Perpetual Limited (PPT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Perpetual Half Year Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susie Reinhardt, Head of Investor Relations. Please go ahead.

Good morning, everyone, and good afternoon or evening to those joining us from other parts of the world. Welcome to Perpetual's half year 2023 results briefing. I am Susie Reinhardt, Perpetual's Head of Investor Relations. Before we begin today, we would like to acknowledge the traditional owners and custodians of the land on which we present from today. Here in Sydney, the Gadigal people of the Eora Nation and recognize their continuing connection to land, waters and community. We pay our respects to Australia's first peoples and to their elders past and present. We'd also like to extend our respect and welcome to any Aboriginal or Torres Strait Islander people who are listening in today and also acknowledge the traditional custodians of the various lands on which you will join from today. Presenting here with us is Rob Adams, Perpetual's Chief Executive Officer and Managing Director, as well as Chris Green, Perpetual's Chief Financial Officer. There will be an opportunity to ask questions at the end of today's presentation. Before I hand over to Rob, we would like to draw your attention to the disclaimer on Page 2 of the presentation. Rob, over to you.

Thanks, Susie, and good morning, everyone. Thanks for joining us for today's first half '23 results briefing. A key theme for the first half of the '22-'23 financial year was the continued execution of our strategy to better position each of our businesses to manage effectively in their respective environments and to drive future growth. While our headline earnings numbers were impacted by the volatility seen in global investment markets during the half, which I'll comment on shortly, you'll see that despite these conditions, we have delivered a solid result and we have positive momentum. Our unique combination of businesses continues to set us apart from our peers, with non-market linked revenues in our Corporate Trust business in particular and within Perpetual Private as well, providing us with the capacity to continue to invest for growth through the market cycles. In our Asset Management businesses, PAMA and PAMI as we refer to them, revenue was, of course, impacted by the volatility in global investment markets during the period and net outflows. In addition, cautious investment sentiment towards equities. Importantly, our investment teams are delivering outstanding relative investment performance, with nearly 90% of our funds outperforming their benchmark over the all-important 3-year time frame. Following the first half, the acquisition of the Pendal Group completed on the 23rd of January 2023. Whilst we're only 1 month in the integration of our Asset Management businesses has commenced and the new executive team is fully focused on driving the benefits of what we expect to deliver -- that we expect to deliver from this transformational acquisition, and that includes our enhanced global distribution reach, our materially strengthened ESG positioning and expected expense synergy realization. Today, we will confirm our previously stated synergy target of $60 million reduction in run rate expenses on a pre-tax basis to be realized over the next 2 years. Turning now to the high-level results for the first half of 2023. Perpetual delivered total revenue of $388.3 million, up 1% on the first half of 2022. Underlying profit after tax was $67 million, delivered within previous earnings guidance of $65 million to $70 million, down on the prior corresponding period. And net profit after tax was $26.8 million, down 55% on the prior period, prior corresponding period, I should say. Our return on equity decreased to 14.8%, which was a 25 basis point drop from the prior year. As I mentioned in my opening comments, we believe this is a solid result in what has been a difficult operating environment and one that demonstrates the strength in our combination of businesses. Importantly, we have continued to invest for growth in the long-term and we've done so with discipline and we've done it across all divisions, particularly to support growth in Corporate Trust, growth in Perpetual Private and the continued build-out of our global distribution team. Expense growth was 4% on the prior corresponding period, excluding the impact of foreign exchange rates and interest rates. Our Board has declared a dividend for the second quarter of $0.55 per share. When added to the first quarter dividend of $0.35 per share, the total dividend for the first half was therefore $0.90 per share. Turning to some of our operational highlights for the half. The first half of this financial year saw further important developments as we executed our strategy to build stronger foundations for future growth. Across our Asset Management businesses, we are delivering very strong investment outcomes for our clients, as mentioned, 89% of all strategies outperformed their benchmark over the 3-year time frame. Reflecting this strong performance, Perpetual Asset Management Australia was awarded both the Lonsec and Zenith, Fund Manager of the Year Awards for 2022. In Perpetual Corporate Trust, which as you know, provides essential infrastructure for the financial services industry, we continue to deliver strong growth with PCT's revenues growing 16% compared to the prior corresponding period, an outstanding result for PCT. In Perpetual Private, we saw yet another half year of positive net inflows. Now the 19th consecutive half of positive flows for Perpetual Private. This consistency over the last 9.5 years, despite the market environment during the half, is reflective of Perpetual Private's market position as one of Australia's most trusted financial advice businesses. In Perpetual Asset Management International, Trillium continues to go from strength to strength with over AUD1 billion, in Australian dollar terms that is, a AUD1 billion of net inflows for the half. While Barrow Hanley