Edited Transcript of PPT.AX earnings conference call or presentation 20-Aug-20 1:15am GMT

Our expenses were up just 1% on the previous financial year, demonstrating appropriate cost disciplines in these challenging times in addition to the expense savings arising from the implementation of our new operating model. Most of this implementation, that is of the operating model, occurred prior to the impacts of COVID-19, which better positioned us to respond to those impacts. Throughout the period, we have continued to invest in both organic and inorganic growth initiatives across the businesses.

Net profit after tax was $82 million, 29% lower than the prior corresponding period. Underlying profit was $93.5 million, down 19%, higher than NPAT, reflecting the investment spend required to implement our new operating model. Despite our disappointing headline numbers for the year, we made meaningful progress on our strategic objectives, and across the group, we are seeing signs of positive momentum as a result.

Perpetual Investments’ closing funds under management of $28.4 billion is up 5% on last year, primarily as a result of our completion of the acquisition of Trillium Asset Management on the 30th of June. Perpetual Private’s total funds under advice of $14.3 billion, while marginally lower than last year, has held up well given the volatility that we’ve seen in investment markets. Approaching $1 trillion in funds under administration, Perpetual Corporate Trust has built on its leadership positions in the Australian securitization and managed funds markets.

Perpetual is a diversified business, and this has provided us with some protection from the market volatility we’ve experienced since late February. As you can see in the first chart, close to 40% of the group’s revenues is not directly exposed to investment markets, hence, provides us with a partial buffer to market volatility. Our nonmarket-linked revenues come from PCT predominantly as well as components of PP, including Fordham.

The second pie chart shows PCT’s growing importance to the group, contributing 39% of operating profit before tax this year. Of course, the dominant impact for us all during the second half has been COVID-19. So I’d like to comment on how Perpetual has reacted and responded during these difficult times.

Unfortunately, for us all and tragically for many, FY ’20 will be remembered predominantly for COVID-19 and its insidious impact on all aspects of our lives. Perpetual’s response to those impacts has been swift and effective. In early March, we put our crisis management plan into action, leading to 95% of our staff immediately moving to remote working. Our recent investment in technology and our robust risk management framework facilitated a smooth transition. Our teams have adapted extremely well to this new way of working, and we are supporting our staff in a range of ways. More recently, we’ve put in place extra provisions for our Melbourne-based colleagues who remain in Stage 4 lockdown.

In uncertain times, regular, timely and relevant communications with clients is critical, and we have been very focused on ensuring that our clients across our businesses feel well informed at all times. We quickly adapted to delivering additional digital content. Since mid-March, our subject matter experts have delivered more than 40 webinars for our clients and financial advisers on a range of topics. The feedback from these sessions has been terrific. Perpetual has been recognized by financial advisers as providing an exceptional level of support with regular updates on performance, market conditions and access to our portfolio managers assisting them to service their clients.

In PCT, our investment in cloud-based solutions, such as the platform for the Australian data warehouse, enabled our teams to manage record volumes due to COVID-19 issuance and as banking clients accessed the RBA-committed liquidity facility. In Perpetual Investments, as one of Australia’s largest active equity managers, the market volatility during the second half presented both challenges and opportunities. Our investment teams were and remained well positioned to take advantage and participate in equity raisings where companies meet the team’s strict investment criteria.

As markets fell, we’re able to take positions in quality stocks that were finally trading at reasonable multiples, setting up our portfolios for future success. As one of Australia’s largest managers of philanthropic funds, our Community and Social Investments team quickly responded by connecting our philanthropic clients with our not-for-profit clients to address emerging needs across the not-for-profit sector. This proactive engagement resulted in accelerating the release of funds with $5 million released into community organizations, providing support for the most vulnerable communities via grants. So whilst this has been an incredibly challenging time for us all, I’m extremely proud of the way Perpetual and our people have responded.

An extension of this response has been our ability to make material progress of our strategic imperatives during the course of the year. Back in November last year at our Investor Day, I spoke about Perpetual’s refreshed purpose of enduring prosperity, and I outlined Perpetual’s 3 strategic imperatives: client first, future fit and new horizons, designed to deliver sustained quality growth over time. I’ll take you through our progress made this year towards those strategic imperatives, setting us up for future growth.

