Praemium Limited (PPS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Can you all hear me okay? My name is Barry Lewin. I'm the Chairman of Praemium Limited. Welcome to the 2023 Annual General Meeting. We have a quorum, so I'll declare the meeting open. On behalf of the Board, I'd first like to acknowledge the many traditional owners of country throughout Australia and recognize their continuing connection to the lands, waters and communities. I'll start by outlining some of the procedural matters. We're conducting the meeting with a virtual component. This hybrid format allows shareholders and proxies wherever they may be to attend virtually. All shareholders and proxies have the ability to ask questions and vote today. For those of you online, should you experience any technical difficulties, a recording of our AGM will be available on our website following the meeting. If we experience any technical issues during the meeting, a short recess may be required, and we'll communicate accordingly. I'd now like to introduce you to my fellow independent Non-Executive Directors who are present at this meeting. To my left, Stuart Robertson, Claire Willette and Daniel Lipshut. I'd also like to introduce our senior executives. We have all of the members of the leadership team here, but in particular, Anthony Wamsteker is sitting to my immediate right, our CEO and Managing Director; and David Coulter, our CFO, whose hand is raised; and Rachel Axton sitting at the table over there, our Chief Risk and Governance Officer and Company Secretary. With us today are our company auditor, Grant Thornton; with Crystel, our audit partner here. Hi, Crystel. And the company's share registry, Link Market Services, who are running today's meeting. It's also great to see so many shareholders, and I welcome you all very warmly. The online platform is now open for shareholder questions, and I encourage you to submit these as early as possible. To ask a written question, please follow the instructions as displayed on the screen. Please note that while you can submit questions from now on, I won't address them until the relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on one topic, we'll amalgamate those together. For those shareholders who wish to ask a verbal question, an audio question facility is available during this meeting. [Operator Instructions] And I'd like to welcome Leath Nicholson, who's just arrived, company's lawyer. [Operator Instructions] For those shareholders in person today, if you have any questions or comments on a particular item of business, please state your name or the organization you represent before doing so. And finally, due to time constraints, we may not get to answer all questions. Hopefully, we will. If this happens, we will answer them in due course via posting responses on our website. In terms of voting process, voting today will be conducted by way of a poll on all items of business. Instructions on how to vote through the platform are displayed on the screen. In order to provide everyone with an opportunity to vote and in case anyone cannot stay for the whole meeting, I'll now formally open the poll on all resolutions, and I'll give you a warning before I move to close voting. For those voting holders physically in the room with me today, you would have received a voting card upon registration. Please complete the reverse of the voting card. Should you require assistance to do this, we have Link staff available to assist you. And you do have the opportunity to change your vote up until the time I declare the voting closed. In terms of the agenda, I'll conduct the meeting in 3 parts. I'll first present a brief Chairman's report. I'll then ask our CEO, Anthony, to address us. And at that point, we'll invite questions from shareholders, and we'll then move to the formal business of the meeting, where we have several resolutions to put to shareholders. So in terms of my Chairman's address, the financial '23 year saw Praemium deliver record earnings per share, reflecting a simplified business model following the divestment of the international business, which allowed a much sharper focus on the Australian market without the drag on earnings caused by the business we divested. Today's Annual General Meeting and the annual report formally adopted at this meeting provide an opportunity for your Board to update you on the progress that occurred throughout the financial '23 year. With the results we achieved last year, Praemium has created a solid foundation upon which to build further growth in market share. Some of the highlights from the financial '23 year include: a 23% increase in underlying EBITDA to $23.4 million, up 41% when compared to group EBITDA in financial '22; total funds administration of $44 billion, up 9% from financial year '22 and a strong 17% revenue growth; continued strong growth of the SMA platform, having generated $1.4 billion in net flows and growth in funds under administration of 14%; completion of all material Powerwrap integration initiatives, marked by fully vacating its Melbourne office and surrendering the lease in January 2023; Powerwrap delivering $0.5 billion in net flows from an $11.4 billion base due to its bespoke capabilities and sophisticated investment options; revitalization of the leadership of the business with several key appointments and internal promotions; a return of $37.3 million to shareholders from the sale of Praemium's international operations in the U.K., Jersey, Hong Kong and Dubai; and the announcement of a $0.05 per share fully franked dividend, which was paid on 10 August 2022, full repayment of $10.6 million in borrowings and the commencement of a nonmarket share buyback with $11.5 million deployed to 30 June '23. The buyback is on-market and therefore, transparent to all market participants whilst affording Praemium maximum flexibility. The company continues to build and grow its capability, and its strong performance over the past year is marked by being ranked by Investment Trends as the #1 platform for Decision Support Tools and Security, Data and Integration. Particularly exciting is the revitalized executive leadership team appointed under the leadership of our CEO, Anthony, which is comprised of individuals with a wide range of senior experience and capability. Praemium also continues to be the leading technology choice for Australia's most successful financial advisers with nearly half of Barron's top 100 advisers using our technology in their practices. Praemium has built technology-based solutions to meet the needs of financial advisers and their clients, and we are now sharply focused on scaling our service and building on the offerings we provide in the Australian market. I would like to thank my Board colleagues for their support and the entire Praemium team for their committed efforts. My fellow directors and I also wish to express our sincere gratitude to all shareholders, both new and existing, for your support. I would now like to ask our CEO, Anthony, to present his report to the meeting. Thanks, Anthony.

