparing the 2. But when we bought Gentrack, it was a similar story. I think it was an ARR multiple of 1.5 at one stage. If you look at that business today, it's trading on an ARR multiple closer to 8 or 9. Once these businesses show some promise, show that they can grow consistently for a reasonable period of time, momentum feeds on itself and the valuation re-rate can be significant. And we think we're on the cusp of that for many of our businesses. Many of them will move into a net debt-free balance sheet. The earnings will show sustainable improvement. Capital management will be considered, we think. And these industry tailwinds are not going away when you look at a business like Urbanise. They are real tailwinds that are only compounding over the next 5, 10, 15, 20 years. And that last point is really what I touched on at the start of the presentation as well. We are seeing demand returning for emerging companies. The ASX 200 as a whole, obviously, not every business, but as a whole, is expensive. The big 4 banks have never been more expensive. And then when you overlay the earnings profile, they definitely have never been more expensive in this listed environment. Small Ords has underperformed every year since 2018 relative to its larger counterpart, believe it or not. We're seeing fewer IPOs. We touched on the quarterly report, we saw 3 reasonably sized IPOs. It's only short term, but they've all produced negative returns since their IPO. So the market is getting smaller, the amount of quality business is reducing. So it will force people into smaller and smaller businesses. That's our view. And hopefully, you see a very significant re-rate as many investors become reactive, and they will be reactive to a rebound in earnings. And we think that rebound in earnings is on the cusp for many of our businesses. There's no doubt some will be more delayed than others. So businesses like a Big River will probably be more delayed than a business such as MOVE as an example, which is probably well and truly down its restructure and turnaround strategy. So the proof will be in the pudding come February and then obviously in August. And then to finish off, if we look at some of the catalysts that we're looking for, and I think the market will be looking for as well that are quite significant in respect to each of these businesses, some of the biggest catalysts that will move the dial for our performance are things like, obviously, BSA produced some absolutely stellar results over the last 1.5 years. They're going through a tender process with nbn's public knowledge. If they can secure that tender, we think the re-rate for that business will be significant. It's trading on a P/E of 5. So if you can get a tender outcome in favor of BSA, the re-rate could be significant. Obviously, Rob touched on MOVE with a market cap of $25 million relative to a revenue base of $250 million to $300 million. If they can show some profitability and some margin improvement, obviously, it doesn't take much to move that market capitalization. And then obviously, Urbanise, which Darc alluded to, still focused on achieving cash flow breakeven in FY '25. This was reaffirmed in their quarterly last week. And they also reaffirmed in their quarterly that they expect to sign one or more strategic partnerships with large Australian financial institutions or banks by the end of Q3. If they can do that and depending on what type of deal it is with what type of counterparty, we think that's really the moment where everyone starts to look at Urbanise and the re-rate is on and could be on for a very long period of time, considering the size of the market. So with that, as I said, I'd like to open it to questions.

I will start. We've only got 2 questions, which is a bit less than usual. So I'll start on these questions. And unfortunately, this new software we have doesn't tell me the name of who wrote the question. So apologies, I can't refer to whoever you are. The question is, on Page 5, it shows you have a reasonable exposure to sub-$50 million companies. Can you give a perspective on what you're seeing in this space, in particular, valuation multiples and the attractiveness? Look, I'd definitely say some of these exposures we have are probably -- it's going to sound awful, but probably a little bit self-inflicted. So Urbanise wasn't a sub-$50 million company, but it is today and the same goes for MOVE. But I would definitely say the -- what we're seeing in the space is if you believe in the stories and the strategies and the moats that these businesses have, there's a significant valuation opportunity over the long term. But you are also taking a very significant amount of risk. This presentation is a bit is you're taking a significant amount of risk with that. Urbanise is definitely not riskless if they can't achieve a deal. It becomes a little bit of a slow burn. But if they can, it is game changing, and that's a business that could grow many years at 10% to 20% per annum in our view. The same goes for MOVE. If Paul and his team can generate margins of 2%, 3%, 4%, 5% as opposed to negative 3% on a revenue base of $300 million is significant. And frankly, when large businesses are expensive as they are, you are forced to look into the smaller space. We are cognizant of not having too much exposure to the smallest businesses in the market. The second question -- my chats have disappeared, [ Ange ]. I'm not sure if you can put them back in. Anyway, I can remember the second question. So the second question was about merging some of the vehicles or the LICs, given the commonality in some of the investments. Obviously, we do get this question from time to time. I would say the commonality is not what you probably think it is. And I think to stipulate or give you an example of that, when NCC was up 13% in December, I think NSC was up 2% and NAC was