In relation to our client first pillar, our Net Promoter Score, which measures how positive our clients are about us and how willing they are to recommend us to others, improved from an already high plus 40 across Perpetual to plus 45 in FY ’20. The strength of our NPS and this year’s further improvement is particularly pleasing given how volatile and uncertain the environment has been. PCT’s NPS score of 62, up from 55 in the prior year, is particularly strong and reflects how highly the PCT team, products and services are regarded by our clients. Additionally, for the fourth consecutive year, PCT was awarded Trustee of the Year.

It has been a year of investment for Perpetual Private as we continue to capitalize on industry dislocation and the desire of the industry’s best advisers to work for a trusted brand. This year, we welcomed 20 new advisers to PP, growing our adviser ranks by 30% over the year. Our new advisers were a major driver of PP’s record flows of — net flows of $600 million over the year, which was Perpetual Private’s seventh consecutive year of positive flows.

In PI, a highlight was our Global Innovation Fund, which reached its 3-year performance track record, delivering exceptional performance to investors, and it was recently ranked as the #3 fund in Morningstar’s top 20 global funds, returning 33% ahead of its benchmark for the year. This fund was seeded by Perpetual, and we’re excited about its growth potential as our distribution team now takes it to market. And other highlights within PI include another strong year for our credit and fixed income team with good growth in assets over the period.

Moving now to future fit. As mentioned, our new operating model is in place, designed to drive efficiencies and to ensure that we are more nimble and dynamic and to empower our people within our risk framework. Implementation ahead of COVID-19 positioned us well to respond to the crisis, and the program delivered cost savings at the top end of the $18 million to $23 million range that we talked about this time last year. At the center of our new operating model was combining the IT operations and product functions of all of our businesses together as one unified group, seeking to drive efficiencies and to gain leverage benefits.

During the second half, we appointed Amanda Gazal as our Chief Operating Officer to manage these key functions, and we are already seeing the benefits arising under Amanda’s watch. We continue to invest in and redesign our governance, accountability and risk frameworks to reflect the new structure to respond to emerging risks to better empower our people and to streamline our decision-making.

Finally now to new horizons. We completed the acquisitions of Priority Life back in November and Trillium Asset Management on June 30, both transactions adding new capabilities to the firm, both with strong growth potential. Our recent announcement to acquire a 75% interest in Barrow Hanley is a transformational deal for Perpetual. It will add more than 20 investment capabilities to the group. And when we complete the transaction later this half, it will more than triple our assets under management, adding world-class investment teams covering global equities, global emerging market equities, U.S. equities and fixed income.

The Barrow Hanley acquisition will greatly accelerate the build-out of our global distribution, most particularly in the world’s largest market, the U.S. During the year, Adam Quaife came on board as our Head of Global Distribution, and Chuck Thompson joined as Head of Distribution in the U.S. They have been and will be extremely busy putting together our global distribution plan covering the key markets of Australia, the U.S., Europe and Asia. Finally, our pipeline of inorganic opportunities across our 3 businesses remains active with a range of complementary bolt-on acquisitions at various stages of development.

Now turning to the drivers impacting our results on a divisional basis. First, on Perpetual Investments. The first 2/3 of the year saw a continuation of the trend of recent years with equity markets inexorably climbing as growth stocks surged. COVID-19 reaction led to the highest volatility ever seen in equity markets in March, and the market has since rebounded strongly. As the markets continue to favor growth over value investing, Perpetual Investments again saw net outflows for the year, albeit at almost half the rate of the previous year, resulting in lower average funds under management over the 12-month period. These outflows combined with heightened market volatility to materially impact PI’s revenues for the year. In addition to that impact, we also saw a balance shift from equities to cash and fixed income as our cash and fixed income continued to see success in growth of assets under management. And as you can see from the chart on the bottom right, that, therefore, had a negative drag on our margins in PI.

I noted earlier that PI’s closing funds under management includes $5.6 billion via the Trillium acquisition completed on the 30th of June. Growth prospects for Trillium look very positive, and our distribution teams here in Australia and now the U.S. have hit the ground running post completion. We worked with the Trillium team to refresh their brand, their marketing collateral and we’ve launched 2 Trillium funds into the Australian market as we engage with the institutional and retail markets here in Australia and the U.S., in particular.

Moving now to investment performance for PI. The performance of our flagship funds was mixed this year. Our credit and fixed income funds were in the first or second quartile across most time horizons for the year. And whilst several of our Australian equities funds saw their performance improve, our core strategies continue to underperform versus benchmark. Our multi-asset funds performed well on a risk-adjusted basis as we would expect in volatile markets.