reported a strong $1.3 billion in net inflows across the various global equity strategies for the half. So as you can see across the firm, we are delivering some really positive outcomes and that momentum is pleasingly continuing into the second half of this financial year, which I'll comment on shortly. Drilling down into some of the inflows in our Asset Management businesses. Given the strong performance profile, our pipeline is building across regions and channels with growth, in particular, coming through our various global equity strategies. The chart on the left-hand side, the first of the 4 charts on this page, shows first half net flows for the combined Asset Management business by asset class. As you can see, net flows into global equity strategies managed by both Barrow Hanley and Trillium, are strong and growing. U.S. equities continues to be a challenging asset class, not just for our business, but across the sector, impacted by the current risk off environment and asset allocation shifts. In Australian equities, we're seeing continued improvement of the net flow position, particularly through the intermediary channel, once again, driven by our Aussie equities team's exceptional investment performance. The second chart on this slide shows Barrow Hanley's net flows by asset sector. And I wanted to really evidence here the tale of 2 stories, if you like. The positive net flows that are coming through Barrow's various global equity and the global emerging market equity capabilities, but of course, the challenges that remain in U.S. equities. When we acquired Barrow Hanley back in November of 2020, we stated that our aim was for Barrow's total net flows to turn positive in the third year following the acquisition. Since then, of course, we've seen the impact of COVID globally. We've had very volatile investment markets and a rising interest rate environment. And as I've mentioned, there is still work to do in relation to improving the net flow position in the U.S. equity sector. Whilst these challenges exist, we still retain that original objective, and with our growing pipeline, we remain optimistic that it can still be achieved. What provide us with this optimism is the very strong investment performance Barrow Hanley teams are delivering and our investment in distribution and product development, including opening up new channels for Barrow. Of course, there is always a myriad of factors that can impact this objective, including market volatility further interest rate movements and investor sentiment. The third chart in Trillium, we continue to see strong interest in our ESG -- in Trillium ESG's capabilities. Despite near-term performance challenges impacted through the ongoing strength of the energy and defense sectors, which their funds have little or no exposure to. And we expect the hype -- regardless of that, we expect the interest in Trillium's global capabilities to continue. Within our Australian Asset Management business, an area of continued improvement has been our net flows via the intermediary channel across sectors. In this fourth chart, I've highlighted the growing momentum of net flows from the intermediary channel into the Barrow Hanley Australian domiciled Global Share Fund, which is now amongst the top 5 global equity funds on a net flow basis over the last 12 months. Recent upgrades in ratings from both Zenith and Morningstar to their highest categories have contributed to seeing Barrow Hanley replace incumbent global equity managers in a number of model portfolios just recently, coming from leading dealer groups and asset consultants. With a broad presence across major platforms and approved product lists now, and given Barrow's exceptional investment performance, we expect this trend to continue. Our confidence in the intermediary channel in Australia extends into other important asset classes, most notably, Australian equities and multi-asset, once again due to the very strong relative investment performance our teams are generating for our clients. Here, you can see on the next slide, the proportion of our investment strategies across asset classes outperforming their benchmarks as at 31 December. This strong performance profile, particularly over the all-important 3-year time frame, leads us to be confident that our net flow trends will continue to improve across investment capabilities, across regions and across channels. Okay. Next slide. As you know, Perpetual has what we referred to as being a truly unique combination of businesses. This is indeed one of our greatest strengths, particularly during periods of investment market volatility. As a diversified financial services firm, we have exposure to both equity and general market linked revenues and non-market linked revenues. Our non-market linked revenues come to the fore when investment markets are volatile. PCT, as mentioned, continues to be a standout performer for Perpetual, while helping to provide the stability of earnings through market cycles. PCT has again seen growth across all segments with total revenue increasing 8% when compared with the second half of 2022 and rising 16% when compared with the prior corresponding period. For Perpetual Digital, we are encouraged by the growth in new clients, which will take some time to onboard, but we expect to benefit from that growth over the next 12 months. Our Debt Market Services business has benefited from continued growth in the non-bank segment while our Managed Fund Services business has delivered growth across all its underlying segments. I mentioned Perpetual Private's consistent net flows outcome once again growing despite the market conditions we've seen in the last half. PP also saw during the period, a strong rebound in non-market linked revenues with Fordham, in particular, having a positive half following the return to in-person client engagements in a post-COVID world. I'll now stop there and hand over to Chris to go through the financials in more details -- in more detail, and I'll be back with you shortly to talk about Pendal and our outlook.

