Platinum Investment Management Limited (PTM) Earnings Call Transcript & Summary

Good morning, and thank you for joining Platinum Asset Management's Financial Year 2024 Analyst Briefing. I would like to begin by acknowledging the traditional custodians of the land where we're meeting on. We pay our respects to their elders past, present and emerging, and extend that respect to all our Aboriginal and Torres Strait Islander peoples today. My name is Olivia Salmon, and today, I have Jeff Peters, Platinum's CEO; and Andrew Stannard, our Finance Director, talking to our FY '24 results, and then we'll open up to questions. [Operator Instructions]. I'll now hand over to our CEO, Jeff Peters.

Thanks, Liv. And let me add my welcome to the analyst briefing. I just celebrated my 7-month anniversary here at Platinum. And when I spoke with you last, I spent a good deal of time outlining a turnaround program we were putting in place. I'm going to spend a significant amount of time today updating you on our early progress against that plan, but also we're going to cover our financials and other aspects. Let me start with that and turn to our key statistics for the year 2024. Our FUM closed to $13 billion, of which 70% is retail. We've seen improved absolute performance in our key flagship funds, generating over 5% returns in the International Fund, and almost 10% returns in our Asia Fund. Our cost reductions, which were part of the turnaround plan and articulated on our last briefing, are on track or actually a little bit ahead, 17% decrease year-on-year for similar halves and on target for our $25 million commitment that we made earlier. Our year has resulted in a strong dividend, yield maintained and our balance sheet remains strong as well with $250 million in cash and term deposits and $64 million in seed investments. We'll spend some more time on that as we go. Our CFO, Andrew Stannard is going to take you through details on our financials. But before that, I'd also like to talk about our growth strategy. As we go further into the presentation, which will revolve around a new sub-advisory business line and also new products. Andrew?

Okay. Thanks, Jeff, and good morning, everyone. Just a quick reminder to use that Q&A functions to enter any questions as you go. That will help with the -- at the end of the session. Slide 4, gives an overview of the financial results for the year to 30th of June 2024. And as can be seen from the table, lower average FUM has largely flowed through into lower revenues for the year, albeit with a small increase in the average fee rate. As part of the turnaround strategy that we announced at the end of February, the business has lent into those lower revenues with meaningful cuts to expenses. The effect of which was to maintain our adjusted EBIT margin for the second half at a still robust 48%. In order to achieve this result and as flagged to the market at the end of March, the business incurred $20 million in turnaround costs, albeit that over half of that amount related to non-cash accounting adjustments on deferred remuneration awards. Those turnaround costs reduced reported Platinum statutory net profit before tax to $73 million, and the 2024 effective tax rate of 38% was distorted by the same nondeductible noncash accounting adjustments, which took a profit after tax to $45 million. Turning over to Slide 5, which breaks down the main components of full year flows and revenues. The business recorded $4.9 billion in net outflows for the year, and that was reasonably evenly split between retail and institutional accounts. Whilst retail outflows did include a few one-offs, for the most part, the result was consistent with the combination of poor relative performance and lower cash annual distributions. In contrast, institutional outflows largely reflected just one partial account redemption that was caused by a change in investment approach at the client rather than directly performance related. In addition, some institutional accounts were repriced with the average institutional fee rate falling as a consequence. This partially offset the positive mix effect arising from having lower institutional fund relative to retail fund. Management fee revenue was down more than $27 million on the prior year, largely reflecting lower average FUM as outflows were more than offset -- more than offset rising global equity markets. Performance fees were negligible as our offshore absolute return short funds, which have a December crystallization date did not earn any fees. Higher interest on our cash balances and positive distributions from our international equity seed portfolios helped reduce the underlying revenue variance, which is stated before mark-to-market on our seed investments to $25 million over June 23. As we always note at this point, although that seeding does introduce a measure of volatility to our short-term earnings on both the up and the downside, it's always important to remember that these investments are strategic in nature rather than opportunistic. Turning over to the next slide, which gives you some more detail on expense line items. As previously mentioned, cost control is a significant feature of our turnaround effort with adjusted expenses for the half stated before turnaround costs, down 17% year-on-year and 10% on 6 months ago. These savings have been achieved despite inflationary pressures and investment in the business, which collectively added around $2 million of cost base in the second half. Fixed costs were largely flat as prior year wage increases and selective new hires were offset by reductions in other parts of the business. Variable compensation was, however, meaningfully reduced, reflecting the mix of staff departures and the cutting of LTI awards, together we've generally reduced STI large deals as a result of poor relative investment performance. Importantly, the recent steps taken to realign investment team, variable compensation incentive pools with future profitability should ensure future compensation is more closely aligned with the shareholder experience. On the non-people side, cost savings and business development were more than offset by increases in