Our investment teams remained very focused on delivering to our clients. In the past, I’ve talked about the challenges that the growth-led environment of recent years has presented to equity value managers, such as Perpetual, and those challenges persisted during the 2019-2020 financial year. With the economic and investment market outlook continuing to be uncertain, in the past, such periods often lead to a renewed focus on valuation multiples and value investing. And when the cycle shifts, it historically shifts quickly. It has been encouraging to see some of our equity funds begin to deliver excess returns once more, and we remain driven to provide improved performance outcomes into the future. We have included the performance history of 2 core Trillium capabilities, their sustainable opportunities and their global equities strategies for the first time. Trillium’s strong performance over all time frames when added to the heightened interest in true ESG investing all goes well for future growth.

Turning now to Perpetual Private. Over the course of the year, PP saw its client numbers swell by 30% driven by successful implementation of the strategy as we bedded down the Priority Life acquisition and added new advisers to our ranks. The scalable professional services model is designed to facilitate deeper client engagement and an improved client experience. This model is firmly embedded now and is gaining traction as is evidenced by PP’s improved NPS score, which jumped from 36 to plus 46 over the period. This holistic approach enables clients to gain access to a team of specialists from all parts of our business to cover all aspects of management of their financial affairs.

I’ve already mentioned the strong contribution that the 20 of the industry’s best advisers who joined Perpetual over the year made to Perpetual Private, and we expect that contribution to build more as more clients transition to us over time. As mentioned, the completion of the acquisition of specialist risk advisory firm Priority Life back in November was important, and the team have delivered a revenue contribution in line with our original expectations with client numbers growing by 10% since the acquisition despite COVID. We continue to assess other potential bolt-on acquisitions for PP that like Priority Life, aligned to our culture, our advice model and immediately add value to our business.

As mentioned, despite the impacts of continued dislocation in the advice industry and the challenges associated with the current environment, PP reported its seventh consecutive year of positive net flows, a very strong result given the climate. We continue to see a strong level of cross referrals from our other established channels, including Fordham, The Private Practice and now also through Priority Life. This is reflected when you look at the composition of funds under advice by segment.

Our Community and Social Investment sector, which includes over 1,000 charitable entities across our philanthropic, native title and not-for-profit clients, is growing in scale and importance. This team manages nearly $3 billion of philanthropic funds and services more than 120 not-for-profit clients, which provides us with unique opportunities to connect our clients with causes that are important to them, while providing much needed support across the NFP sector at scale.

The chart on the far right shows the assets managed in Perpetual Private’s range of proprietary multi-manager funds, managed exclusively for PP clients. PP has an independently chaired investment committee that oversees the management of these funds, including manager selection. It’s this team that selected Barrow Hanley back in 2016 and awarded them a substantial global equities mandate. The team operates completely independently of Perpetual Investments, and PI is simply another manager who may be considered for an allocation.

And finally, turning to Perpetual Corporate Trust. PCT has had a terrific year of record growth, which this year included providing critical services to the banking and financial services industry to support the response to COVID-19 impacts. Across all 3 business lines, Managed Funds Services, Debt Market Services and Data and Analytics Solutions, each line has seen solid growth, record NPS scores, has responded well to increased volumes and has continued to deliver innovative solutions for its clients. These results are further demonstration of PCT’s leading role in Australia’s securitization market and in the managed funds market.

In MFS, the team have developed new enhanced fund manager and service provider monitoring to assist clients to better manage fund liquidity and COVID-19-related risks. Our custody business saw a 7% increase of physical customer loan documents to more than 750,000 and a 24% increase of digital customer loan documents to around 45,000. Our DMS client relationships are absolutely unmatched with the average tenure of our 20 largest clients now being over 17 years.

Our Data and Analytics Solutions business is gaining scale and reached a milestone, exceeding $10 million in revenue this year supported by growth in Perpetual Business Intelligence combined with the full year contribution of the Roundtables business which we acquired in late 2018. The DAS team supported clients in the COVID-19 environment by increasing the frequency of portfolio insights and benchmarking of over $2.4 trillion of retail loans, changing that from quarterly to monthly during this period. DAS continued its track record of innovation, delivering new digital products to support clients in order to meet European regulatory requirements for securitization funding.

