Praemium Limited (PPS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Praemium Limited 2023 Annual Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Wamsteker, Chief Executive Officer. Please go ahead.

Thank you very much, and good morning, everyone. Thank you for your interest in our results presentation today. As you probably all know from the presentation, I have our Chief Financial Officer with me as well today, David Coulter, and we will be going through some of the operational highlights for the year, as well as then the financial results, and we will conclude with some view forward on our strategy and outlook. But I'd like to start by saying, at Praemium we acknowledge the Traditional Custodians of Country. We pay our respect to their Elders past, present, and emerging for they hold the memories, traditions, and culture of First Nations’ People. As is usually the case with presentations like this, it comes with a disclaimer. So I draw everyone's attention to that disclaimer, but I won't be going through it in any detail. As I said, we will just cover some of the highlights in a very short introduction today. Then I'll hand over to David, who has to do heavy lifting, I must admit, today on the financial results, and then we'll conclude with a bit of a look forward. And then I imagine there will be some questions, so we'll have plenty of time for questions. Looking at the business highlights, which is on Page 6. The key point I want to make here is the opening up of operating leverage inherent in our business. We're very pleased that, that operating leverage is increasingly opening up, and we're also confident of the ongoing growth. And obviously, if you've got a business that has got some leverage within it, and you can grow further, then that gives an encouraging outlook for future profitability. I won't go through each of the numbers there. They're more than adequately dealt with on that slide and the points on the right-hand side. But suffice to say, we're very pleased with what we've been able to deliver with the first year of the business focused on the opportunity within Australia, which we're in that situation, of course, because we were able to divest the international business at the end of the last financial year. There was some minor work still being done on the international business part of the service agreement with Morningstar. That was all concluded by the 31st of December in accordance with the plan. So predominantly focused on Australia -- almost exclusively focused on Australia, and we're very pleased with the outcome of our first year doing so. If I just go to some of the operating tech development and sales outcomes for this year in highlight form only. I'm going to come back to the first 2 points on that slide. But obviously, our developers continue to do a great job building out the technology platform on which our business is based. And those 2 wins out of the 6 categories in the preeminent survey of platform performance is a very good result. And if you asked us at the start of the year, what 2 categories we would like to win? They are the 2 we would like to win. So very pleased with 2 out of the 6 category wins. We have now completed internally the operational and client service integration of the Powerwrap business so that it is one business with the Praemium business, all under a common leadership model and very pleased with how that's going and the opportunities that gives us not only for financial synergies, but also for aligning the product offering, so that we've got a breadth of offering now that is unsurpassed in the platform market. Through the year, we continued to build on our strengths and, in particular, added a number of technology feeds and interfaces and developed further reports to what is already the most comprehensive reporting suite in the platform market. And finally, we were able to sign a new 6-year strategic agreement with Escala, which is the group's largest client. So a very pleasing result on that front as well. But as I say, David has got most of the presentation to go through. We're spending more time on the financials than any other part of the business, which we think is appropriate given that this is the annual financial results for the group. And so I'm now going to hand over to David. And thanks, David, for your involvement in the call.

