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

Good morning, everyone, and welcome to the Platinum Asset Management Limited Analyst Briefing for the FY '25 Half Year Results. I acknowledge that I'm hosting this briefing from the lands of the Gadigal people of the Eora Nation. I also acknowledge the traditional custodians of the various lands on which you all work today and the Aboriginal and Torres Strait Islander peoples participating in this briefing. I pay my respects to Elders, past, present and emerging and celebrate the diversity of Aboriginal people and their ongoing cultures and connections to the lands and the waters of New South Wales. My name is Dean McLelland. And with me today, I have Jeff Peters, Platinum's Managing Director and Chief Executive Officer; and I have Andrew Stannard, Platinum's Finance Director. We'll provide some remarks about the FY '25 half year results, and then we will open up for questions. I encourage you to submit your questions using the Q&A function at the bottom of your screen. You can ask questions anonymously if you like, but make sure they go in there. I'll remind you again, once we finish the formal remarks just to get your questions in. With that, I'll hand over to CEO, Jeff Peters.

Thanks, Dean, and thank you for joining us. I'm going to cover some brief highlights of the half, and then we'll dive into a detailed review of financials and then a detailed review of our update of our progress on the turnaround strategy and our initiatives going forward. So, if we go to the next slide. In terms of the highlights of the half, with the cessation of our inorganic discussions toward the end of the year, we've now turned exclusively to focus on our turnaround, which is showing progress. From a financial perspective, which you'll hear about, obviously, outflows have been challenging for us, but we've still got good expense control and healthy operating margins at 43%, I'm happy to say that outflows are beginning to moderate across the platform, particularly outside of the Platinum flagship International Fund, which I'll be spending some good time and we've seen good investment performance improvement in a number of our strategies as well. We are still taking aggressive actions to ramp up progress on the turnaround, and I will describe those in detail. But highlight-wise, we'll be making changes and announcing changes to the Platinum International Fund today to revitalize the performance of the team and the process that we use for investing. We are continuing to take strong expense control actions. I'll announce several new fund launches and a build-out of the distribution effort today and we've also improved our capital management, including a AUD 0.20 special dividend paid out in December 2024. So, making good progress, a lot of activity to come, but we're going to start with a review of our financials. So, I'll turn it over to Andrew Stannard.