technology costs due to ongoing system upgrades and accounting charges related to lease extension for our property in Sydney, a decision that was actually the lowest cost option available to our business. Turning to the next slide, which provides some more detail on the turnaround program. Progress so far is ahead of schedule with 136% of the FY '24 target delivered, and 80% of the financial '25 target already either identified or captured. Nearly 60% of identified savings relate to people, reflecting both reduced compensation and staff reductions. Non-people savings largely reflect the rationalization of our product range, most especially the closure of our Irish-domiciled UCITS funds and the London office as well as reduced the advertising costs. Turnaround costs have been inflated by some large noncash accounting adjustments related to departing employees. Cash costs largely reflect redundancy and similar payments. My final slide shows the firm's balance sheet, which remains extremely strong. Net assets attributable to owners were $314 million as at 30th of June 2024. This was comprised mostly of cash, which totaled $250 million at the end of the year. This is being stated before our final dividend payment of approximately $23 million and we also had seed investments at fair value of around $64 million. We continue to be careful stewards of capital with new funds being largely seeded by recycling cash out of preexisting seed portfolios. As a result of the product rationalization in the second half, significant cash has been released and is now available to seek new funds during the financial year '25, in line with our announced strategy today. The Board declared a fully franked final dividend of $0.04, taking the full year dividend to $0.10. And this aligns closely to profit after tax after adjusting the noncash turnaround costs, as we indicated that we would do in March. The full year dividend yield remains attractive at around 10% before the effect of franking credits. Thank you all for listening, and I'll now hand back to Jeff.

Thanks, Andrew. We'll go to the next slide, please. The last time we were together, I laid out a comprehensive turnaround program for us to implement over the last half of last year and then going forward. That program had 2 parts to it, reset part to stabilize and improve the core business and then a growth part. I'd like to spend the next several minutes taking you through the elements of the reset part and where we stand. I'll also spend a minute or 2 on the sales and service and culture at the bottom, those are just underway, and we'll be updating you on those in future meetings. Turning to the first 5. The things that we talked about doing and have done indeed are, one, a deep examination of our investment platform, our expense alignment, which Andrew just covered. A review of our remuneration framework, which has led to significant changes, a review of our product offer, which I'll cover as well. And then a renewed client communication effort, the results of which I will also go over. Let me turn to the next slide and begin going through each of these in detail. First priority for us, it was an examination of our investment platform and the initiatives around that consists of 2 parts. The first of which were team changes in the reorganization done in March of 2024. What we did during that reorganization was increase the research resources directly supporting our Platinum International Fund, focus our decision-making and portfolio management structure by the removal of sleeves, which added complexity and also name count in our funds. Clarified and appointed lead portfolio managers to each of our sector funds, and changed how they're paid and remunerated to linking them to outcomes and performance. And improved role clarity for PMs and analysts, many of whom in our prior structure had dual roles that had the potential for conflicts. Why did we do that? Well, the potential conflict was real, and we wanted to simplify that and remove that. The role clarity this brought, brought extra focus on enhancing our stock picking skills. The role accountability improved our clarity and our research support for PMs. And we've got an enhanced larger research platform, which can be shared across all strategies. The benefits of this, less complexity, more concentrated and simplified portfolios. And I should also say that this reorganization did result in 7 people leaving us. That was not the reason for us to do it. It was done for effectiveness, but that was a result of the reorganization. Where do we sit so far result-wise? Well, so far, it's encouraging. The team structures have been running now for several months, and they're well embedded. We had no regretted departures during this time frame. The research effort is more streamlined, more collaborative and seems to be working well. So very early days, but off to a good start on the reorganization. Next slide, please. We followed that with a start-to-finish examination of each of our products and how they actually run, starting from the positioning of the product to what the belief set is about how we're going to add value for clients what the staffing is, how the process works, and how it should perform in what markets. In addition, we've taken a fundamental look at how we govern ourselves from an investment perspective, and I'll talk about that as well. This examination has resulted in several initiatives, which we're in the process of finalizing. And once they're finalized, we'll communicate them more broadly and roll them out. But I want to affirm and reaffirm that we are not changing Platinum's Investment philosophy. We're proud of who we are. We believe in what we do, and we're going to keep doing things that way. However, there are things within our investment platform where we will make enhancements. And let me give you some examples. In portfolio construction, putting together the number of stocks that we have in our portfolios, for example, we've adopted or we're adopting a more formal process for cash management and we're increasing the oversight or the review of securities in the portfolio, so-called sell discipline protocols. We're