Thanks, Rob, and good morning, everyone. Turning to our results at a glance. Operating revenue of $388.3 million was 1% higher or $3.4 million greater than the prior corresponding period, primarily driven by a stronger performance in PCT and the PP non-market revenue growth. Group investments and foreign exchange movements, partially offset by lower average markets impacting in Asset Management and in Private, and net outflows in Perpetual Asset Management. Performance fees earned in the half was $7.2 million or $900,000 lower than the first half of '22. Total expenses of $298.3 million were $23 million higher. Controllable costs were 4% higher, while higher interest rates and foreign exchange impacts contributed an additional 4% growth in expenses. Our growth in expenses reflected a number of areas of investment, which I'll talk to shortly, but also included the normalization of employment costs following the very tight labor market we experienced in the first half of FY '22, which led to our highest vacancy factor on record and did impact the expense line there. Underlying profit was -- after tax was $67 million, down 15%, driven by lower revenue in our Asset Management businesses along with higher expenses. Net profit after tax was $26.8 million lower on the prior corresponding period. There were a number of significant items through the period totaling $40.3 million, $26.6 million of those related to Pendal transaction and integration costs. Note that at the time of the acquisition, we said we would incur approximately $40 million in transaction costs. We're reconfirming that today, along with $110 million in integration costs, with the majority of those to be incurred over the next 18 months. Given completion only occurred about a month ago, we aren't yet in a position to give more detail on those costs, but we expect to be for our third quarter update in April. It's also worth noting here that the effective tax rate on NPAT during the half year was 40% up from 30% in the first half of '22. This was mainly attributable to the non-deductible Pendal acquisition costs, which were partially offset by prior year adjustments, non-assessable income and lower tax rates in some of our offshore jurisdictions. Earnings per share on UPAT was 16% lower, with return on equity on UPAT 14.8%, down from 17.3% in the first half of '22. The dividend includes the dividend for the first quarter of FY '23 and a further dividend for the second quarter which I'll explain later in the presentation. Turning to the next slide. In terms of key movements at the divisional level, there was mixed performance, Asset Management revenue was down 6% impacted by decline in average equity market levels and net outflows for the period. PP revenue came in flat on the prior corresponding period, also impacted by lower average equity markets, but offset in an improvement in non-market revenue through both our Fordham business and returns on cash. And PCT's revenue was up 16% with strength across all areas of that business. Looking at our segment UPAT performance in detail. UPAT this half was lower due primarily to our equity market linked businesses, partially offset by continued growth in PCT. PAMI's UPBT decreased by $19.2 million and PAMA's by $3 million, driven by those lower average equity markets, net outflows, lower performance fee revenue and continued investment in global distribution, partially offset by favorable FX movements on the revenue line, stronger investment performance and lower variable remuneration. In PP, PBT decreased by $1.8 million, influenced by lower average equity markets and investment in people following a tight labor market in that first half of '22, along with an increase in marketing expenditure following a return to in-person events post-COVID lockdowns. This was partially offset by improved performance in Fordham, which benefited from a return to in-person engagement with its clients, with revenue also higher from interest on cash holdings. In Perpetual Corporate Trust, we saw PBT growth of $4.6 million with continued profit growth from both DMS and MFS and continued momentum in Perpetual Digital. In Group Support Services, PBT decreased by $200,000, predominantly related to an increase in interest expense, offset by higher revenue on principal investments. The tax impact on the above resulted in a half-on-half movement of $7.6 million due to that lower UPAT outcome. We continue to take a disciplined approach to our expenses, with expense initiatives focused on growth areas. During the half, controllable cost growth was 4%, most of which was attributable to new FTE and PP and PCT to support BAU growth across their businesses. While we also saw higher expenses from investment in PCT's digital business and in distribution and support functions to support our offshore Asset Management business. Cost growth from high interest -- and interest rates and FX impacts on non-Australian expenses added 4% to our expense growth. We are working through the combined Perpetual and for Pendal Group forecast at the moment, and are planning to provide FY '23 expense guidance for the combined group in our quarter 3 update in April. Turning to the cash flow. Free cash flow was negative this half, mainly due to the overpayment of tax expenses in this half, which will be recovered in the second half. Lower average markets impacting headline revenue in the Asset Management business and increased expenses associated with the investment and distribution and group support for PAMI. After paying dividends totaling $52.6 million, the resulting net cash position prior to acquisitions and seed funding was $103.4 million. And total cash as at 31st of December was $133.6 million. The balance sheet at 31 December was strong with a debt-to-capital ratio of 24.7%, which is below the target upper limit of 30%. In the first half, the decrease in cash and cash equivalents was mainly driven by payment of the final FY '22 dividend, offset by inflows from operating cash activities and the additional drawdown of debt. The increase in borrowings reflect that additional drawdown of $25 million to fund working capital requirements. Retained earnings decreased primarily due to the payment of the FY '22 final dividend, again, the accrual of that special dividend. Post the Pendal acquisition as at 20th of February, we have drawn debt of $769 million with undrawn facilities of $75 million. As mentioned previously, our gearing ratio remains below the targeted limit of 30% with a pathway to reduce this gearing. Our current leverage ratio, based on pro forma EBITDA is 1.6x gross debt over EBITDA, and we are targeting a pro forma leverage of 1.2x gross debt to EBITDA by 2026. We retain our dividend policy, which is to pay out within the range of 60% to 90% of UPAT on an annualized basis. Turning to dividends now. The Board has declared a total interim dividend of $0.90 per share for the first half, which reflects both a fully franked ordinary dividend of $0.35 paid on the 8th of February, and a partially franked ordinary dividend of $0.55 per share to be paid in March this year. As we've been emphasizing for some time, going forward, the level of franking will be driven by the proportion of Australian earnings included in our overall earnings. I should also note that the first quarter '23 dividend was paid to the then Perpetual share base of around 57 million shares, while the second quarter dividend will be paid to our new combined share base of 112 million shares and paid from the combined earnings of both Perpetual and Pendal for the December quarter. The first and second quarter dividend taken together, reflect a payout ratio of 81% of UPAT in line with our dividend policy. As we integrate Pendal, we expect the dividend payout ratio to be around the midpoint of our range of 60% to 90% acknowledging the need to balance shareholder returns with the cash needs of integration and our stated intention to pay down our debt. Before I hand back to Rob, I'd like to draw your attention to the detailed divisional results and further information that sits in our appendix. With that, back to you, Rob.