Thank you, Jeff. And turning to the financial summary on Page 4. The business ended December with AUD 11 billion in FUM with average FUM for the half of AUD 12 billion. This was down 26% on the prior comparative period and drove our fee revenues and profits lower, albeit partially offset by meaningful reductions in expenses. The EBIT margin remains attractive at 43% but was nevertheless down 10% on a year ago. Strong capital management was exhibited in the half with the payment of an AUD 0.20 special fully franked dividend in addition to the declaration of a further AUD 0.015 interim dividend today, taking the total cash return to AUD 0.215 for the half before the impact of franking credits. The next slide dives in a little deeper on revenue. As noted, net revenues, net retail outflows increased in comparison to the December '23 half, mostly reflecting some challenged medium-term and benchmark relative performance, particularly in the flagship international service. That said, it's encouraging to note that gross outflows have slowed in comparison to the June half. There was also a 2 basis point positive mix shift away from lower fee institutional accounts that helped drive average fee rates higher to 116 basis points in the half. In terms of other income, interest income was higher, thanks to the realization of seed investments and higher interest rates, albeit that with the special dividend paid at the end of December, the second half interest is most likely to be lower. Net unrealized gains from seed investments were relatively modest at less than AUD 1 million, some AUD 1.1 million less than December '23, and this was caused by a combination of lower seed balances due to product rationalization and lower returns from some of the funds themselves. Turning now to expenses on Page 6. As previously announced to the market, the business has made significant inroads into its cost base with December '24 expenses down 18% on December '23 and 25% on the June '23 half. Cumulative expense savings realized to date continue to run slightly ahead of our previously announced plans, equating to a AUD 15 million annualized cost reduction in the half. The December half showed deep costs right across our cost structure in comparison to December '23 with variable remuneration down 30%, fund admin down 43%, and business development down 30%. Fixed staff cost reductions of 8% largely reflected head count reductions, partly offset by wage inflation with further changes enacted on the score early in the second half. Occupancy and depreciation went against the trend of falling costs, increasing by AUD 0.5 million on the prior half. This was due to the combined effect of extending the Sydney office lease, actually a net cost saver versus the other option of moving and extra amortization of our new middle office accounting software that relates to our new target operating model. Statutory expenses of AUD 49 million increased by AUD 2 million due to AUD 9.6 million in transitory turnaround costs. The next slide focuses on those turnaround benefits and costs. As can be seen, the half-year delivered AUD 7.5 million in cost savings, meaning that the business is on track to realize at least 100% of its FY '25 target. First-half savings naturally exclude measures taken over recent weeks, and these measures increase our confidence in meeting the planned FY '26 incremental savings of AUD 5 million as these will largely be the run rate effects of measures taken in the second half of FY '25. Jeff will talk more on the turnaround program shortly. But in short, we see an opportunity to reduce costs should revenues continue to fall. Naturally, these savings do come with associated one-off costs, which are summarized on the chart on the right-hand side. As the chart shows, some 97% of costs incurred since we began the turnaround effort relate to people, whether in the form of severance costs or the accelerated amortization of share-based payments for departing staff. However, also included in the turnaround costs for the December half was some AUD 3.5 million in additional costs related to key staff deferred retention awards. These measures were required to be taken in response to recent corporate activity. My last slide summarizes the firm's balance sheet, which remains strong. The most significant movement in the half was the payment of the AUD 0.20 fully franked dividend, and this has transformed the balance sheet into a much leaner and more efficient capital structure. That said, the business, we think, still retains sufficient reserves to continue to invest in growth initiatives with AUD 152 million in cash and AUD 52 million in seed investments at balance date. I'll now hand back to Jeff, who will update you on our turnaround.