Great. Thank you very much, Anthony. Turning to the financial results. I'll start my part of the presentation on Slide 9, where we have the net flows and FUA. This has already gone to market. It was released on the 18th of July, but it's worth reiterating because, of course, particularly in the specialty platform provider or challenger platform space, it's the ability to generate organic growth that distinguishes those participants in the sector from the large institutional incumbents. It was, again, a very successful year, albeit the second half of the year had its challenges for all participants in the sector. But overall, we're very pleased with the $1.4 billion in broken down roughly to SMA $900 million and Powerwrap $500 million, with the tailwinds from markets also contributing very close to the equivalent amount, which is, of course, a structural benefit of being in the sector more years than it is not, without that being a future prediction, of course. Those structural tailwinds definitely assist in generating additional revenue when the markets are going your way. We do not rely on it. We're focusing here on the organic growth we've been able to generate. It's taken us to a record level of FUA in Australia at $44 billion when you include our virtually managed accounting service, which itself was up 4%. Looking at the other parts of the business, up 19% and 11%, that being SMA and Powerwrap. These are now all at record levels for those products and services that we're offering within the Australian market, and that's what we're concentrating on now, as Anthony put, with the international division behind us. And when I get to EBITDA, balance sheet and cash flow, you'll see the benefits of that flowing through for the financial year. That strong growth has come from a very even distribution in our pipeline. We are breaking down at roughly 1/3 absolute new service to new advisers, new client groups, and then a spread 20% to 50%. This combines Powerwrap and the SMA in our pipeline. It does vary. It varies with the level of flow that we have given. We're giving percentages here, but it's always been a very strong entree to the business through a new service, and that's what that demonstrates over each of these half years. We also have a reasonably even spread of sum by the length of tenure. Of course, the overall sum is a much larger corpus than the flow being introduced. The graph on the left shows you that the introductions to the business are very strong from your advisers and new client groups, and that will filter through to the tenure to keep it roughly even. All that said with pipeline, must emphasize that we do value the contributions we get from our long-standing partners. And having long-standing partners that have themselves excellent business models and excellent relationships with their clients is only to our benefit, and that's what keeps us keen on delivering leading service, leading products and leading technological capability. And this is where today's emphasis ought rightly be, on our Australian segment results. The Australian segment is what we refer to as the continuing segment. If you've got the deck, it's just taking some time to turn over. It looks like it's up now. The Australian segment saw revenue growth of 17%, which led to the opening up of EBITDA margin from 31.5% to 30.1%. Anthony mentioned right from the outset, the strength we have in leveraging our business. In that, if we can grow our revenue faster than we can we are growing our cost, so we can constrain or manage our cost to a degree that they're not growing to the same rate that our revenue is, we'll have an EBITDA margin growth that will deliver through to the bottom line for shareholders. I'll go through the cost in some more detail when we get to the EBITDA bridge in a couple of slides, but I would note that the single greatest increase in our cost has been the cost of operations. There's a step-up in a particular cost there in that we have an outsourced admin increase. But we're also looking at costs which would naturally grow as we grow our FUA, those costs being things like custody or underpinned by trading from our trading partners. I'll note that IT, sales and marketing, and to some extent, general admin and corporate have been constrained to at least a level below inflation, or there's a good rationale for increasing that cost. And again, looking at the points on the right, I think with the general admin adding governance resources, the expected insurance increases and, of course, some consulting work that's needed to be done to ensure that our cybersecurity environment is strong, have all been to the betterment of the organization overall and necessary impose. I'll go now to our platform revenue margins. This is on Slide 12. I believe that presentation has caught up with my pattern of speech. Platform margins, we actually disposed more than any other participants in the market. We think it's really important that our investors and the market more broadly understand how it is that we derive our platform revenue. If you see here, the performance, particularly since in the SMA we repriced the cash admin fee up to 130 basis points, has lifted the overall contribution. That isn't to suggest, however, that Powerwrap isn't also benefiting from the increases in interest rates overall. The uptick is particularly pronounced in the last quarter of the year where I think perversely, if you have a lower flow environment, you definitively have a lot more trading execution revenue coming through from your platform products. And we've seen that in the way that particular portfolios might have been liquidated to go to say, cash yield products off platform, there's a lot of trading out of existing positions that has to take place, and we earn the revenue on that. And that's why we're very pleased to be transparent on how it is that we derive the revenue and to give people some sort of sense that whilst it's volatile within basis points, it's largely recurring based on the admin fee we derive from the platform. I mentioned earlier the EBITDA variability. Our EBITDA has been driven by revenue growth, no question. 