Thank you, Barry. I mentioned at last year's AGM that Praemium is a growth business and that we plan our business activities accordingly. The growth we achieved in financial year 2023 demonstrates that this remains the appropriate management mindset for us to adopt. I'll take a few moments to update you on our current business plans and the outcomes we expect. Our last presentation to the market was in August when we released the 2023 financial results. At that time, I discussed our new executive team. Each executive has now had the opportunity to review their area of responsibility, establish their top priorities and develop plans that will allow us to continue our trajectory of strong and profitable growth. I'm pleased to report that we have seen tremendous progress in each functional area because of the leadership provided by our executive team, and I'll now discuss that progress. This slide is also from the results presentation in August. It identifies our main strategic initiatives for this year. The development of our next-generation IDPS continues to track to schedule with launch anticipated in the first half of 2024. This product will complete our platform range, complementing the SMA and Powerwrap schemes. We are confident that the next-generation IDPS will allow us to accelerate our already solid growth in market share. We have now completed a project to review all our operational processes and compare similarities and differences between the 2 platform products and the portfolio administration service, or VMAAS. This has identified numerous opportunities for further efficiency and productivity gains, which are in the process of being implemented. The next phase of the operational transformation review is occurring within the technology department with an examination of the IT operating model. In addition to the anticipated cost savings, the operational transformation is a key component of the group-wide service enhancements. The other major component is the HR and training improvements that have been identified under the new leadership team. The final strategic initiative I want to comment on is the acquisition opportunities. Since divesting the international business, we have been inundated with a wide range of proposals. Whilst the vast majority have been discarded, I would be surprised if 1 or 2 important and accretive transactions did not materialize over the balance of this financial year. That said, nothing has yet been conclusively negotiated and resolved on this front. I will now turn to the financial outlook for Praemium. This slide shows our revenue margin on our 2 platform products and has been part of our recent half and full year results presentations. We have updated the slide for the first 4 months of this financial year to give further insight into our financial outlook. The average revenue margin is about 2 basis points lower than the average for the period from January to June, that is 25 basis points compared to 27 basis points in half 2 FY '23. This decline predominantly reflects lower trading volumes and cash balances than the previous 6 months. It is not clear how long this relatively subdued activity is likely to persist. The comprehensive program of work on the 5 strategic initiatives under the leadership of the new executive team has required a level of investment in the business. Each project within the overall program has been commenced and monitored with a robust business case. Each project is required to deliver improvements in one or more of the areas of revenue enhancement, cost reduction and risk management, especially cyber risk. In addition, there must be an expected return on investment above a significant hurdle rate. Internal management projections of the financial impact of the changes, once fully implemented, indicate that we should expect a material increase in the underlying EBITDA based on the current business size and mix, and assuming no material changes in our client base or market conditions. Some of this benefit is expected to arrive in the second half of this financial year, and most of the benefit is expected to be fully realized over the next full financial year and each year thereafter. The cost of this change program is composed of 3 key elements. Some is arising in the usual capital expenditure allocation budget. Overall capital expenditure, however, is not currently expected to be materially different from last year other than due to inflation. Some is part of the usual capacity expansion that arises as the business grows and is treated as a recurring expense item. This component is fully accounted for in the internal management projections described above, but will negatively impact EBITDA in the first half of FY '24 because the expenditure has arisen in advance of the financial improvements that expenditure will generate. And some is nonrecurring and is a one-off expense associated with the need for some external expertise and capability not needed within the business on a permanent basis. Coupled with the ongoing and relatively high rate of inflation that persists, it is expected that the operating costs in this current half year will be around 10% higher than the previous half year, that is January to June. The one-off nonrecurring costs are expected to amount to about $1 million for the full year. Based on the impact of these costs and the revenue margin decline mentioned earlier, we currently expect that EBITDA for the first half of FY '24 will be approximately 20% lower than the corresponding half last year. That said, based on the long-term increase in EBITDA expected, the return on investment of the overall change program implemented by the new executive team is well above our internal hurdle rate. Allow me to finish by adding my thanks to everyone in the Praemium team for their contribution to the results we have achieved. I would also like to thank our clients for their ongoing support and suggestions on how we can further improve our product and service offering. And finally, thank you to our shareholders for your investment in the business over many years. That concludes the business update, and I hand back to Barry.