Thank you, Andrew. And if we could go to the next slide, please. Thank you. One year ago, when I arrived, actually at this very meeting, I articulated a turnaround plan that had 3 phases in it to stabilize the business, to reset areas where we could improve and then to initiate growth and return Platinum to a growth footing. That plan had a 3-year goal to improve our business, profit, and flows, improve investment performance and drive new flows. And what I'd like to do today is give you an update on the progress that we've made against those, that plan in the first year of our 3-year turnaround. I articulated 8 actions that you can see on the left. I'm not going to go through all of these. The ones in the greenish blue shading are ones that are substantively complete or largely on track, and I'm not going to spend a lot of time focusing on those. The ones in the reddish shading are where we will focus the remainder of the remarks today. But before doing that, I wanted to share some of the results we've seen on the right-hand side of the chart. Firstly, Andrew mentioned, our margins are holding at 43% and our expense reduction is ahead of plan. That's obviously critical. We're going to keep our cost control diligence as we go forward. I'm pleased to say also that we've seen performance improvement across the fund lineup. At the start of '24, 2 of our 8 funds were achieving a cash-plus objective for investors with one of them being benchmark. In the last 6 months, 6 of our 8 funds are achieving their cash-plus benchmarks and/or beating benchmark, and I'll go through that in a minute. But those performance improvements are strong to see. They are not across all of our funds. We do have performance issues in the International Fund, and I'll talk about that at length. That has corresponded with signs of flow moderation, particularly outside the International Fund flows, which I'll talk about in a second. And Andrew has already covered our balance sheet working harder for shareholders and our ability to allocate cash to see. If you turn to the next slide, we will, we can see the investment performance improvement. So, on the far right, on the far left, you see our 8 funds and on the far right, you see their relative return versus the index and versus cash plus in terms of an objective and you can see that the second half of '23, only 2 of our funds were ahead of cash, as I mentioned. Go over toward the second column and you see the second half relative return to index and cash-plus, and you see substantive improvement across a lot of our product line. So, progress is being made, and we're happy to see that. For reference and context, the reorganization that was described in our meeting in February last year or March last year was completed substantively the end of March and early April. So, the second half is really reflective of the results, first results from that. On the next slide, in terms of the redemption rate, I'm happy to see the first signs of it beginning to slow. Across the platform, we've seen a reduction in total amounts of roughly 20% on monthly half year one, half year 2 compare, a 5% slight improvement in terms of the overall rate. Taking out the International Fund, however, we see a larger improvement, 37% absolute improvement and a 24% improvement in the rate. So, first signs of improvement in our redemption rate. There are still things that we need to do, however, and I'm going to spend the remainder of the presentation talking about the decisive actions that we need to continue to advance over the rest of the year and beyond. And there are really 4. The first is to revitalize the International Fund in terms of performance, and I'll be announcing in a minute some team changes and other process initiatives on that. We need to continue our strong expense management, and Andrew has talked about that. I'll reiterate that later. We have a lot of new product efforts and launching new capabilities in our partner series, which I'll describe in some detail. And we're also building out our distribution capability to be able to drive inflows based on these new products and other products in the suite that are salable. So, this is a good agenda, strong agenda for the second half of the year, but I think we'll continue to advance our turnaround in key areas. So let me go through these one by one. First, in terms of the International Fund, when I arrived, obviously, improving performance was job one. It continues to be job one. We've made some nice strides in a lot of our portfolios, but we're still not happy with where the International Fund is. So, we're taking some steps to revitalize that. Let me first, though, talk about what we're not doing. And what we are not doing is changing our philosophy. We're going to remain consistent with our classic Platinum philosophy of valuation focus, benchmark agnosticism, bottom-up high conviction approach, trying to find great stocks that are mispriced across the entire world with an emphasis on long-term capital growth and downside protection. Nothing in that is going to vary. That said, we are undertaking some changes. I'm announcing today a change in the strategy leadership, in terms of who's running the International Fund. Delighted to announce that Ted Alexander is joining us as the new CIO of that fund. I'll describe more about Ted and his background in a minute. Also, Jim Simpson, who recently joined our Board at the AGM was a Platinum founder, is coming in and taking on a role of helping me do investment oversight through the investment oversight group, which he is chairing our primary governance mechanism for the investment side. Clay Smolinski is stepping back from his role as Portfolio Manager of PIF. Clay is taking a sabbatical of 6 months. He's made this personal decision, and I think it will be an important time for him to recharge. At the end of that time, we will reengage with Clay to see what role there may be at the firm for him should he want to come back, and we look forward to that. Andrew Clifford is also stepping back from his portfolio manager duties on PIF but remain part of the investment oversight group and help us with this transition to make sure that we retain the philosophy and retain all of the great things that make Platinum, Platinum. So, with that set of leadership changes, we're also continuing to look to evolve our investment processes around that fund. Firstly, we'll be reevaluating our fundamental research to improve its effectiveness possible. Second, we'll be increasing our use of quantitative tools and data tools, actually capturing a lot of the trends that are happening in the marketplace broadly, but also bringing those more up to speed for Platinum. We'll be expanding our risk management portfolio construction disciplines in an effort to reduce our volatility and enhance our risk-adjusted returns and we'll be having a look at our cash management and currency positions to increase the efficacy there. A lot of this work has been begun in the last 12 months from a process perspective. We're looking forward to consolidating the gains we've made and taking them even further with the new team. And as I mentioned before, we're