Thanks, Chris. Now turning to the acquisition of Pendal. As I mentioned, the acquisition is most certainly transformational for Perpetual and indeed Pendal and is a critical moment in the histories of these 2 storied brands. Through this acquisition, we have created a global leader in multi-boutique asset management, with more than $200 billion in assets under management, covering all key regions globally with a broad array of quality active investment capabilities across global emerging markets, U.S., U.K., European and Australian equities, cash and fixed income and multi-asset strategies. The combined business materially accelerates the global growth strategies and ambitions of both firms and we expect to benefit from the now materially enhanced scale and distribution reach into and across all major markets globally. Our global multi-boutique model will support, promote and grow the 7 highly respected asset management brands that today make up our group. And across these 7 businesses, we now have a total of 146 investment strategies across all asset classes. And moreover, across those strategies, we have significant capacity for future growth as we have previously outlined. Turning to the next slide. Our total assets of $200 billion now provides us with material and diversified exposure across all asset classes. So let me just briefly run through those. Of course, Australian equities, which the definition now includes property equities previously reported by Pendal, the global/international sector, international, also known as [ EFI ], which will bring together both businesses collection of global equity capabilities, noting that this definition will also include Asian equities. U.S. equities managed across Barrow, TSW and Trillium. U.K. and European equities managed by various Hambro teams. Emerging markets capabilities managed by both Barrow Hanley and Hambro. And together, this creates an equities book of over $160 billion with significant exposure to several higher margin global equity capabilities, each differentiated by style and each with significant capacity for future growth. In fixed income, we have Australian fixed income combining assets managed by both the Perpetual team and the Pendal local team. And U.S. fixed income assets managed within Barrow Hanley and TSW. As one group, our multi-asset AUM is now significant. So we are creating a new reporting line for that important sector. And we will be separately reporting our cash book as Pendal have done historically. So as you can see, our AUM is well balanced across sectors and regions. Importantly, it's further diversified by investment style and by distribution channel. Across our equities capabilities, we have a growing position in dedicated ESG capabilities with our combined dedicated ESG AUM totaling around $17 billion as at 31 December. Like our other capabilities, our ESG funds have significant capacity for future growth. Importantly, as you can see on the table on the right-hand side, the majority of our capabilities sit in higher-margin asset classes. With our expanded global distribution team and reach, we are in a stronger position to build our AUM across our capability set over time. Turning to the next slide now. As I think we've talked about previously, the global boutique model was common to both Perpetual and Pendal. And this differentiated model will be materially leveraged through this business combination. Our model is focused on attracting and retaining the best investment teams within our boutiques, supporting independent investment thinking. Our global multi-boutique model is focused on supporting our boutiques with institutional strength to support services. This will include our immediately enhanced global distribution capability, which importantly will have a multi-channel approach across all key markets. With the benefit of scale, we also have further capacity to expand our capability set globally and to generate improved economies of scale through central global support and oversight where it makes sense. Both Perpetual and Pendal have been focused on building out their global distribution footprint. As a combined firm, we've bought forward those plans of each company by many years. As we now combine our distribution teams that will be managed in line with the 3 key regions: the Americas with around $116 billion in AUM; Australia with around $60 billion in client assets; the U.K., Europe and Asia together with around $24 billion of AUM. In the Americas, our expanded intermediary team will improve our reach for all relevant capabilities. We will be focused on channel expansion opportunities for every boutique, using data and analytics to better inform decision-making, whilst also leveraging existing product structures in place. In the U.K. and Europe, where our client base is relatively evenly spread between intermediary and institutional clients, we will be leveraging our complementary distribution capabilities. Over the medium term, we will look at how we can improve coverage across key markets, along with leveraging our ESG capabilities, which have real interest to European and U.K. clients more than anywhere else in the world. In Asia, where we have key client exposures and are seeking to build that exposure as a combined business, we will plan to sensibly accelerate our build-out in this growth region. Our shared base in Singapore provides a synergistic foundation for this expansion over time, and we will explore other key markets such as Japan, which to date have been largely untapped for both firms. In Australia, we are seeking to improve our channel and segment focus, supplemented by bespoke investment solutions, which are increasingly a focus amongst key clients and prospects. As we previously stated, with fully established and clearly differentiated brands, teams and investment styles, our Australian equities teams and distribution teams supporting them will be kept entirely separate. Turning now to the next slide. With the transactions completing just a month ago today, I am pleased to report that we have already made good headway into bringing our businesses together. Our new executive leadership team has been appointed, and those team members are now fully focused on integration, including finalizing our target operating model and team structures. Pendal client engagement has been extremely positive with 98% of consenting clients improving the transaction and continued positive client engagement throughout this process. An immediate focus in the first 100 days post acquisition is to finalize our global distribution leadership and teams across the regions, with some key appointments already having been announced early this month. Importantly, through our dedicated integration team led by Amanda Gazal, who has moved from her role as Group COO to manage the integration, we are finalizing our organizational design, communicating closely as we bring the businesses together as smoothly as possible. Today, we reconfirm our targeted pre-tax expense synergies of $60 million with approximately 50% of those synergies to be delivered in the first year post completion, so that's by the end of January 2024. Synergies are expected to be delivered from a number of areas across the business, including the consolidation of listed company expenses, management duplication, as well as efficiencies across technology, operations, distribution and marketing. We're also reviewing areas of product structure duplication so we can best leverage our combined product footprint. Today, we are also reconfirming the $110 million in costs, which we expect to incur in order to integrate the businesses. The majority of these will be incurred, as Chris said, in the next 18 months. We are 100% focused on driving the benefits from this enlarged group, including our broader and deeper distribution team, our enhanced ESG presence and driving the benefits of our improved scale across all parts of the business. Turning to the next slide. In summary, we are laser focused on delivering our targeted benefits from the significant investments we've made across all areas of our business, of course, most notably Pendal. For Pendal, our immediate focus is on integration, client retention and growth, and achieving our expected synergies. And in bringing our businesses together with Pendal, we are taking the opportunity to refresh and simplify our approach and processes, including how we communicate. Today, this includes new descriptors for our divisions going forward, which we will refer to as asset management, wealth management, which is a more globally accepted term for our advice business and Corporate Trust. Across Asset Management, we will be leveraging the recent outstanding investment performance through our enhanced global distribution team to drive net flow improvement. The second half of FY '23, so this calendar year, has started well in that regard. Despite the challenging environment, we have still -- we've seen a clear moderation of outflows from the U.S. intermediary channel for Hambro and we've seen some great wins for Barrow Hanley, in particular, including finalizing the pricing for their new -- their first CLO capability, which has now locked in $550 million of flows for this quarter. In wealth management, we are focused on driving operational leverage in Perpetual Private and realizing growth across all business lines. And finally in Corporate Trust, we will continue to leverage our premier market position across all segments while seeking to diversify our earnings growth through our range of proprietary digital solutions. So with that, I will now close and let's hand over to questions. Over to you, Susie.