Drilling into the detail of each area of PCT a little bit more. Last year, we said that we expected our MFS business would benefit from the increased trend of asset managers to outsource the role of responsible entity and trustee. And this has indeed been the case as is reflected by some of the key transactions completed during the year, with examples on the page including PCT being appointed for the Willis Towers Watson global equities multi-manager fund and Thornburg’s global multi-sector fund. MFS’ revenue contribution to PCT continues to grow and the sources of that growth are diversified across our service offerings.

Turning now to our Debt Market Services business. The increase in DMS’ funds under administration of 33% to $656 billion reflects growth from both new and existing clients. As the graph shows, a large portion of this significant increase was in balance sheet securitization as a number of clients sought to access the RBA’s committed liquidity facility from March onwards. It’s important to note that this increase is unlikely to be repeated and that the resulting revenue impact — revenue generated is at lower margins. DMS’ revenue rose strongly over the year by 13% to $69.9 million, largely driven by continued investment in our digital product offering to meet clients’ changing needs due to the dynamic regulatory and funding environment.

As mentioned, our Data and Analytics Solutions business is gaining scale, and it’s pleasing to see breadth and depth of the client wins across the financial services sector, including quality names such as IFM Investors and Macquarie Bank. So all in all, a really strong year for Perpetual Corporate Trust.

I’ll pause there now and hand over to Chris, who will take you through a more detailed review of the financials before I return to share our strategic forward-looking priorities. Thank you.

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Christopher Green, Perpetual Limited – CFO [4]

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Thanks, Rob, and good morning, everyone. Our results, as Rob said, reflect challenging conditions for 2 of our businesses as well as decisions taken by management in responding to COVID-19. For clarity, when I go through the metrics, I’ll be comparing FY ’20 to the corresponding prior year.

In summary, full year revenues of $489.2 million were down 5%. Total expenses of $356.8 million were 1% higher, in line with our stated guidance. And net profit after tax was $82 million, down 29%. The significant items of $11.5 million include the cost to implement the new target operating model as well as Trillium acquisition costs. The effective tax rate of 29.7% was higher than last year due mainly to lower capital gains distributed from listed investments, which is shielded using existing unrecognized capital losses as well as lower R&D claims this year. The final dividend of $0.50 takes the full year dividend to $1.55 per share, representing an estimated payout ratio of 94%, towards the top end of our guidance to pay 80% to 100% of NPAT on an annualized basis. Return on equity was 12.5%, down from 17.5% last year.

Now let’s look at the revenue in more detail. A $12.6 million increase in PCT revenue was offset by a modest decline in PP revenue and a $31.6 million or 15% decline in Perpetual Investments revenue off the back of lower FUM, lower performance fees and prior period distributions. Other income was $2.8 million lower due to lower interest received and lower distributions on seed investments and mark-to-market movements in the second half.

Adjusting for significant items, expenses increased 1% from $351.9 million to $356.8 million. The 1% increase reflects higher staff costs due to an increase in FTE as a result of acquisitions offset by operating model benefits and a normalization of variable compensation after write-backs in FY ’19 associated with executive departures. The modest decrease in administration and general costs reflects lower spend on consulting and other discretionary expenditure offset by continued investment in technology to support new business initiatives and the costs associated with evaluation of inorganic opportunities.

The adoption of AASB 16 Leases has seen a change in how we report operating lease costs. So while our premises costs are $9.7 million lower this year, there has been a corresponding $10.2 million increase in D&A on the leases which are now recognized as right-of-use assets. There were also some cost savings arising from the surrender of surplus office space, and the higher D&A also reflects amortization of acquired intangibles and capitalized software.

Now on the expense profile. I’ll give you some detail on a number of growth initiatives, and we’ve presented the waterfall in a similar style to last year. You may recall that at this time last year, we were embarking on a design and implementation of a new operating model to reshape our workforce and to ensure that our operating structure was nimble and agile. We expected this new operating model to deliver between $18 million and $23 million in cost savings on an annualized basis and for expenses to grow at the lower end of our 2% to 4% expense guidance. It’s pleasing to say that we’re on track to deliver these savings with $8.5 million of the benefits realized in FY ’20, meaning costs grew at just over 1% for the year. This will equate to $23 million of benefits in FY ’21, so right at the top of the range. The cost to implement the new operating model were just shy of $10 million and are included in significant items this year.