Thanks, Anthony. I'll now proceed to take questions from shareholders. Questions relating to audit queries and specific resolutions will be addressed later in the meeting. Are there any questions or comments on the phone?

Chair, there are no questions from the telephone.

Thank you. Are there any questions or comments online?

Yes. There are a few questions from Mr. Stephen Mayne. The first question is Netwealth shares were around $18 2 years ago when they proposed a merger, which valued our company at $1.50 per share or $775 million as an enterprise. Since then, our shares have tumbled to $0.46, including a 20% drop this morning, and Netwealth shares have only fallen to $14.29. In hindsight, shouldn't we have engaged more positively with Netwealth and attempted to seal an agreed merger deal? What is the current status of relations with the Heine family and Netwealth?

Thank you for that question, Mr. Mayne. It's a good question, and I wish we all had the benefit of hindsight when we look back on those sorts of discussions. I wouldn't want to get into what was, at the time, a confidential discussion. But I should say that, that discussion and the due diligence wasn't complete, and we were unable to reach terms that the Board considered to be acceptable at the time. And we took advice from our advisers and considered the matter very carefully. We retain -- well, I certainly retain a warm relationship with Michael Heine. I understand he's passed on the senior management of the business to his son, and I haven't seen Michael for some time. That's probably about as much as I should say.

We have a further question from Mr. Stephen Mayne. At last year's AGM, there was a 46% protest vote against some changes to the CEO's LTI arrangements, and a proposed constitutional amendment was voted down. There are more protest votes today. What are we doing to improve relations with our major shareholders so they stop lodging protest votes? How well resourced is our Investor Relations function?

Thank you for the question, Mr. Mayne. I think we worked very hard at maintaining shareholder relations. It's a very unusual small-cap company that doesn't have votes registered against various resolutions. This year, we've had votes against a couple of those resolutions, but not nearly sufficiently to overturn the resolutions, and we keep striving to make sure that we reduce the number of protest votes. Thank you.

There are no further questions for any business.