17% revenue growth, $10.8 million increase, largely off the back of the platform. Broken down by volume growth in the first instance of around $2.5 million, but a substantially increased margin as was evidenced on the previous slide. Of that, $6.6 million attributable to margin growth. We've calculated that around $4.5 million of that uplift is due to the cash admin contribution or an additional cash admin contribution. And of course, portfolio, one of our other core business, is growing very steadily in line with the portfolio growth overall. I mentioned earlier, outsourced admin had been a one-off -- it's not a one-off, sorry, it's an uplift break in for this full year, but it represents a full year's charge that's been recognized only in the second half and it breaks down roughly evenly over the 2 halves, $0.7 million and $0.8 million. We have an outsourced admin arrangement with OneVue via Diversa as our RSA on the super SMA admin product. That fee is delivered by those 2 partners to us, and it was communicated to us in the second half of the year with a backdated charge right through the start of the financial year. And hence, it's had an outright impact in the second half of the year and for the full year of '23 overall. The other cost of operations has increased in line with increasing FUA. Wage inflation is something that you'll have observed right across reporting season, I'd expect. We're at roughly 65% of our costs driven by the contribution of our people. We had a footnote on the previous slide showing, I think, $32 million to $30 million of salary or employee cost contribution. And that's what you're seeing there is the natural increase that's come with having a high component of your cost devoted to your people and the wage increases we've had to deliver to them to remain competitive in a very tight labor market. The other items I won't go through in detail, I did mention those in the top line of the P&L itself or the segment P&L. Turning now to cash flow, which we have on Slide 14. It is. We're always very pleased when we have an underlying EBITDA to see a great alignment with that operating cash flow and our underlying EBITDA. So $23.4 million converts most readily to the operating cash flow of $26.8 million. So cash conversion has been very strong. Tax paid is very low, and I'll come to that, and there's a very specific reason. It essentially involves the ability to engineer a very large tax write-off for the divestment of the international business. That's flowed through to our statutory net profit after tax in terms of the very large tax benefit that's come through to benefit that one. The tax paid, in fact, would be even lower in cash flow terms when you can see that there's a reasonable size receivable from the ATO, which we received in mid-July. So the cash flow from operations is actually even better through the end of July than it looks there. So conversion rate is very strong to our underlying EBITDA. The investing cash flows reflect largely an ongoing pattern of R&D that we engage to ensure that our products and service are at the leading edge, hence the awards that Anthony referred to earlier and which he will emphasize again later in the presentation. That has lifted by $1.5 million. It is essentially not at our discretion that uplift. It is that the prior year was a little lower than we conventionally devote to that sort of activity and that we had some mandatory regulatory change in the form of fee consents to deliver to clients, and they were not able to be taking the balance sheet necessarily. So there was a bit of a diversion of development resources in that year where we got $7.5 million for the size and scale of business that we're running and our desire to be, as I said, at that leading edge of the platform sector as an appropriate level of spend, we review it constantly. But we're very comfortable that it does indeed keep us technologically very capable. The biggest impact this year, and most of this was laid out at the half, there's been an increase only in the share buyback amount, is that we've deployed those surplus funds from the international divestment, again, to the value -- or for the value of shareholders, we paid a $0.05 dividend, which we've fully franked. Share buyback is ongoing depending on market liquidity, and, of course, we repaid our borrowings, which not only in hindsight, but under the circumstances we were facing, was a very savvy business decision, the way that interest rates have gone since that time. The buyback is progressing and will be restarted today, and we'll be pleased to see that continue through to the next half year results. Lastly for me, before I head back to Anthony, we have a very strong balance sheet. What's illustrated most starkly here is the amount of cash available to us. It's gone from $81 million to $46 million, which indicates that to the extent we can, we're deploying that for shareholder value. But it doesn't mean that we sit on our hands as far as balance sheet structure goes. We did make an announcement to the ASX that we expect our group regulatory cash to reduce from $15 million down to $10 million, meaning the amount that we're specifically required to hold against our AFSLs. We also have sitting in the bank, ready to go, $9 million of Powerwrap tax losses, which we can utilize in future periods. We can't take that to the P&L overall in one big hit. There's a number of tax rules that govern the way that those losses must be administered. And it's our estimate that it will take 11 years or roughly $800,000 a year to exhaust those losses. That's something that we will be engineering because we do expect to be profitable, cash generative on a recurring basis years into the future. The Board considered the dividend policy lately or in the last quarter of the year. That policy is heavily reliant on being able to deliver franking when we pay a dividend. We'd talk more at the next half year about how that half year has gone, of course, and what's available to us. But noting that we have received a sizable tax benefit from the divestment of International, our franking credit balance is not high because we have not paid in cash terms a large amount of tax in the financial year, and we had deployed our franking credits in the $0.05 per share special dividend immediately following the international divestment. I'll now hand back to Anthony for the strategic component of the presentation. Thank you for your time.