The majority of the cost savings are staff-related as we reshape the workforce, but also include other efficiencies identified following the formation of the new centralized Perpetual Client Solutions division, which brought together product, technology and operations from across the company. While the total number of FTE has increased modestly over the year from 960 to 999, the composition and structure of the workforce is much leaner. The majority of the FTE increase relates to growth initiatives, including the Adviser Growth Strategy and the Priority Life acquisition in PP. The change in the workforce, combined with investment and growth initiatives, has resulted in a modest increase in staff costs this year, which reflect the full year impact of Perpetual Roundtables acquisition combined with the acquisition of Priority Life in the second half. It also includes CPI increases for some staff.

As earmarked at the outset of the review, we reinvested some of the cost savings on organic and inorganic growth initiatives as well as improving our technology. The $6.4 million increase in technology spend includes new and ongoing software licenses to support existing and acquired businesses as well as infrastructure upgrades, including the replacement of some core legacy platforms in PCT.

Over the past 12 months, we spent a further $6.2 million on both organic and inorganic growth initiatives across the business, including the Adviser Growth Strategy in PP, transaction and completion costs for Priority Life and investment in the distribution platform both in Australia and in the U.S. At the half, we estimated completion costs of Trillium of between $3 million and $5 million and that these will be treated below the line. For FY ’20, we have reported $1.9 million of these costs as significant items.

In April, we committed to identifying further cost savings in response to COVID-19 as we responded to the government guidelines to work remotely and the need to keep our people safe. Our investment in technology over the past 18 months enabled us to seamlessly move 95% of our workforce to working remotely, and that arrangement continues today. With people working remotely and unable to travel and entertain, our discretionary costs were $2.2 million lower in the second half. In addition, a number of initiatives within the operating model review resulted in permanent expense savings in areas such as vendor management, subscriptions and memberships.

Moving now to individual business units, starting with Perpetual Investments. As Rob discussed, PI’s investment performance was impacted by market conditions which prevailed up to February this year where growth continued to outperform value. This resulted in net outflows albeit at a lower rate than the prior year and lower performance fees. In terms of results, total revenue was down 15%. The decrease was largely due to lower average FUM from continued outflows and lower average performance fees.

Average FUM was 13% lower. We saw a moderation of outflows to $2.6 billion from $4.3 billion in FY ’19. We received $3.1 million in performance fees this year compared to $3.5 million last year. Those fees were largely attributable to our structured EMCF and our pure equity alpha products. Average revenue margin for the year was 69 basis points, 2 basis points lower than last year. The decrease in margin reflects the higher proportion of FUM in our increasingly important cash and fixed income business, which equated to 39% of total FUM or 30% including Trillium.

Operating expenses were 9% lower due to Trillium completion costs being treated below the line as opposed to M&A costs related to transactions that did not proceed in FY ’19 being expensed. Transaction costs for the Barrow Hanley acquisition as well as acquired intangibles will be treated below the line in FY ’21, and I’ll talk to this later in more detail. PBT margin on revenue was down 7 percentage points to 32% due to lower revenue achieved this year.

To Perpetual Private, where revenue was down 2% on last year. Market revenue was 1% higher, reflecting higher average FUA in FY ’20 of $14.7 billion as well as net flows in the second half. Nonmarket revenue was less — 7% lower, reflecting lower interest rate environments, lower estate administration fees and lower Fordham revenues. Fordham was impacted by COVID-19 with reduced or delayed consulting work, leading to a drop of $1.5 million in revenue.

Total operating expenses were 3% higher, reflecting the investment in new adviser take-ons, Priority Life completion costs and BAU costs from December 2019 offset by operating model benefits. The market-related revenue margin was 2 basis points lower than last year due to repricing activity of legacy products mentioned last year and at the half.

Now to Perpetual Corporate Trust. PCT had another terrific year. Total revenue was up 11% with growth in our product extensions and Debt Market Services and continued momentum in our Managed Funds Services business, all supporting the strong result. Debt Market Services revenue was 13% higher, reflecting growth in the securitization portfolio from both new and existing clients as well as the full year contribution from Perpetual Roundtables. PCT also saw growth in Perpetual Business Intelligence following the launch of a number of new products during the course of the year. The Data and Analytics Solutions business is now reaching scale and contributed over $10 million in revenue in FY ’20. MFS revenue was 8% higher driven by new deals won from both existing and new clients within its core commercial property and [RE] services businesses.