evolving our management governance model, making the investment oversight group the primary vehicle through which we'll govern the investment teams as they come in independently of each other. I will be on this as well as Jim Simpson, Andrew Clifford and a bunch of others. I want to reiterate that these changes are almost entirely focused on the International Fund. Our other funds are performing well, doing well and the people who are running them will stay in place and the processes will stay in place as we look to consolidate the improved investment performance from those. And just to give you some background on Ted Alexander. Ted is an industry vet. He's had 17 years of experience working in a variety of places, managing global long/short from Neptune, Magellan and very recently, most recently in his own firm BML and also at Orca, where he was the Head of Investments. He's very well qualified, Rhodes scholar from Oxford from Tasmania. And you can see on the right-hand side, his track records. At Orca, over 4 years, Ted delivered solid outperformance and very strong risk-adjusted performance, which you can see on the right. In the last year, Ted basically tracked the index a little under but had very strong beta-adjusted performance as well. So, from a risk-adjusted perspective, he's got a very strong track record. And from an absolute perspective, he's done quite well as well. We're delighted to have him and his first day is Monday. Moving on from the International Fund, which is job one and will continue to be. We're also looking aggressively to ramp up our growth. And doing that, we're formalizing several things I mentioned at our Annual General Meeting and in past updates with you. The first is our Arrow Trust hedge fund strategy, which I've mentioned before. That will be launched toward the end of the first half of calendar year. To remind, it's an active long/short global equity portfolio, high conviction, low beta. It's aimed at institutional and high net worth clients, and it targets an absolute return of cash plus 5, with low correlations. It provides strong upside capture, but very strong downside protection and a very effective capital vehicle. It's continued to perform well, as you can see from the chart on the right, particularly on a risk-adjusted basis. It's top quartile in investment universes versus its peers globally. And I'm gratified to say it's off to a very strong start this year. We are expected to launch that and have that in the marketplace, as I said, toward the end of the fiscal year this year. In addition, from our existing product opportunity, the Asia fund has had a dramatic and nice to see rebound of 25% over the last 12 months, continues to perform very well since inception, has beaten the index over the last 5 years and since inception. You can see the performance numbers on the right. We've begun strong marketing efforts to sell that product with some good success. It obviously stands on its own, but it also offers a great alternative to emerging market allocations for Australians who already have a lot of commodity and energies in the existing Australian book. And so therefore, Asia is a great emerging markets opportunity for them. We look forward to continuing to market that and seeing strong results. And then lastly, we are launching our partner series, our first offer, which I indicated before, with the launch of the GW&K Global Small Cap offering. GW&K is a Boston-based firm, an affiliate of AMG. It operates independently and autonomously as a partnership, but it is definitely affiliated with them. It's an actively managed firm with AUD 83 billion across several strategies and roughly 50 investment professionals. It's known as a small cap leader around the world with a very long history of investing and doing well in that. And the strategy that we're launching, which is our global offering has about $1.8 billion in it, but has significant capacity to grow. We expect that to launch on April 1st, and we'll be in the market talking about that. You can see its return histories, which are solid, and I think compare well to a lot of the incumbents in the Australian market. So, we're excited with Arrow. We're excited with Asia. We're excited with GW&K to have these offers coming back to the marketplace or coming to the marketplace. And as a result of this, we're also committing to expand our distribution capability with the intention of bolstering the sales force and senior sales talent and currently in the market and more to come on that later. I'm also in close negotiations with another large global firm to expand the partner series with one to 2 product offers likely in the second half of the year if this comes to fruition. So, we're building out our partner series, getting new things for our clients and are excited by the growth prospects that they offer. Let me switch from the strategic and the growth back to the financials. I don't want to rehash what Andrew has already covered, but I think a couple of points do make sense to highlight. On the balance sheet, Andrew has already talked about the strong dividend of $0.20. Our ROE is now up to 18%, which is good. But the point I want to make on this chart is that despite having paid back significant cash to our investors, we still have enough to grow. If you look in the middle of the bottom chart at the end of December, we still had $200 million on the balance sheet. We've recently paid out a dividend of that, and then there's $50 million roughly to allocate to working capital and regulatory capital. That still leaves us $140 million to invest in growth, of which roughly $50 million is unallocated. So, we've quite explicitly made our balance sheet work harder for shareholders but have put enough capacity in it and dry powder in it to invest in growth. And then finally, I just wanted to take the time to reiterate our commitment to expense control. You've seen half year adjusted expenses down. You've seen the fact that our cost reduction targets are in hand. Our head count has dropped from 114 in September to 92 now. And we've completed product rationalization. We've completed our middle and back-office transformation. All these are making us more efficient in getting our cost base under control. What I also want to indicate is that we do have the capacity to continue action should they be warranted if the revenues continue to act as they have in the last half and fall. And we will do such actions if they're warranted. So, expense control remains strong despite our growth focus. To sum up, we've made some good strides. It's been a challenging year in many ways, but we've made some good strides in the turnaround program. It's a 3-year program. I expected it to take 3 years. I think we are on track. We are seeing the first signs of real progress in terms of investment performance and in terms of redemptions, which are 2 of the key indicators. Our margins remain strong. That said a lot to do, focusing on the International Fund, which I have described today, our growth initiatives and then continued expense and capital management control. So let me wrap up there. We will turn it back to Dean for questions and thank you.