Thanks, David, and well done. Looking forward, look, the way I'm -- and we might be -- yes, so I just want to talk about how we look at the market and then talk about why we think that is working for us and will continue to work for us. The direction in which the market is going, the market in which we operate, which is, of course, a B2B business, we sell our software and our services to financial advisers, so that they can serve their clients. So that market, the way the financial advice market is going is a positive tailwind for us because the sort of expertise and specialization that advisers are looking for from both platforms and noncustodial service providers really benefits from the strength in which Praemium has built up over the years. And so simply the way we look at it is, we look at what's going on in the market, what are we good at, and therefore, what are the products and services we can offer to give the market what the market is asking for. So that slide is, I know it looks simple, but that's really just saying that's how we look at the strategy. What does the market want? What are we good at? What does that mean we should be able to offer? And we think we've done it pretty well, including having some components in our offering that are unique in the market, some that are clear differentiators because we're better than the market of those things, and some where we're competitive, but it rounds out the fullness of the offering. So if I go to the next slide and just talk about what does the market look like? And this is a slide we've used before. But again, I just want to draw your attention to the fact we operate in the platform market. It's where we generate most of our revenue, but it's not the whole market. The platform market, which really is the right hand side of that Venn diagram, it's not even 1/3 of the total market opportunity. So there's a lot more assets held by the investors that our advisers are targeting off-platform or noncustodial holdings than on-platform. And so in order to serve that part of the market, you really need to be able to offer the full service. You need to be able to deal with assets, whether they're on-platform or off-platform, look at them altogether, manage the reporting of the whole lot together, manage the tax position for the whole lot together. And so the service that we provide by giving a whole of wealth view is certainly in need if you want to service the high net worth part of the market. And that's pretty much what that slide shows. I won't go through it in detail. But obviously, there is some convergence between the platform market, which is a lot of that is retail money, and the high net worth part of the market, which we talk about there. But certainly, advisers are moving in the direction of setting up their practice to deliver a service for high net worth advisers. That service is in great demand and we provide the technology and services solution to be able to deliver both. Again, just to have one more slide on the market opportunity and the direction of the market. If I look at Slide 19, and there's quite a bit of information on this slide. I'm not going to talk to it all in detail, but it helps to understand where the market is heading when you look at it across these categories. Where are we in terms of demography? They said all the time, demography is destiny. Where the market is going demographically, it's not going to change. We're going to see changes there. Technology, obviously, is emerging. The advice market itself is changing quite a lot. And the way portfolio as a structure is changing. Now within that, we've highlighted a few of the key aspects within each of those trends. But most of those boxes, the services that you need to meet the changing requirements that is evidenced by that trend, Praemium does extremely well. And so then if I go to the next slide and talk about what we do well. And this is just drawing out a little bit further from the investment trends survey, some of the things that we really do well, independently acknowledge that we do them well. I talked at the start about the 2 categories in which we came for, security data and integration and decision support tools, and some of the others. There's 14 categories where we were #1 because it's all up. There's about 60 subcategories for those 6 main categories in that survey. 14 of them we came first, but some of those 14 are really important in terms of the way the trend is going. Number one for noncustodial assets, which, as I say, is a much bigger asset pool than the amount of money on platform. Number one for tax tools. Again, the higher net worth people get, the more important it becomes for them to fully understand not only the tax position and have that very accurately calculated, but also for tax planning and tax optimization. So being #1 in some of those categories is a level of independent confirmation that when we say, here's where we see the market going, here's what we're good at, and you can see the overlap between what we're good at and where the market is going. And so that's why we feel strategically, we're in a great position with a good foundation. Then the other big development during the year is that we've now got a significantly different executive team to what we had 12 months ago. Since that time, David and I -- we were both here 12 months ago. But since that time, we've made substantial change to our executive team. And now we've got the breadth of talent required to build on that foundation that we've got and to meet the challenges that the market throws up and to take advantage of the opportunity that is in front of us. And so again, it's a slide that I'm not going to go through every individual and what they bring to the table, because it's on the slide already, but the breadth of experience and the way this team is working is very exciting in terms of having the people that can realize the opportunity. I did say that it was David and I. Of course, I should draw your attention. James Edmonds has been with the group for quite a long time, and it's wonderful to have him in the role that he is on that executive team as well, but all of those people, great people, in terms of their experience, capability and the way that they bring a level of energy and enthusiasm to the opportunity that we've got. Finally, just some of the -- where does that leave us? So we've talked about what the market's doing, we've talked about our strengths. So what do we need to do? And the #1 thing on this slide, the #1 thing is to keep expanding on our strengths. The areas where we're strong are where the market needs to see continued improvement in service. That's what the market is looking for. So the #1 thing in our strategy is to keep building on our strengths. And in our business, that means to build out further the wrap capability that we've got, which is currently in the Powerwrap solution and which is, in our view, probably the best wrap product on the market for high net worth advisers and their clients given the breadth of functionality that is on offer in the Powerwrap solution, but we can build out next generation of that product, which we are doing, and to keep building out the noncustodial service, where, again, we're #1 in the market in terms of the size of the administration business that we operate, whether it's the technology or whether it's the admin service, we've got, by far, the biggest client base in noncustodial assets, but we still think we're well under 10% of the total opportunity. So it's a huge opportunity. A lot of it is a cottage type industry, done on spreadsheets or not built fit for purpose system. So there's a huge opportunity for us to maintain the #1 position in noncustody, but to actually grow our business very strongly there. So that's our number one priority. The other priorities I won't go through in quite as much detail. But clearly, we identify the areas where we've got to keep doing well and keep building out more professional capability, operations, service, superannuation, and we keep an eye open for acquisition opportunities. There's nothing that we need to announce today, I hasten to add, but there are many opportunities in the market. The capital markets are in such a position -- they continue to be in a position where for businesses that have got a strong balance sheet like we do, you will get shown opportunities. Some opportunities we go and look at ourselves. Where they don't have to be shown to us, we take the initiative. As I said, there's nothing that is ready to go at this point in time. But it is something that we keep an eye on. We're very happy that the Powerwrap acquisition was a good one for our group, and there may be other opportunities of the nature going forward. So that's really it from David and I. Time for me to stop and go to questions.