[Operator Instructions] First question comes from Andrei Stadnik from Morgan Stanley.

Yes. Can you hear me okay?

Yes.

Yes.

Can I ask maybe 2 or 3 questions? Firstly, in terms of the product mix within investments going forward, you certainly have a lot of bases covered. But how are you thinking about alternative asset classes? Like do you think you have enough in terms of alternative products?

Andrei, it's a good question. The transaction is obviously important, brings together terrific capability sets, but it's not a total panacea. That's for sure. We do have exposure to some quality alternative capabilities in each of those with plenty of capacity. But I think over the course of time, I think we would ideally have deeper exposure to a broader definition of alternatives. So for example, we don't have exposure to private market capability sets, either debt or equity. So that definitely will be a focus over the medium- to longer-term.

If I can ask around ESG? So I have 2 recognized dedicated ESG brands. How are you going to use those to grow the business?

Yes, it's a good question, Andrei. I think the -- obviously, I think I previously referred to ESG investing as the permanent global mega trend in asset management. I still believe that to be the case. So to be in a position where we have 2 terrific firms with terrific heritages, respectively, who run money very differently, whose product propositions and investment capabilities set are quite different, I think, puts us in a uniquely strong position. So the differentiation between the way that Regnan teams run money in Trillium is quite clear. And I think we've got 2 very strong growth engines for the business going forward. I look at the Regnan team, for example, in the U.K., where we have a terrific global impact strategy, which is -- I'm looking across Alexandra for 3 -- not even 3 years. 3 years in the running with terrific prospects, great capacity, terrific investment team. I look at the global thematics, the first global thematics that Bertrand Lecourt is running, water and waste strategy, which I think is the top performing water and waste strategy globally with significant capacity and that will be the first of many global thematics we run in ESG investing. That's very different to Trillium's integrated ESG investment approach, which in itself is proven to have very high market appeal. So I think we're blessed to have the 2 brands, and we will support the 2 brands.