Thanks very much, Jeff and thank you, Andrew. We have got 2 questions in at the moment. So, I just remind everybody online live. [Operator Instructions] We will start with a question from Elizabeth Miliatis from Jarden. In the presentation pack, you noted costs will continue to be cut should revenues continue to fall. Are you calling for broadly flat cost-to-income ratio for FY '27 onwards even if revenue deteriorates? Why not cut these costs today and improve EPS further?

Well, we certainly need to control costs and make sure that our margins remain strong. I think it's premature for us to make a commitment to a flat margin or a flat cost control effort. There are things you can, there are things to reduce in costs that at some level begin to cut into capability. And as a result, with the change in the investment team, we want to make sure that we are providing everything that's needed for our clients to enjoy Renaissance in the International Fund which I think should answer why we are not to make more aggressive changes. Some of the other changes that we could make, frankly, are more time-oriented due to continuing changes in our unit registry or other things like that. It's important for us to have dry powder, but it's also important for us to maintain flexibility because growth and a great investor experience are our #1 priority, and that's what we're going to focus on.

Another question from Elizabeth Miliatis from Jarden. Base management fees have remained resilient. Should we continue to see flat base fees over the medium term? Would you contemplate cutting retail fees as you did in FY '18 to stem flows or do you plan to retain current fees over the coming years? Thank you.

The answer to that question will depend on the fund. There are some areas where I think we are priced quite appropriately. There are some areas which we continue to look at. With the new management team of PIF, we want to ensure we have got a good investor experience. But then on my agenda is to look at the fee experience, particularly in that product, but in others as well. So more to come on that. So yes, that will be a focus.

An anonymous question. Hi Platinum team. How will Mr. Ted Alexander balance his existing role at BML, especially from a conflict management point of view?

Well, Ted won't have an existing role at BML and BML, as I understand, is being wound down, including the mandates that he currently has. He's joining us with 100% commitment to Platinum. So, I don't think he will have to balance anything.

Another question anonymously. Jeff, you mentioned investment research will be assisted by more modern means. Does it mean the size of your research analyst team will scale back?

It's a good question. I think in the industry, in general, a lot of people are trying to figure out what the future of research looks like given AI tools and other technology. We will certainly have a look at what our research team looks like. But as I have said before, our first job is performance and our first job is doing right for our investors. We will make sure that, that answer is what drives us, and we will make our research as effective as it can be. So, in terms of the number of researchers, et cetera, that will obviously fall out from that. But our first goal is to make sure we have strong performance and strong research.

A question from Rishi [indiscernible]. What should we expect in terms of implementation costs going forward? How much more costs can you take out?

You want to take that?