actually down 1%. So it shows you the correlation between the funds is not what it used to be. So I think some of the common holdings represent roughly 20% across the 3 funds, to give you an idea. I think if you were to merge the 3 funds, we've always talked about potentially going from 3 to 2. I think if that was doable, we would look at that, assuming it is a benefit to all shareholders. But where we stand today, and frankly, some of the LICs, if you look at NAC, it trades at NTA, it's not compelling just yet, but it's definitely something we do actively think about. Just a question here from Rod Finch. Given the growth rates that the largest companies in the world like Meta are achieving, basically, do we not understand that we should be investing in larger businesses, not some small pockets of a small economy? Good question, Rod. I suppose my answer would be is we leave that investment decision up to the likes of you. So people who are looking for exposure to the Big 7 or to the European Union or wherever you want an exposure, ultimately, that's your decision. I think for the last 20 years, we've been investing in small caps and micro-caps and private businesses within Australia and New Zealand. That's our niche. That's where we feel our competitive advantage is. And ultimately, if people want an exposure to those businesses, then they will obviously acquire shares now. But given the comments that you've made, we completely understand why people don't want exposure to that end of the market and they want exposure to the NASDAQ. So they go and buy a NASDAQ ETF. Just a question on Daniel in regards to the debt within NAC and NCC. Obviously, some concerns about the LVRs considering some of the companies that are illiquid and NAOS owns large percentages of those companies. Can you provide some thoughts on how you're managing the debt levels and covenants? Yes. Good question, Daniel. I think what I would say is given what we went through last year and frankly, the previous year before that, we have never -- well, we have never, I was going to say we never paid penalty interest. And obviously, we've never broken -- gone through any of those covenants to date. So we are very aware of it and we have a strategy in place to manage it, and that has been very effective to date. Over the period of time, clearly, we've diversified some of our investments compared to where we were 12 months ago because it does give us more liquidity in a market that's become, as you probably would know, extremely illiquid. So we're very cognizant of that. I think the risk that we do face though and I've never shied away from this is we continue to have some large investments that can move the dial from a performance perspective. So if something was to change significantly, then obviously, that could affect our covenants or our LVRs more specifically. But where we are today, we feel very comfortable with where we are. A lot of our businesses are profitable, they're dividend paying, so it does allow us to continue to pay those dividends. And as we went through NSC, we went through a refinance with that LIC and we were able to refinance in a relatively orderly manner. Given at the time where the market was, going to U.S. election and rates moving around all over the place, it wasn't the easiest time to do it. So we do feel very comfortable about where we stand today. And hopefully, with some performance, we'll hopefully feel more comfortable in 6 months' time. Trent, your question relates to the debt as well. Hopefully, I answered it. But look, these are good questions. It's something, as I said, we pay attention to it daily. We feel very confident with the investments that we hold. Yes, we're concentrated, but these are real tangible businesses that make money that hopefully I've conveyed over the past few months, we are seeing some tangible positive results coming out of these businesses. And we feel if that does continue, the re-rate will be significant. And obviously, the effect on the LVR will be extremely significant. But -- and it does work the other way. But obviously, from an NTA perspective, our gearing has hurt us significantly because it's magnified the effect on the NTA, but it does work the other way. And I know we've all got very short memories, including myself, that if we can -- if you look at NCC as an example, when we had that 13% month in December, obviously, the effect on the NTA was actually 20% because of the gearing. So I'm, for once in my life, going to be half glass full here. And so if you overlay the potential for earnings growth in our businesses plus the valuation re-rate from a multiple perspective plus the gearing, the ability for this NTA across NCC and NAC specifically to move by 30%, 40%, 50% is very rare. And that's how we think about it. We just need some of the results to come out to be a little bit better than what the market is thinking. And I think you'll see that play out sooner rather than later. And that's it from a question perspective. But obviously, I want to thank you, everyone, for attending. I appreciate the feedback and the questions. Obviously, it's going to be a fairly important quarter for us across Q3. I'd obviously like to thank Darc. We're very privileged to have someone of his caliber present today and take time out of his extremely busy schedule considering what he's got on at this time of year. I would like to thank Darc and wish him all the best at Urbanise and the other businesses that he sits on the Board of. And as I said, if you do have any other questions, don't hesitate to contact me or Rob. We generally get back to everyone on the same day. So don't hesitate to reach out, and we'll address any concerns or questions that you have. But all the best for February, and hopefully, we can provide you with a positive update for Q3. So thanks again, and enjoy the rest of your day.