If I can ask a third and final question? Just around crystallizing value in the Corporate Trust division, there were some articles recently highlighting the opportunity, a lot of interest from other parties to buy that business or buy a stake, a Perpetual stake in the business. What are your thoughts in terms of crystallizing the value in Corporate Trust?

Well, I've been -- I mean, Chris will comment on this as well, I'm sure. I've now been in this role for -- coming out to 4.5 years and I think since the first few months I started in this role, there was speculation about Corporate Trust. It's been pretty consistent. It probably got a bit peaky last year. I think great businesses like Corporate Trust attract a lot of interest. Great businesses like Corporate Trust businesses that other people would like to own rather than us. The fact of the matter is, we have been a great owner of this great business and we will continue to be.

The only thing I'd add to that is that, that speculation that Rob talks about in terms of PCT being sold has been going on the 16 years that I've been at Perpetual. So...

The next question comes from Lafitani Sotiriou from MST.

So I'll start off with Barrow Hanley and the Trillium acquisitions. Can you just clarify what's happened to the upside to these acquisitions that you flagged before making them? Now let me just walk through some numbers. PAMI's underlying profit for the last half was $12.7 million. That's down by over 60% versus PCP. Given another $500 million was spent on acquiring both Trillium and Barrow Hanley, plus the integration costs, it is less than a 5% annualized return. But this return [ fall ] to about 0% when we include the step-up in the group costs which occurred, which is around -- worth around $6.5 million. And when we also include the one-off costs in the last result, which for Barrow Hanley and Trillium added up to over $6 million, again, which is stripped out of this underlying number. So when you sort of add these things together, there is actually largely no real return from the 2 acquisitions you made in the last 6 months. So can you just talk us through what's happening in these businesses? And then secondly, why we should have confidence that you should be able to deliver upside in the Pendal acquisition given that there's a lot of similarities?

Sure. Shall I go first? Laf, thanks for the detailed question. I think with Trillium, we acquired Trillium, 100% Trillium in July, I think, late June, July of 2020, just as COVID was obviously setting in. I think what we've demonstrated with Trillium is an ability to take a quality capability to market to build distribution from scratch around -- because bear in mind, Perpetual at the time we had no distribution capability outside of Australia. So we started that build from scratch. When we announced the transaction, we talked about the investment we needed to make to build that distribution. That distribution is working. I think we've had consistent record net flows for Trillium, that's building very nicely, but it comes at a cost in the early stages, and that's why -- because we had to build the distribution capability and product platforms and mutual fund platform, UCITS platforms from scratch. So the pleasing part of it is the growth that we're seeing and our expectations for that growth to continue. It is expensive to set up distribution from scratch, to set up the product structures from scratch. We expect to see the return on that investment start to be realized in the future. And bear in mind also, this associates with Barrow as well. We accelerated some of our spends in distribution in the U.S. when we saw the market opportunity has been greater. So I'd make that point with Trillium. Barrow Hanley, I think we've been very upfront. We've been disappointed by the flow profile in initially U.S. fixed income and probably pretty consistently U.S. equities. We've been very pleased with the progression we're making in the global equity strategies. We've been again investing in the distribution at Barrow, as well as Trillium and in the intermediary team in the U.S. and then outside of the U.S., all of that from scratch. So it takes time. And it's not inexpensive to attract world-class distribution people and built those platforms. And we expect to deliver the return on investment over time. And bearing in mind, from an environmental perspective, you had 2 of the 3 years that we've owned Trillium has been -- was COVID affected, and similarly with Barrow. We acquired Barrow in November of 2020. And then the volatility that we've seen in markets and the risk off, obviously, a number of things that we couldn't predict at the time. So these investments are long-term investments. We expect them to deliver our shareholders the right sort of returns over the long-term and we're confident that will happen. Chris, if you want to add to any of that?

The only thing I'd add there is that, we have made a lot of investments in the offshore business in terms of platforms. And one of the reasons that we're coming together with Pendal is that, where we have to use its platforms, we will have one, where we have 2 mutual fund platforms, we will have one, and we'll get synergies from our global distribution platform. So there is a relationship between Pendal and the other 2 transactions in that and I think we're pretty clear about this throughout, that even with Barrow Hanley and with Trillium, we didn't think we were at a scale globally to really take advantage of the opportunities. Now with the breadth and quality of the investors that we have and the distribution platform and the support that goes into supporting a global business, we think we're well set and we will be patient.

Look, the interesting thing with all of that is that, a lot of this extra and additional expense that you're talking about as that was necessary, wasn't really flagged at the time of the acquisitions and the metrics that you presented in terms of providing upside and net-net, the markets are up, so that you have actually had a tailwind over that period and there should be upside, but nevertheless point stands that in the last 6 months, you've really got no profit from those assets. Let's move on. We haven't really had a chance to ask some questions around the Pendal Perpetual transaction properly since the deal was completed. So can I start off with -- can you please explain why the transaction was not a merger of equals rather than Perpetual paying a premium? As the independent experts' report indicated was about 25% to 40% control premium and we can see it in the numbers, there was a large cash component. You had a higher earnings base. So can you just explain clear to us now why Perpetual paid a significant premium for Pendal and it wasn't a merger of equals?