Thank you. So I'll continue to the formal business of the meeting. Before proceeding, I would remind you that only shareholders or their appointed proxies are entitled to vote or speak at this meeting. So I'll now move to the business outlined in the notice of meeting. I'll provide an opportunity for discussion on each resolution and would ask you to limit your questions to the resolutions put before you. I confirm that Andrew Farrell from our share registry, Link Market Services, has been appointed to act as returning officer for the purpose of conducting and determining the results of the poll. As Chairman of the meeting, I will vote in favor on all open proxies for all resolutions to be put to the meeting. Consideration of financial statements and reports. Section 317 of the Corporations Act requires directors of a public company to lay before the Annual General Meeting, the financial report, the directors' report and the auditor's report. The company's annual report was released to the market and made available on the company website on the 29th of August 2023. There is no requirement for a resolution that the annual report be adopted.

However, at this point, I invite any questions shareholders may have for the auditors. Are there any questions on the phone?

Chair, there are no questions on the telephone.

Thank you. Are there any questions or comments online?

There is a question from Mr. Stephen Mayne. Thank you for disclosing the proxy position to the ASX along with the formal addresses. Could the Chair share what he knows about why there was an 18% protest vote against the remuneration report? Do any of the proxy advisers cover us? And did they recommend an against vote? How extensive were consultations with major institutional shareholders to encourage them to support all resolutions? And do you know who voted against and why? In response, are we contemplating making changes?

There are a number of questions within that question. So I might ask you to repeat the first question, and I'll deal with them in turn.

Could the Chair share what he knows about why there was an 18% protest vote against the remuneration report?

So it's difficult for me to answer that question because I receive very, very limited feedback. One shareholder was kind enough to engage with me, and we had a discussion around the rem report. And his question was basically around the level of disclosure on Anthony, in particular, his STI component and what particular conditions he was required to meet and how he traveled against those in financial '23. And I disclosed all of that to this particular shareholder and gave him an undertaking that we would do more to fully disclose around those vesting conditions in the future. I've had no further feedback on the sizable vote against the remuneration report. So it's very difficult for me to say much more about that.

The next question within the question is, do any of the proxy advisers cover us? And did they recommend an against vote?

I can't answer that question. I'm simply not aware, and none of the proxy advisers contacted me. As I said, I only had one shareholder contact me to discuss the rem report.

And then how extensive were consultations with major institutional shareholders to encourage them to support all resolutions? And do you know who voted against and why?

I don't know. I think we do have the information on who voted against, and we will talk to them and try and understand their position.

And to close that question off, in response, are we contemplating making changes?

Making changes. We're always contemplating improving ourselves. So we'll look at the feedback we receive from the discussions and see what improvements we can make. We will certainly improve the level of disclosure around remuneration. I'm not sure that the feedback was that our remuneration was disproportionate to that in the market, and we certainly use independent remuneration consultants to benchmark our remuneration as appropriate. So we have a reasonably good feeling for the level that, that should sit in.

Final question for this item of business is as at 11:45 a.m., the shares are down 25% at $0.43. Are we surprised by this? Do we regret spending $14.3 million buying back our shares at an average price of $0.69?

It's a good question. Personally, I'm surprised at the way the share price has reacted to the announcement when the market opened. It's not something I'd like to comment on as to why share prices behave as they do. If anybody else understands that, they're a lot wiser than I am. The second question was the share buyback. I think one makes those decisions with the benefit of advice at the time. And we considered the share price at that time to justify at a value that justified the buyback. We'll continue to review the buyback certainly in light of recent movements. And hopefully, those movements will be short term.

There are no further questions online for this item.

Thank you. Are there any questions from those in the room? No questions.

So I'll move to the resolutions to be put to the shareholders. There are 3 items of general business, all being ordinary resolutions, and I'll go through each individually. The first item of business is resolution 1, adoption of the remuneration report for the year ended 30 June 2023 as set out in the 2023 annual report. The vote on this resolution is advisory only and nonbinding on the company. However, the directors recognize the outcome of the resolution as an indication of shareholder sentiment in relation to the 2023 remuneration report.