strengthening our risk management, increased our enhanced portfolio position reporting, increased attribution capabilities, things like that. We have formed an investment oversight group to govern our efforts, which meets fortnightly, and which consists of a cross-functional team, including myself, our Head of Product, our Head of Compliance and our key investment professions. We've gone through the majority of our products in this process. We have a few left to do, and we'll be finished with that process by the end of the year, but our major flagship funds are complete. It's too early to have seen these initiatives, which are actually rolling out -- we'll be rolling out soon, bedded down. But we're very confident that the changes that we're going to make here, the enhancements that we're going to make here combined with keeping to our process and not changing our philosophy will bear fruits in terms of investment performance. Next slide, please. I did want to give you some indication of how we're doing in terms of what matters, which is client performance. And you do see some green shoots in our flagship products over the time line. At the end of last year, we had negative returns, absolutely in both the International Fund and in the Asia Fund. And it's nice to see that, that has changed in the first 6 months with the international firm -- with the International Fund returning 5% and the Asia Fund returning almost 10%. I recognize and we recognize as a firm that our relative performance is not where we want it to be, but the improvement in absolute numbers is a nice green shoot for us to see. Next slide, please. We also took a look at our remuneration plan because we had received several key feedback points over the years about our prior plan. The feedback point started with the fact that remuneration outcomes were not perceived to be well aligned to the business either for shareholders or for unitholders. The plan was perceived to be very complex. There are multiple elements that of dissatisfaction around the LTI plan, and we had an odd timing difference where our remuneration year and our financial year were not aligned. We've taken a systematic look at our rem plan and made significant changes that are in the process of being finalized to address these feedback points. For example, our incentive compensation now is out of a single pool. That pools derived from pre-incentive profit and revenue for FY '25 tied directly to the business. We have incentive awards that are linked explicitly to KPIs and business outcomes for every person in our organization. And we've changed how we compensate on investment performance to take the emphasis away from shorter-term time frame, such as 1 and 3 years to longer-term time frame, such as 3 and 5 years, which is more aligned to investor needs. To address the complexity of our current plans, we've simplified the framework and taken 6 plans down to 2. And regarding LTI, we made no new awards in LTI for FY '24, and the decision has been taken to close the plan to new awards going forward. Prior year noncash awards that have filled their TSR tests will be written off, Andrew has spoken about that. And we also do recognize that long-term compensation is an important element that is vital for the marketplace. So we're revising a new LTI plan for KMP. It's in the design phase, and that will be launched in FY '25. And in terms of the timing difference, we've realigned our performance period such that remuneration in financial year are tied together now and one fit. So significant progress around remuneration. Our goal with this is to allow us to retain and attract our key talent. We're confident that these changes will help us do that. Next slide, please. I mentioned also that we would be taking a look at our product line, and that's completed. We've taken a look at it in 2 ways. One is to review our strategies, and the second is a review of our vehicles and offshore businesses. In terms of the strategy review, we've looked at every one of our funds and our product range and taken one action. The Global Transition Fund is to be closed as of September 2024. In terms of vehicles, we've taken the decision to simplify our product range. And the Platinum Asia Investments Limited LIC and the Platinum Capital Limited LIC are expected to merge into the active ETF PAXX and PIXX in March of 2025. We've also taken actions on our offshore business. As Andrew mentioned, we terminated our Irish UCITS platform. We closed our London office, and we closed our Cayman fund lineup, all of those reduced complexity and added profitability. Next slide, please. And last and very importantly, we've also reengaged at a fundamental level with our clients. We put a plan in place to target discussions and client communications with 80% of our FUM, a plan which we've actually exceeded. And we've talked to these clients, many of which directly, including many meetings that I've done personally to get a feel for what our client base is thinking and to talk about Platinum with them. There are a few takeaways I'd like to share. The first one is, importantly, our clients that are with us in our funds understand what we do, understand our philosophy and its role of their diversified portfolios. This is absolutely critical and to reiterate, we're not changing this. We've also received indications of support for retaining current investments with Platinum, of course, subject to investment performance and business stability going forward, but those indications of support were gratifying to see. I do have to say that there are people who are impatient for improved investment performance, and we're working very hard on that, as indicated by our investment initiatives I priorly described. That -- those were the 5 elements of the turnaround plan that we committed to having done through the end of the year, and we're on track for all of them. We've advanced significantly in each. It's a little early to have the full results come and be bedded down, but we're highly confident that the incremental fruit these will bear will become very noticeable over coming months. Next slide, please. I also -- in our last briefing talked about how we