[Operator Instructions] Our first question comes from Lafitani Sotiriou of MST Financial.

The first one is in relation to the revenue margin. And it's great to see the benefit from the repricing and the cash margin uplift -- the cash margin uplift come through in the second half. But if you look at Slide 12, and I think we had this dynamic last time that it looks like the trend is still up. And there's a notable spike in the SMA platform in the last month. And so can you just talk us through expectations into the next financial year? Are we still anticipating an uplift because the chart would suggest, if you've got 34 basis points for SMA in FY '23, that you would look to beat that given the exit rate at 41. But I don't want to just assume that. So can you just talk us through some of the dynamics because it is quite volatile over the year?

Yes. Thanks for the question, Laf, and thanks for taking the time to listen to the call. Really appreciate it. I suggest that there's volatility in those revenue margins that comes with the fact that we're very transparent in our pricing to our client groups. So that the admin fee on a portfolio is a component and averages out at say, in the SMA, 15 basis points. And we know that because we kept fees at certain dollar thresholds and we're a servicer to high net worth clients and high net worth private client groups. Therefore, when you have volatility, it is more likely to be in line with volatility that comes from trading or execution revenue because we charge basis points on those activities within a portfolio as well. Point I was making was that it picked up significantly in the last quarter because we actually had what we acknowledged, and we took calls again on this and commentary we had, net flows in that quarter that were subdued relative to the other 3 quarters in the financial year. And that was subdued, and I think other participants in the sector also made this point, because we were seeing funds taken out of portfolio in volatile equities and taken to off-platform cash, be it term deposits or other sorts of off-platform bond-type structures. Because yields are up to the point that those sorts of assets are now a lot more attractive than they were, say in 2022, or the first part of 2023. When you trade down your position, you're executing a lot of activity from which we can levy an execution fee. The shorter then answer to your question is, I would take the average over, say, the second 6 months, because you've got a full reckoning of the uplift in the cash admin fee on the Praemium SMA and you've got a full half year's trading activity averaged out over months and use that maybe as your exit proxy.

That makes sense. Can I move to some of the cost side and I note your comment on the external repricing. But just with the wage inflation internal, could you just talk to the dynamic, as 7% for your own employees is still pretty high. And can you talk to what the dynamic is at this point in time? And would you expect that to ease over the financial year into '24?

I'll let Anthony talk at the macro level, but 6% observably was what was absorbed by Australian wage payers over that financial year. We're not out of whack with anyone in having awarded our people around 6%. I know we've got a lot of our people listening to the call as well. Maybe they would be wanting to hear that what you were saying there, Laf, was accurate, but I can assure that we were broadly in line with market dynamics overall. We've done a lot of research now with Angela having joined the team, as was on one of Anthony's slides, into benchmarking our people and where we're genuinely placed. It's not easy, I must say. Platform providers don't necessarily readily translate to roles that you observe at other financial services providers, but we can make pretty good proxies or pretty good assumptions about where our people sit, what they're remunerated, and whether or not that's reasonable given the market overall. Our conclusion is, and again, apologies to those people from the firm listening who think they're underpaid, we're pretty good. So we're not expecting necessarily that we'll have to take some sort of significant uplift again into 2024, but we're not blind to the fact that inflation remains present, albeit a little more subdued than it was at the start of this financial year just gone. The RBA wage inflation forecast is where we take a lot of our queues as well. That's set for 4% again into 2024 financial year. So it's not a bad...

Can I just clarify, was there any rollover? Because I imagine there's still some synergies that we're rolling into this financial year from the Powerwrap transaction, because I remember a bit of that was later dated. And in the presentation today, you're talking about Powerwrap's next-generation platform. Can you talk to expected investment? Will it be capitalized? I think you've kind of flagged capitalization R&D would be pretty flat versus last year. Can you just talk us through what that is and magnitude?

Yes. I'll just talk quickly to the question about the Powerwrap synergies. They are largely absorbed into 2022. The only observable uplift on Powerwrap was by closing out the premises we leased in Melbourne. But staff-wise, we didn't really have a lot more to come through from Powerwrap. So I wouldn't place a great emphasis on that in terms of why the wage is able to be constrained to a level of, say, 6%, 7%, if you allow, for the FTE uplift. I'll hand over to Anthony for the next-gen Powerwrap. I would just ask, Laf, if you can come back to the queue, so we can just give other people an opportunity to ask their questions if that's all right. And we should have said something, roughly 2 questions each is probably a good way to go, so that we can get everybody in.

Yes. But I'm sure we'll get through other questions. And if you rejoin the queue, we would love to hear some more from you. But look, we do want to build out a next-generation wrap. The Powerwrap is a very good product, but it's a bit manual in some of the ways that it deals with behind the scenes. But it's definitely, as I say, it's a premium wrap product for the high net worth market given the flexibility and the breadth of what it offers. And hence, it's got some blue chip clients using that platform because of that. But the development is leveraging off what we've already got in the combined Praemium technology stack and the Powerwrap processes. So we're leveraging something that we've already got, but just trying to make it a much more automated product. And therefore, it can be priced a bit better, it can be more profitable for us. But the investment is not going to increase. We already invested significantly in development of our technology. And it's just focusing on where that development should be. And so what we've called out today is that in terms of building out our strengths to big opportunities are to do a next-generation or a new version, if you like, of Powerwrap, and to build out the noncustodial side of our business. But both of those, in our opinion, we are taking a strength and making it even better. And so building out the strengths that we've got rather than filling a gap where we've got a weakness. And the reason we're able to do that is because of what we said that we've already got the products and the services and the strengths in the areas and the direction where the market is going. We've got there in advance of the market going there because that was the collective wisdom of the people who have been involved in both Praemium and Powerwrap over the years, thought that's the direction it would ultimately go. Now that it's getting there, we've got to maintain our leadership position in noncustody and in the Powerwrap offering.