Are there any questions or comments on the phone? I think we've had one certainly.

Chair, there are no questions on the telephone.

Thank you. And online?

No questions online for this item.

In the room? Please. Thank you. I will.

Can I ask you about the benchmarking that you referred to with regard to this program? So the HUB24 CEO is paid $1.2 million, and their share price is $2.8 billion, their EBITDA is $102 million. It seems vastly disproportionate to the benchmarking that you're referring. So who are you benchmarking against?

So we benchmark periodically, we don't benchmark every year, and we benchmark against a sample of similar companies. So it's effectively a peer review. We look at -- and I don't have the report in front of me, the last report. We look at technology stocks, we look at financial services stocks, and we look at them in a range of market caps. And we use an experienced consultant to guide us through that process. These benchmarking, I don't think it's right to compare and say HUB24's market cap was 10x the size, therefore, our CEO should be paid 1/10 of the CEO of HUB24. As a Board, you also have to look at the experience you need in the company. And you have to pay the market price for that experience. You can pay much less and you get much less in terms of experience. So that's a judgment that the Board makes with the support of Daniel, who chairs the Rem Committee. When we file our process, we benchmark appropriately, and we try to get to the right outcome, including the incentive arrangements. So that's the process that we follow. Are there any other questions? Yes?

Yes. It's [ Jeff Rogers ]. I'm a shareholder. I didn't read the rem report, so I confess to that. But could you perhaps just outline, maybe the Chairman of the committee could help us to do that, just to -- could you tell me, does it relate to -- what are the key, I guess, measures? Is there any sort of earnings per share factor? Or was it TSR or some other thing I haven't uncovered or heard of before?

So in terms of the way remuneration is structured?

Yes. Can you give us like a 30-second overview?

I'll try without having that in front of me. So basically, the rem report covers the 2 key management personnel, and that's David, our CFO; and Anthony; and it covers the Board who are all -- other than Anthony, who's an executive, the Board or all independent Non-Executive Directors. And basically, what the rem report does is it provides the detail around what they earned during the financial year '23 and it compares it, and correct me if I don't get this 100% right, to the financial '22 year. So shareholders can have a look. It's pretty transparent from that point of view. It breaks it down into 3 components: base fees, which is, let's call it, the salary plus superannuation; and then there's a short-term measure, which is a 12-month measurement like a bonus; and then there's a 3- to 5-year, typically, what's called an LTI, long-term incentive. The long-term incentive is linked to share price performance. So we measure ourselves against the share price of...

I think that's right, total shareholder returns.

Yes. Yes, total -- it's effectively a total shareholder return measure. And the short-term incentive is really the way the Board incentivizes Anthony against some key measures over the relevant year and how he's performed against that. So the point I was making earlier, which we'll disclose better next year, is what those 3 or 4 measures were that Anthony was required to meet in financial '24, how we went against those and how it was remunerated. Does that cover your question?

I think so, yes.

That's more than 30 seconds.

Yes, sure. That's fine. I'm sure people would like to know more. But is there anything to do with earnings per share in there? Or is it entirely relative to yourself?

Do you have a copy of the annual report that I can actually have a quick look at?

It's one of the elements.

It's EBITDA, so yes.

Yes, it's definitely one of the elements.

EBITDA.

EBITDA, yes.

Thank you. That will be with interest.

Any other questions on the remuneration report?

There being no further questions, the details of the proxy voting on this resolution are displayed on the screen. The next item of business is for the reelection of Daniel Lipshut sitting to my immediate left, who retires by rotation. In accordance with the company's constitution, and being eligible, offers himself for reelection as a director.

Are there any questions or comments on the phone?

Chair, there are no questions on the telephone.

Thank you. Are there any questions or comments online?

Yes. There's one from Mr. Stephen Mayne. Could Daniel and the Chair share what they know about why there was an 11% proxy protest vote against Daniel's reelection today? Is it an independent question? And do we need to add another 1 or 2 genuinely independent directors to ensure we have a super majority of independent directors?