Shall I get this?

I think we've always been clear that the Pendal transaction in Asset Management businesses, in particular, and Rob got more experience with this than me, with previous experience, that we're not big believers in mergers of equals in asset management scenarios. There needs to be a party in control. There needs to be a really clear single narrative quick decisions, the establishment of a single unified leadership team quickly, which we've done, for example, which would be much more difficult in a merger of equals scenario. And so, it was always going to be the case that there was going to be a control transaction and that a merger of equals was not something that we were attracted to. You've probably got more context on that.

Yes. And I mean, you have the former Pendal Board will speak for themselves. But I think a merger of equals was not something that was contemplated at the time as being something that would be acceptable.

Sorry. So can I just be very clear here? So you've just told us that the reason why Perpetual shareholders paid a 25% to 40% premium to the Pendal shareholders is because you ultimately want it to be the party in control. Is that right?

That was a contributing factor. That was a factor, Laf. I think...

So this is a very significant amount of money that was paid as a premium to Pendal shareholders. Can you provide us a clear reason? And so far you've only said that it's because you guys wanted to be the party in control.

I've just said, Laf, that was a contributing factor. Yes. And a host of factors comes into such an important decision, which included the general feeling that there still would have been some form of premium paid if there hadn't been an acceptable way to merge the 2 businesses, but that wasn't acceptable at the time.

But why is that? Sorry, because you have the high-quality business, you could keep talking about Corporate Trust being very high-quality people needing it. You traded on a premium beforehand. So can you just -- this is really important. Why was there a 25% to 40% premium paid for -- to get control of the business?

Because ultimately it was the judgment of the boards, so that was the only way the businesses would come together.

And Laf, that we've also picked up a high-quality business in Pendal with some fantastic investors across the globe that we are bringing into our Asset Management business that give us both scale and capability. So there was quality on both sides...

We've seen the upside you've been able to deliver with the PAMI businesses so far. And the independent expert's report showed a huge earnings deterioration coming through in the next year of 30%, 40% for Pendal. So you have to qualify those comments you just made. But can I just move on to the next point in relation to the transaction? Now why was there not an out for Perpetual shareholders for you guys receiving another bid for change of control for Perpetual in the scheme of arrangement? Now who was responsible for not providing an out for Perpetual shareholders which could end up being very material for them? It seems pretty elementary that you guys have been receiving offers for your Corporate Trust business ahead of you guys announcing that Pendal acquisition, which means that the overall interest in the Perpetual shares. So why was it and who was responsible for not giving you guys an out to accept a competing bid in the best interest of your own shareholders?

Laf, I'll start with the fact that we at no point have wanted to engage with the party or had an offer capable of engaging with the party on an alternative offer here. We've always wanted to complete the Pendal transaction have been consistent about that throughout, even through getting clarity on that point at the end of last year. So this is a transaction we have at all times wanted to get done and are very happy to have got done.

Is this going back to your being the party in control? So did you purposely put a poison pill in place so that your shareholders, they were not able to accept a superior offer during this -- during what happened in the last 3 to 6 months because again what you've just answered doesn't provide any clarity because this is pretty elementary? Why weren't Perpetual shareholders provided with an opportunity to accept a competing offer for Perpetual shares knowing that there was interest in your business?

Yes, we're still yet to be tested. There was an indication made by the courts and could have ultimately...

No, no. Sorry, sorry. There was -- within the Pendal...

Sorry, Laf, I'm not too sure. In some ways I'm just a little bit worried too that we're taking up all the time, we have other people with questions as well. Very happy to take some of those matter...

I'm sorry, but this is very important. These are very big decisions that have been made or not made. Can you just clarify? I've only got -- there's only 2 questions, like this is 1 and then I've got 1 left. Now if you can just answer the questions rather than trying to [ pull ] me off?

We're not [ pulling ] you off, Laf. We were trying to answer the questions...

Well, it sounds like you are. This is like -- it was a very big deal for Perpetual shareholders in the last period why you guys didn't provide yourselves with an out to accept a competing bid. I want to understand why?

Laf, as you'd be aware, there was a proceeding to determine whether we had an out or not. That ultimately determined that we didn't.

Sorry, but you could have got legal protection, you could have put specific paragraphs in place to make it very clear and you haven't. This is like [ Legal 101 ]. So are you saying that you were not aware that you didn't have that ability?

No, I'm saying, Laf, as I said before that it's not relevant because at all times we wanted to complete the Pendal transaction.

Okay. It goes back to being in control rather than necessarily in your shareholders' best interest. So can I just finally finish? In a lot of the language of the presentation before you completed the deal, you were referring to the transaction being accretive in the first year, and it seems like you've now, the presentation today, we don't have that language anymore. Can you just clarify, is this deal still accretive in the first year?