Total operating expenses for corporate trust increased by 3% driven by full year business-as-usual costs of Perpetual Roundtables combined with continued investment in new service offerings and the digital transformation of core trustee operating systems, again, offset by operating model benefits. PCT’s PBT margin was 44%, 2% higher than last year. Debt Market Services FUA was up 33% due to growth in lower-margin balance sheet residential mortgage-backed securities as bank clients access the RBA’s committed liquidity facility. We’ve also seen solid growth in FUA from public securitization for both bank and nonbank clients. However, this was offset by a decline in covered bonds and asset-backed securities issuance. And Managed Funds Services FUA was up 6% to $285.8 billion.

Now moving to the balance sheet. The change in cash and cash equivalents reflects repayment of our $87 million corporate debt facility in June as well as the $58 million paid in respect of the Trillium acquisition on the 30th of June. Liquid investments, which include our seed funds, were 16% higher, reflecting an increase in investments in unlisted unit trusts. Goodwill and other intangibles increased by 29%, reflecting the acquisition of Priority Life, preliminary values for Trillium as well as continued investment in technology upgrades that were capitalized.

As we flagged at the half, the 32% increase in other assets primarily reflects the recognition of right-of-use assets on adoption of the new leasing standard. As I noted earlier, the decrease in corporate debt reflects repayment of our previous facility. In June, we entered into a new facility with ANZ with access to a new undrawn $50 million debt facility as well as a $135 million facility — bank guarantee facility that has been utilized to meet regulatory requirements. The increase in total liabilities reflects the commitments under operating leases, previously off-balance sheet prior to the adoption of AASB 16.

Before I hand you back to Rob to talk you through our strategic priorities, I’d like to talk you through the key impact on our financials in FY ’21 of our recent announcement to acquire Barrow Hanley, including dividend settings. It’s nearly a month since we announced our intention to acquire Barrow Hanley, which as Rob has already made clear is a transformational acquisition for Perpetual. The deal is expected to close before the end of this half. As we noted earlier, Perpetual Investments generates 36% of our revenues; Perpetual Private, 38%; and Perpetual Corporate Trust, the remainder. Post completion of the Barrow Hanley acquisition and combined with Trillium, we expect Perpetual Investments to represent over half of the group’s revenues.

Both acquisitions diversify revenue by asset type and by geography and provide a broader array of growth opportunities. These acquisitions will also change our cost base. So I want to step you through the impact on our FY ’21 cost profile that both of these acquisitions as well as the investment in our U.S. distribution team will have on the numbers.

Firstly, we expect underlying expenses of the existing business to be 2% to 4% lower in FY ’21, reflecting the annualized cost savings from the operating model review and the temporary cost savings announced in July that will be in place over the first half. We’ve assumed that we will still be working remotely until at least the Christmas break, so the cost profile also reflects cost savings associated with less discretionary travel and entertainment offset by the uplift from the completion of Priority Life in FY ’20.

We expect the combination of the build-out of the U.S. distribution team, Trillium and Barrow Hanley costs to add a further 27% to 29% to our cost base in FY ’21. This assumes the Barrow Hanley acquisition is completed this half, which will require regulatory and customary approvals including client consents. The cost guidance excludes those significant items that in Perpetual’s view are material nonrecurring costs, such as transaction, integration and other costs associated with the acquisitions, which will be treated as significant items. It will also exclude the amortization of acquired intangibles.

As we indicated when we announced the transaction, the Barrow Hanley acquisition will have a material impact on Perpetual’s statutory net profit, which is the basis for the current dividend policy. It also means a material amount of our revenue will be derived offshore, which has implications for our dividend settings and our ability to pay fully franked dividends in future years.

As we announced on the 27th of July, from FY ’21, we are going to amend our definition of underlying profit after tax. The definition of UPAT will be amended to adjust NPAT for both material nonrecurring items that don’t reflect normal operating activities and to exclude tax-effected amortization of acquisition intangibles. This change will mean that our underlying profit will better reflect the operating cash flows of Perpetual post the acquisition of Barrow Hanley and will more broadly align with the strategic imperatives of the group.

In terms of what this means for dividend policy, we will move away from the current 80% to 100% of NPAT to paying out a range of UPAT. The aim will be to strike a balance between maximizing returns to our shareholders, ensuring we have sufficient cash flows to fund our operations and pay down debt, while also carrying sufficient cash reserves. This definition of UPAT allows the Board to consider looking through noncash transactions impacting our statutory NPAT that don’t reflect ongoing operations, the most important of which is likely to be acquisition intangibles. In addition, in time, our dividend will no longer be fully franked, which is a natural outcome of more income being generated from offshore operations.