Okay. So, 2 parts to that question. So, in terms of turnaround costs, we provided an update in October in terms of what we are thinking in terms of the second half, which is that there is a potential for an acceleration in turnaround costs in the second half, particularly around the acceleration of LTI plans. So, I would encourage people to have no worries if they haven't already to have a look at that announcement. We also obviously have got the first half. So, from an analyst perspective, you have got information now on what first 6 months looks like. So that should be helpful as well. In terms of further cost opportunities, I think Jeff has already covered that in the previous question from Liz.

Okay. An anonymous question, can you please provide detail around the status of the PMC PICs and PAI PACs schemes given the material delay to the time lines of these? What is the reason for the delay?

Okay. So, for those on the call that don't know, we are proposing to merge the 2 listed investment companies, PAI and PMC into the active ETFs PICs and PACs. That's done by way of a scheme of arrangement. In order to implement that, which is technically a takeover by PICs and PACs of the listed investment companies, we need the ATO to give us some tax rulings and that takes some time. And that process, therefore, will push, has pushed the date slightly by about 3 or 4 months into July.

A question from Marcus Barnard, Bell Potter. Can you comment on the stat tax rate seems high. Does it fully reflect the turnaround cost of $9.6 million? Do you expect it to be lower for the full year?

So the trick with the tax expense line is, first of all, big picture, Platinum is pretty simple from the perspective of tax because it's basically an onshore business. So, 30% tax rate is a good starting point. What we've got slightly complicating the picture both in the last financial year and this financial year is we have some pure accounting noncash accounting adjustments, which is related to the long-term incentive plan, the accelerated write-offs, which we just referenced. So, they become a difference in the tax rate and artificially push up the tax rate because you basically you're backing that out.

Okay. Two questions from Lafitani Sotiriou from MST Financial. The first one, GW&K has underperformed versus benchmark on a post-fee basis on a 1-, 3- and 5-year time frame. Is this the best you could find to kick off the partner program?

GW&K actually did not have a good fourth quarter, and that's what has driven that performance. If you go back to Q3, they had outperformed on all of those time frames. And in consultation with them, I understand that they're recovering from that quarter currently. One quarter does not talk a lot about quality of an investor, and GW&K is an outstanding name and that fund is an outstanding fund. So, I would ask people to watch this space for updates on performance. We have a great deal of confidence in them. I happen to know them personally through my time in Boston, where I spent 30 years. I know the management team, and I know, and I have deep respect for them, and I have great confidence in them.

And the second question, can you update what the fund ratings and commentary has been in relation to Platinum International Fund and how it may change following the recent team changes?

Yes. It's too early to offer any commentary on that. I will say that we've been in touch with the ratings houses, and we have meetings scheduled with them over the next several days to go and review those changes. We will be able to comment more on that once those meetings are complete and they've given us their feedback.

Okay. That's the end of the questions that we have had submitted through the portal. We will just wait a couple more seconds if there are any questions coming through. [Operator Instructions] Okay. Question from Rishi. What will be -- sorry, Rishi, what will be the economics around the Platinum Partner series look like? What will be PTM's role? And what will you make on these partnership funds?

So let me start with the role. The role will be, they will be sub-advising funds that were the RE for so Platinum funds, and we will be providing distribution and support in market for those funds. The economics will obviously vary fund by fund. I think a guidepost would be to think about institutional type pricing for the investment management of those funds. And one could imagine sort of a 40% to 50% type of split for Platinum. They will be, obviously, from an economic perspective, if you're not running the actual money, you don't have the investment costs. So, your costs are focused on the RE costs and distribution. So that split will make the profit margins on those products quite attractive.

Thank you. Just a follow-up question from Marcus Bernard at Bell Potter. The turnaround cost of $9.6 million, is that in addition to the $15 million in H2?

Yes.

Okay. No more questions coming through at the moment. Anything straight through the portal? It looks like there's no more questions at this time. So, at this stage, I would just like to say thank you very much for joining us today and for your questions. If you do have any further questions, please do reach out to Liz Norman directly. But for us, for now, it is, thank you very much and goodbye.