Yes. As we said, we believe this deal will be accretive in the first -- within the first 12 months. Yes.

Based on the synergy run rate?

We believe the deal...

Actual synergy run rate, not all of it being launched in the first year?

Based on the same methodology, we've been talking through prior to the transaction as well.

Which is all the synergies in the first year, which is you just said today that only 50% will be realized in the first year. So can you just clarify, will it be accretive only in the first year based on the actual run rate you think you can achieve the synergies?

We have said that it will be EPS accretive based on the full run rate synergies in the first year.

But you just said you're not going to be able to do that?

It's always been the basis on which we've stated the accretion, Laf. I do think we need to move on and provide other people with an opportunity to ask questions, Laf. Yes, we're very happy to speak to you off-line, I think, later today anyhow, Laf.

[Operator Instructions] We have a question from Marcus Barnard from Bell Potter.

A slightly more less confrontational question, I hope. But could you -- when you announced the merger, you said the run rate synergies of $60 million and you said you're well on track to complete them. Given the markets now lower, you've seen some outflows. Given the Pendal and yourselves weren't unable to cut cost while you were in the merger process. Can we expect to see that synergy target being raised when you update us in March? I realize you might not be able to say that or say anything, but can I have your thoughts on that?

Yes, sure. I'll make some comments, and Chris will, too. Yes, we're only literally 1 month into the transaction and so post completion. And so, therefore, we're learning more every day. And as we go about our active decision-making, that we'll fully inform whether or not we can extend beyond that number. And I think in general as a response to the environment, we have implemented a number of initiatives across the business in terms of our run rate expenses and how we're managing expenses more broadly, given the environment. So I guess, Marcus, those 2 things will combine to get us to the point where we look forward to updating you and there may well be some upside to that number, but today we just reaffirmed because it is only a month in.

And I've got a little bit further, Marcus, to say we're very comfortable and confident we'll be getting at least $60 million of synergies. But to your point, the world has changed a little bit since we gave that target. So we are working through that as we speak.

Just conscious of time, we might take 1 more question. James from Credit Suisse.

Look, just a question. Could you maybe talk about some of the opportunities to cross-sell, what's the client feedback been like on the broader product set? And what are your distribution teams most excited about potentially selling?

Yes, thanks, James. I mean, I think it depends, different things in different regions. I certainly know the distribution teams in the U.S. are looking forward to getting a more fulsome suite of capabilities, even in some exchanges with some of the members of that team this morning. They have that enthusiasm across the board. So I think there's definitely opportunities in each of the major regions for some of that cross-sell to occur. And for Perpetual to get leverage off -- Perpetual owned capabilities, previously Perpetual capabilities like Barrow and Trillium to leverage off the deeper distribution footprint in Europe, for example, and similarly in the U.S. So I think there's going to be good opportunities across the board for both sets of capabilities. And there's also some unusual, we have potential leverage points, too. So for example, the business we acquired in Corporate Trust a little while ago, Laminar Capital has some fixed income functionality that could well be of application to Pendal fixed income teams, that's being explored as we speak. So we think there will be some less obvious potential benefits of bringing the 2 firms together as well.

Yes. And can I just ask another question on the International Select Fund? I mean, what's the client feedback been on that strategy? Obviously, it was -- there were some large outflows prior to the completion [indiscernible] but -- and performance is a little soft over the 1-year time horizon, but what are you expecting from that strategy going forward?

Yes, it's an important question, International Select has been such an important capability set for Hambro, for Pendal. And as you said, we went through a tougher time given its style and given the concentration and the portfolios that Chris and Nudgem run. And as a result, outflows were peaky in the last months of last year. I did make the specific comment that there has been a material, I'd say, very material moderation in that outflow profile from the U.S. intermediary channel. And speaking with the U.S. intermediary distribution team over the course of the last few days, they are, I would say, mildly optimistic about the future. One thing we know about investors, great investors like Chris and Nudgem is that, they've been through these periods of time for, and we spent a lot of time with that investment team and all investment teams and are completely encouraged by the skill and quality of those individuals and their ability to recover from those difficult periods of performance and to deliver to their investors over the long-term. So we're very confident that will happen. But it's certainly been pleasing this calendar year to see that serious moderation in the outflow profile.

Yes. And just a final question. On Perpetual Private, look, you talked about the benefit of cash rates rising. You can see the non-market revenue ticking up. Is the benefit from cash rates, is it capped out now or could there be further benefits as rate rises -- as rates rise?

No. I don't think it's necessarily capped out, James. We obviously rode the ride down and shared the pain of their clients as rates went down. Depending on where we are in the rate cycle for towards the top end, then yes, probably it is topping out. But we certainly have seen real recovery in our earnings on those cash. And if we see 2, 3, 4 more rate rises, you'll see further benefits coming through.

Thanks, James. I think we might close it out there. Conscious it's a busy day for markets today. Thank you all for listening in. All of our result material is on our website, and the webcast will be launched on our website over the coming day, and have a great day. Thank you.