The next question comes from April Lowis of Barrenjoey.

The first question for me is just on the revenue margin. I know you covered it off a little bit in the last question, but it continued to creep up a little bit. But I was just wondering if there's any other factors other than the cash flow repricing, if you could just clarify that?

I'll go back to the answer I gave to last -- there's volatility in it depending on the level of trading that takes place in the portfolio, and that's the most significant factor outside of the uplift from cash, which in and of itself in the, say, the second half of the year is fairly stable. The cash reprice took place on the 30th of September or 1st of October. And there were interest rate rises progressively through the year, but we did cap at both Powerwrap and the SMA in the first half of the financial year.

Great. And then just one more for me. So OpEx was up in the second half. Just wondering whether we should think about that being the new baseline or more steady ongoing investment above that into FY '24?

Although it's the new baseline now, it's very difficult to pull the lever back on wages, which is our most significant cost. That's what our people are awarded. If we were going to be able to do anything significant, that would take some reasonable reengineering of the group outside of the existing resource pool we have. And right now, we sit pretty happily with the mix of people we have in Armenia and in Australia, where we've got roughly 250 in Australia and 90 in Armenia in very round terms, with cost differentials that I won't go into too much detail. But I think that the employee mix is right. It's 65% to 70% of the costs overall. The cost of operations that have gone up are at very low basis points, for example, on custody, but on very high FUA. They're not likely to be able to be negotiated down in the near term. So I'd be looking at that base and roughly saying, okay, I can constrain wage inflation to some sort of reasonable approximate to the economy overall, and other costs I've got to look at on an individual basis. But it's not unreasonable again to assume that inflation persists into 2024.

The next question comes from Cameron Halkett of Wilsons Advisory.

First one, just on the 2 pager of the results release, as you commented around July flows into FY '24 being encouraging. I'm just wondering if you can expand given there's been similar comments by your peers as well on this topic and just whether that's more of a comment from you guys on inflows or moderating outflows in July.

Thanks. Cameron, good to hear from you. And yes, look, it does. We know the comments the others have made as well. And we think that it's been an encouraging environment to start FY '24. And so perhaps it's -- even though we've all got our points of difference, perhaps it's just beneficial for all the challenger platforms at the moment compared to what we were seeing last year, last financial year. In terms of is it from moderating outflows or inflows, because we've got 2 products, we can see just in the Powerwrap product at the moment, we're seeing a continuation of a pattern where there's still a bit of money moving to some of the off-platform fixed interest. So the results that we're seeing there, we think they will get even better once there's a moderation of the outflows. Whereas for the SMA scheme, the Praemium scheme, as we call it, we just got some encouraging numbers, both products, leading to good net flows for that scheme.

Yes. Good to hear. Second one, just on one of the strategic initiatives around M&A. David talked a little bit about that earlier. Just looking at where the cash on the balance sheet is today, I suppose, can you just talk about what you might be looking for in terms of M&A? Is that potential platform consolidation? Or perhaps should we think a bit more software buyers?

Yes. Thanks again, Cameron. So look, obviously, there's a bit of market commentary around the platforms that are available, and depending on how you look at it, we're about the eighth biggest platform. So there might be some platforms out there that have got a smaller share than us that would be worth us looking at. We're not saying they are. As I said earlier, there's nothing that we need to announce or talk too much about at the moment. But of course, if there are platforms that are potentially available, it's remiss of us not to have a look. Part of what we want to do is make sure we're building out the whole technology stack. Part of the advantage we bring to the market is that we build the technology ourselves, we continue to manage almost all the technology stack ourselves. We're not dependent on third-party suppliers. And what we do with that control of the technology as we integrate and interface with a lot of different systems. Sometimes if you see a system that's a really good system and is adding a lot of value to the advisers, you might say, maybe we should acquire that business and own the technology ourselves rather than just interfacing with it. So if opportunities arose like that, and we've been shown some opportunities like that, we look at it, but nothing's come to fruition yet. I think the other part of your question is, how would we look at it if there was an acquisition that we can fund with cash on our balance sheet compared to one where it's beyond our cash capability to fund the acquisition? And obviously, the latter where we would need to do a raise, we would be a lot more cautious about that. Not to say that's impossible to do that, but you have to take into account that we've expressed a view about our value by buying back our shares. We think one of the best investments we can make with our cash is to buy back our own shares. So in that environment, if suddenly an opportunity arose where you had to issue more shares, we would have to be very strongly convinced about the merits of that transaction outplaying the fact that we think we should issue more shares at a time when -- to the extent that we've got available cash for buying back shares. So all that means an acquisition that is funded from our own cash resources is preferable for us at this point in time. But it would be remiss of us not to look at any opportunities out there as long as we understand fully the dynamics of issuing new shares straight after you've been buying back shares isn't going to look good unless it's absolutely compelling.