Thank you, Mr. Mayne. I'll try and answer that question. So to the first part, we've had no feedback, and we obviously would welcome that feedback. Daniel has been a Non-Executive Independent Director since pretty much since I joined, and I stress that he is completely independent as that is defined. He's also a material shareholder in the business. And from my point of view, as Chair, he's a very strongly contributing and challenging Non-Executive Director. I have no idea why there was a 10% or 11% vote against his reelection. In terms of the -- what Mr. Mayne, you've described as the super mix of independent directors, at last count, from a Board of 5, we have 4 independent Non-Executive Directors. That's 80%. That is a super mix. And in terms of bringing on additional skills, as a small company, one has to assess the cost of doing that against the value. And to this point in time, and I wouldn't say that, that would necessarily continue, I think we've got a diverse set of skills and experience around the Board table and knowledge of the company. And I think the Board works well and harmoniously with management. It's a hardworking Board, and I haven't seen a need to bring on any additional independent directors at this point.

There are no further questions online for this item.

Thank you. So are there any questions in the room?

There being no questions, the details of the proxy voting are on the screen. Final item of business is resolution 3, which seeks shareholder approval for the company to renew the Praemium Directors and Employee Benefits Plan. The resolution is there.

Are there any questions or comments on the phone?

Chair, there are no questions on the telephone.

Thank you. Are there any questions online?

There is one question from Mr. Stephen Mayne. Given the interesting discussions across a range of topics today, including this team member benefits item, could the Chair undertake to make an archived copy of the full webcast available on the company's website? Even better, why not produce a full transcript? The likes of Nine, AGL, ASX, ANZ, Domino's and Lendlease all produced their first AGM transcripts in 2021. Will you follow suit today? This is something IAG has been doing since 2003. There is no record of past AGM debate on your website, so please be more transparent.

Thank you, Mr. Mayne. We're happy to be as transparent as shareholders would like us to be. Can you just confirm, Rachel, what we're currently doing?

Praemium currently have a full transcript available after the meeting for any shareholder who wishes to view.

Thanks very much. I hope that answers your question, Mr. Mayne.

There are no further questions online.

Any questions in the room?

One question.

Yes, Will?

There is a new item in the benefits plan with regard to change of control. It's an automatic assumption of vesting on a change of control and total Board discretion to vest all. Why has that been added?

I'm not sure it's a new item, to be honest. Can you -- can anybody confirm?

I don't recall it being a new item.

I think it's been there...

For standard best practice.

I think it's been there...

The October 2020 version didn't have it.

Didn't it? Well, subject to correction, I've chaired 3 Boards. Now I'm down to one, and I've consulted extensively in this area and with my consulting head on at SLM Corporate, and this is a pretty standard feature from what I can see. And effectively, what typically happens is the Board has a discretion, but usually, the change of control event triggers the share price vesting condition. So the -- more often than not, the Board doesn't need to exercise that discretion. It simply brings forward the event as a result of the change of control and the premium that comes with the change of control. Where it's a matter for discretion, it's a matter for discretion. So we try and meet the market for the executives that we recruit and need to retain. So I'm sorry I wasn't more precise on what we had last compared to what we have this time. But from my personal and consulting experience, it's best practice. Are there any other questions from the floor? Okay. Details of the proxy voting are displayed on the screen. They are now. And so with that, that concludes the formalities of the meeting. If you've not already voted, please cast your votes now as the poll will close shortly. Shareholders and proxy vote holders will have 5 minutes to submit their votes via the online platform. Please note that a countdown timer will appear at the top of the online platform. The results of the poll will be released on the ASX company announcements platform as soon as they're available this afternoon. On behalf of the Board, I'd like to thank all shareholders for your support of Praemium during the year and for attending this meeting. I declare the poll and the 2023 Annual General Meeting closed. Thank you very much. I used to invite shareholders to have a sandwich, but I think that happened before rather than after. If you can find the sandwich, good luck.