Our financial indicators this year reflect disappointing financial results with all metrics lower than prior year. The final dividend of $0.50 takes the full year dividend to $1.55 per share, representing an estimated payout ratio of 94% for the year and towards the top end of our guidance to pay 80% to 100% of NPAT on an annualized basis. The final dividend will be paid on the 25th of September and will be fully franked. The payout ratio is an estimate and won’t be finalized until we know the outcome of the SPP on the 26th of August. Again, the dividend will be paid to all eligible shareholders with a record date of 4th of September, including those that are new to the register or increase their holdings via the institutional placement or SPP.

Now back to Rob to talk through our strategic imperatives for FY ’21.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [5]

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Thanks, Chris. And as Chris has just said, I’m going to take you through our strategic priorities for FY ’21 and I’ll do so, again, by referencing our 3 long-term strategic pillars.

In relation to client first, we will be focused on continuing to expand the range of products and services that we offer our clients. Most notably for PI, we will be very focused on expanding the number of investment capabilities that we can offer to retail and institutional clients here in Australia given our acquisitions of Trillium and Barrow Hanley pending. We will also look to explore other distribution channels, aiming to broaden our reach over time. And we’ll stay focused on continuing to improve our clients’ experience with Perpetual, investing in further digital solutions to improve connectivity and engagement.

Moving to future fit. We will build on the work of the last 12 months, continuing to decommission legacy architecture, and we will be increasingly migrating to cloud-based infrastructure. Our governance, accountability and risk frameworks will keep evolving as the business changes through our acquisitions and through our new operating model, empowering our people within those frameworks.

And finally, we’ll be very focused on new horizons that have or will result from our acquisitions of both Trillium and Barrow Hanley. Our teams are working closely with the Barrow Hanley team to ensure that we efficiently meet our completion date and that just like with Trillium, we really hit the ground running on day 1. Critical to that important [name] will be the implementation of our global distribution plan across the 4 key regions of Australia, the U.S., Europe and Asia. Our distribution leadership team has experience in each of those key regions. And through the transaction [all] modeled into our plans, we’re about to take a significant step forward in global distribution. Post completion of Barrow Hanley, we will have a further 20-plus investment capabilities, which will allow us to become more solutions focused with client prospects across all of these 4 key markets. And whilst we will be very focused on delivering 2 or beyond our own expectations from these important transactions in asset management, we will continue to identify and explore complementary bolt-on opportunities across our 3 lines of business.

As I opened with, whilst the last financial year has had an array of challenges for us to manage, which combined led to disappointing financial results for this year, we have made material progress on laying strong foundations for our future growth. Our business diversification has served us well in the last 12 months, and we see growth opportunities for each of our businesses into the future. The near-term environment will clearly be a difficult one for all participants in financial services. However, I firmly believe that our strong brand, the depth and breadth of our relationships, our strong balance sheet and our desire to deliver more to our clients, our people and our shareholders positions us well for the future.

So with that, I’d like to — I think we’ll now move on to Q&A. Cathy?

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Questions and Answers

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Catherine Buckmaster, Perpetual Limited – Senior Manager of IR [1]

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Thanks, Rob. First on the line is Andrei Stadnik from Morgan Stanley.

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Andrei Stadnik, Morgan Stanley, Research Division – VP [2]

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So I wanted to ask, firstly, Rob, you’ve highlighted potential for further bolt-on opportunities. In terms of Perpetual Investments, are those opportunities more likely to be outside of U.S., for example, in Europe or Asia?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [3]

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Hard question in some ways, Andrei, because we’ll be opportunity led. I mean let me be clear. The priority is on proving up the business case for Trillium and adding value to Trillium through distribution activities, completing Barrow Hanley and then doing the same for Barrow Hanley. There may well be bolt-on investment management, asset management opportunities in either the U.S. or Australia. I mean the opportunity set is far broader in the U.S. We — for example, we’re currently talking about 1 or 2 potential small bolt-on opportunities that could happen post the Barrow Hanley transaction. So it’s hard to say. But I guess, just based on the opportunity set size, there’s certainly more outside of Australia than in. But that’s not to say that if the right opportunity didn’t present itself in Australia, we wouldn’t look at it. But our priority is on bedding down what we’ve already done.