The next question comes from Warren Ashley Jeffries of Canaccord Genuity.

Yes, sorry guys, I'm jumping between calls at the moment, so I might have missed this, but have caught the end of the talk of the investment in next generation Powerwrap platform and noncustodial services. Was there an uptick in investment to be had to do that? Or does it sort of fall within your normal bands of OpEx and CapEx that goes into your development each year?

Yes. Thanks, Warren. And it does come within the existing capability and expenditure that we do. And I'll put both of those comments in the answer. We've got a really good development capability. And fortuitously, we can direct it where we need it to go because we do own our whole tech stack. So if we see development opportunities, we can redirect people from some of the things that they've been putting on to other things as the opportunity arises. So we've got the capability to do it already. We don't have to expand our capability to build out some of the development opportunities that we see for ourselves, and we certainly don't see a dramatic uptick in the amount that we've got to spend on our development capability. So it's within what we've got. It's simply saying going forward is where we see the prioritization of our development capability and spend.

And time frames on those investments and seeing an outcome or a launch of new offerings or the next-gen platform?

Yes. I think we would expect to come to market with a new offering in this financial year. I wouldn't like to get much more precise than that. I suspect that will be early in the new calendar year that we would be coming to market with, as I say, what we think is a next generation of what Powerwrap offers to the market.

And that includes the noncustodial...

So the expansion of the noncustodial is just to continue the advantage that it enjoys, which is, in our view, the best noncustodial system, but there should be this overlap that we're always -- there's never an end to that need to give the whole view of the noncustodial and the custodial holdings that people have. So when we come with the next generation of Powerwrap, we feel like that will be well received in the market, obviously, or we wouldn't be building it out the way that we are. So we're very confident of the reception that should get in the market. And that could well lead to people saying, this is so good. And it leads me to some new opportunities or questions for how I can integrate the reporting of my noncustodial and my custodial assets. And so part of what we do is we're always responding to clients. When we put a new offering out in the market, the clients, obviously, they give you opportunities to fine-tune it. They give you feedback for fine-tuning it. The really big opportunity -- part of the reason why this is such a big opportunity is when you look at the high net worth segment in that Venn diagram that we've got, and last time we surveyed the market, that was $2.8 trillion. High net worth individuals don't typically have all their money with 1 adviser. They often have multiple advisers. Sometimes they're managing money themselves. To the extent that technology providers like ourselves and platform providers can go to those advisers and give them more reasons to get a higher share of wallet of their high net worth clients, we think that's where there's a real expansion opportunity, not just for us, but for advisers who want to win a greater share of wallet of their high net worth clients who've currently got such diverse advice holdings. They might have 2 or 3 brokers, they might have a private wealth adviser. They might have money that they're managing elsewhere. If we can go to the adviser and say, that's all true, but if you give them our latest offering, you can help your clients see all of their wealth in one spot, we think that gives them a business growth opportunity as well.

So Warren, just to add to that from Anthony, in our operating and finance review or the directors' report, the annual report, that allows us to go into a lot more detail about what advantages we've gained from the development we've done. If you go to Page 10, you'll see something like 15 bullet points and all the releases over the years. So we talk about deploying our resources as is communicated back to us from clients, but also from our observations of where the industry is going, it's never ending. So you asked the question, when are we going to see the benefits from this? We see the benefits every time we put out a quarterly flow state.

Next is a follow-up question from Lafitani Sotiriou of MST Financial.

Just 2 follow-up questions for me. One is just on the -- I just want to go through the balance sheet in a little bit more detail. So you had some tax refund in July, probably pushing your cash balance to around $50 million in total. So there's no dividends at the moment until franking is back up. It seems unlikely there's going to be material franking credits in the next year. And so with the buyback at the current pace going through, it looks like, if anything, you probably got a bit of a trouble problem, I guess, in trying to get the capital back to shareholders in the absence of an acquisition. So what's the internal thinking, because you're generating as much cash or probably more than you're doing in buyback. And that's a lot of cash to be carrying. What's the view over the next 2 to 3 years? Like in the absence of a transaction, will you look to accelerate buybacks next year or try to or start ramping up dividends next year? How should we think about it?