would articulate a growth strategy. And I'd like to spend the next few minutes talking about that. In my 30 years in the industry, I've come to a belief that you have to earn the right to grow in asset management. It doesn't just come to you. You have to earn it. And to earn it, you need 4 different things as an asset manager. You need strong investment performance and a good investment offer. You need an excellent client experience, both service and other. You need great talent and cultural strength across investments and across the business as a whole, and you need a stable economic base and an efficient operational platform. Platinum has many of these things. We've got a strong retail brand. We've got an excellent reputation for client service. We've got a large installed base of direct clients and a very large adviser base as well. We've got a distinctive investment-driven culture and heritage. And we've got a strong balance sheet and institutional-grade operational platform. Our investment proposition is highly differentiated and we're working to improve it with absolute returns that have improved and more work to do on the relative side. But we have a lot of assets that we can leverage to do a better job for our clients, serve them better and grow. And that is what we're going to do. Next slide, please. So our growth strategy is actually to leverage all of Platinum's assets. And before I get into it, I do want to make the point that we are not taking our eye off the ball. The turnaround of the core business is front and center and will continue to go. But we do believe we have an opportunity to serve our clients better by offering more broad services and also leverage all of Platinum's assets, to move away from an undiversified position of just being in growth equity to a more diversified asset class product lineup that allows clients to access great products from Platinum across all the styles and options. How are we going to do that? We're going to do that in 3 ways. We're going to add new products managed by Platinum and we're going to launch a new business to distribute new products managed by external partners, which we're calling our Partner Series, and we're going to deploy our balance sheet to support both of those and accelerate their progress. Let me give you examples of each one of those planks. Next slide, please. In terms of new products managed by Platinum, we have a suite of things in development, many of which look quite promising. Let me give you an example of one. We have a quantitatively driven absolute return hedge fund strategy that's quite aligned to Platinum's core investment philosophy that's been incubated over the last 4 years with strong absolute risk-adjusted returns, which you can see below. This return stream is excellent and the other aspects of the fund in terms of market exposure and excess returns, et cetera, are very strong. The relative risk return measure, Sharpe ratio also is quite strong. This would be a product that would be more aimed at sophisticated clients such as high net worth and family office, but we're aiming to commercialize this over the next several months, and we'll update you on that progress as we go. Our objective is to build a portfolio of new products managed in the Platinum way by Platinum over the next 3 years to provide incremental sources of value to clients and also incremental sources of FUM. Next slide, please. But in Platinum, we recognize that we are in one asset class global equity and that there are more asset classes where we can add value to clients. And to expand into those and to diversify our services, I'm happy to announce a new business line, the Platinum Partner Series. The goal of this business line is to provide exclusive access to top-performing global managers that have institutional business here in Australia, but without a significant wholesale and retail presence, people that would be desirous of that as well. Our goal is to achieve asset class diversification, deepen our client relationships with great products and attractive complementary asset classes to what we currently do and add new flows. Our first fund manager relationship has been secured. We'll announce more details about that when appropriate, and we have several others in negotiation. Our first fund, we expect in early 2025, and our goal is to build a suite of products managed by world-class global managers to bring to this marketplace and expand our reach and grow our business. Next slide, please. Capital management is vital to support both of these growth efforts. So let me spend a minute on that. Of course, when you speak about capital, you have to make sure that you meet your main goals of keeping a solid balance sheet and a strong dividend payout. We want to have meaningful cash to new seed strategies, vital for us, and we also want to have sufficient capital to be opportunistic around inorganic should things arise. Let me say a word here. All companies are involved in inorganic opportunities from time to time. Inorganic opportunities we look at, and we'll continue to look at us as every company. I have nothing to announce on that score today, but it is something that we continue to see as opportunities arise. Our capital allocation currently has 27% supporting the business, 20% on seed, and 53% allocated to other uses, strategic uses is what we call them. That seed numbers artificially low because we've repatriated seed from some of the product closures that I mentioned earlier. Our desired capital allocation of what we'll be moving towards is roughly 1/3 supporting the business, 1/3 on seed and then 1/3 for strategic uses, which we will plan on allocating for high shareholder returns. This growth strategy, we think will take some time to play out, but we have a great deal of confidence that it will be materially additive, both for clients and for Platinum in terms of flows and FUM, and we look forward to updating you on our progress as we go.

Thank you very much for joining us and providing your questions. If you do have any further questions or need more clarification, please reach out to Liz Norman directionally. Thank you very much, and have a good day.