Yes, good question, Laf. And you're quite right, you've analyzed that in the way that we think about it. But the question that we grapple with is, as you say, how fast should -- well, you could do an unfranked dividend given the cash position, but we don't have much appetite for that and we don't get a lot of shareholders saying, what I really want is an unfranked dividend. So we think, in terms of getting it back, the buyback is still the preferable strategy. And then you come back to how much should you carry in cash. And that answer, you can't -- without a crystal ball, you can't get it exactly right, because you say -- we know there's a flow of transactions being thrown up and offered to us. And one day one of them might make sense and you reach agreement, you say we're going to do that transaction. But you could come to this same call next year and people say, you sit on a lot of cash and you didn't do a transaction. So that's why, without the crystal ball, you won't necessarily get it exactly right. But in the meantime, you do want to have enough cash that you could do a meaningful transaction. We've got -- say, the market cap is $300 million. If you saw a transaction that was worth $30 million, it's only 10% of your market cap. Hopefully, the shareholders trust us with an investment of that magnitude, much smaller than that. You might still do transactions smaller than that, but they potentially are less and less impactful. So when you start to think in terms of percentage of market cap, and having that as cash availability, not that that's exactly how we look at it, but that's one way you can look at it. Then we're not really sitting on that much lazy cash, although, as I say, if at the end of the year, people say you sat on over $30 million cash for a whole year, it feels a bit lazy to me, we would have to cut that criticism. But at the moment, we weigh all that up, what's the size of transactions we're being shown, how many of those make a difference. No point doing a transaction if it's not going to actually make a difference. What does that take? And what's the probability of those transactions emerging? And the probability is not so high at the moment that we've signaled to the market we think there's a transaction coming. So you balance all of those things up and we say we don't think we're sitting on a lot of lazy cash, all things considered like that. And we have very few people say to us, your balance sheet looks a bit lazy at the moment. We seem to be in a market environment where not many companies are being accused of lazy balance sheets right, I mean...

Yes. I'm not -- you go, Laf.

I just want to follow up and maybe before you answer, David, just to clarify the franking component piece. So if you do have sustainable franking generation, like is there a rough payout ratio that we should look to going forward? I was kind of -- we've been told over the last couple of years that a dividend policy is coming, or it's going to be more set, and it still seems a bit unclear to me. And if you did have the franking credit, could we get an idea as to how much you'd look to pay out?

Yes, sure. Look, these are policies. So they're not strict guardrails outside of which you're not allowed to pay. But we have agreed at management and Board level that we'd be looking at a concept of underlying profit after tax and a payout ratio of 40% to 60% on the assumption, right, that you just pointed last that we're generating sufficient bank credits.

Yes. Okay. Okay. All right. I just want to follow...

Could I just to finish off, too, about that. Can I just say, to date, the Board on one occasion had franking credits, and we essentially distributed just about all of them. The company has not ever sat on franking credits. And I don't think anyone's minded that, "oh, you know, the best thing we could do going forward is to build up a huge franking credit reserve". It's more than likely, if we were able to build them up, we would distribute them in the form of a dividend as they're building up rather than sitting on them.

And we did. With the divestment proceeds, the amount that was deployed on the dividend was constrained by the franking balance itself. I've no doubt that were there more franking credits, the dividend would have been higher.

I guess it's more just -- it's a bit of a quality problem. You've actually got a big bucket of capital and generating a lot of cash as well, and you're kind of having trouble getting it back to shareholders. And granted there could be a transaction that changes the dynamic, but we have to kind of look to the next 2, 3 years about how that capital comes back. And I just wanted to get a better idea as to what the thinking is and what some of the policies are, which is what some of the color I got. But just moving on to one final question. I just wanted to go into some of the awards you're winning. And just so we understand, when you -- 1/3 overall for platform selection, is it the Praemium SMA platform that's being assessed? Or is it more your holistic offering and just sort of where you understand and where the development comes in and where the new Powerwrap next generation is coming in, which are the platforms more of the key focus and the ones you're winning the awards for?

So clearly, the main platform that we talk about is the Praemium managed accounts scheme or the Praemium scheme. But as you can tell from like coming first in noncustodial assets, it does touch on the other services. And so certainly, the offering in Powerwrap and the noncustodial is in the mix of what we're being rated on, because it's all -- we call it the platform of everything. We treat our businesses as one platform. And when we go to the awards with the investment trends, they're looking at our overall capability, particularly the managed accounts scheme, but the other capability aside. And our aim is, if investment trends was 100% aligned with exactly what our high net worth clients are asking for from our platform, we would be extremely determined to be #1. But there is -- it's a very good and it's the best independent survey we've got in the market for platform in Australia, but there is a difference between the selection criteria of our high net worth clients and how that gets assessed. And so the fact that we're coming third is good. Are we devastated about not coming #1? No, we're not, because what we want to be is #1 for the high net worth advisers.

We have no further questions.

We've got until 11:30, and I think we'll pull it up then. I'm hoping that David and I will get a chance to meet a lot of people over the next couple of weeks having put this result out today. But I really once again want to say thank you for your interest on the call. And for those who are shareholders, thank you for your support of our company, and look forward to meeting up with a number of you in the not-too-distant future. But thanks, again. Have a good day.

Thank you. Once again, thank you for joining the Praemium Limited event. This does conclude today's event. Thank you for participating, and you may now disconnect your lines.