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Andrei Stadnik, Morgan Stanley, Research Division – VP [4]

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And my second question, just around Perpetual Private. So just checking on Slide 10, it seems to be saying that of the new FUM that could come with the new advisers, about $300 million has transitioned. The potential is over $1 billion. Am I reading that correctly? And what could be the expected timing in terms of shifting over some additional FUM [before]?

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Christopher Green, Perpetual Limited – CFO [5]

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Andrei, we’re not going to be able to give you too much clarity on the timing just because of the uncertainty associated with advice generally during COVID. We are seeing the FUM that we had hoped to see come across from the advisers that have joined us in the past 12 months. I think as I mentioned a couple of weeks ago, it’s coming over slightly slower than we would have hoped given what’s going on with COVID, but it is moving. I think the numbers you’re talking about are reasonable, but it’s hard to be more specific on timing.

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Catherine Buckmaster, Perpetual Limited – Senior Manager of IR [6]

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Next question is coming from Ed Henning at CLSA.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [7]

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Firstly, can you just touch on Trillium and just run us through the net flows that we’ve seen in the last June quarter? And obviously, you’ve done a refresh of the brand, and you’ve launched some products here. What would you see as success for Trillium both in the near term and the medium term as it plays out with your investment there?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [8]

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Ed, good questions. I’ll set aside the net flow of the June quarter. I don’t have the number in the top of my head. I don’t think we’ve released it, but it was — I think the period from announcement of the deal to completion, I think, yes, assets under management were slightly higher than from point-to-point than we expected and that was a combination of markets and some flows. In terms of what does success look like, I mean, to be honest, I’m very bullish about what we can do — what we can bring to the Trillium business over time. Have a look at their website. I think the refresh is terrific. The team has been fully engaged in that reset. And just to remind everybody that the reason this partnership came together was because Trillium, by their own admission, didn’t understand distribution. They needed to partner up with somebody that does.

In hiring Chuck Thompson, a former colleague of mine from the Henderson days, again, I remind everybody that Chuck built a $20 billion business from scratch for Henderson. He’s extremely experienced in both retail and institutional distribution, and he has been working incredibly hard with the Trillium team. He’s hiring right now. We are actively already — we’re only — what is it now? We’re only 7 weeks in, participating in RFIs in the U.S. and outside of the U.S. We’ve launched the fund — the Aussie funds here. I mean so a lot of activity going on because there’s a lot of interest.

So I won’t put a number on it, but I think over the medium to long term, I’m very bullish about what we can do with Trillium. And importantly, capacity is not an issue for them. It’s a business that could quite easily be several times the size it is in terms of assets under management today.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [9]

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Can you see much tailwinds over the short term? Or is it a bit of a — more of a slow burn as it takes a while with the RFIs, et cetera?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [10]

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Yes. The tailwinds for true ESG investing is stronger than they’ve ever been. I mean I was reading a piece earlier this morning on the mega trend towards ESG investing. Flows out of developed markets into ESG at different times over the course of the last 12 months have been at record levels into ESG investing and have exceeded flows into more traditional classes. ESG is fast becoming mainstream. So I think the tailwinds are many and varied, and this is a permanent mega trend. And to now own one of the businesses that founded the category 38 years ago and has been doing it for 4 decades, I don’t think we could be better positioned.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [11]

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Okay. I might just ask a second question, if I can. If you look at the revenue in the DMS business, how much was actually attributed to the increase in internal securitizations for the banks around the CLF?

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Christopher Green, Perpetual Limited – CFO [12]

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A reasonable portion because there was a lot done, but it’s important to note that that’s much lower-margin business. So what really drives the growth of revenue in PCT are market term securitizations by our bank and nonbank clients, and we saw good volumes in that during the course of FY ’20. There was a kick up from the banks accessing the Committed Liquidity Facility. It was — it did help, but it is much lower margin. So I think the better way to look at it is the term securitizations that come out of the bank and nonbank clients as opposed to that CLF issuance.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [13]

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But I’m just wondering what was — is there — can you give us a rough revenue split of what happened in the second half to give us a feel of the underlying growth?

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Christopher Green, Perpetual Limited – CFO [14]

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Look, the way to look at it, because it was — there’s a lot of noise in that second half with that CLF issuance is that with 33% growth in FUA, you’ve seen the growth in revenue, and that suggests that, that CLF proportion was much larger than it normally is. And I think we’ve been talking to you for a couple of years now that 2 years ago, I think we would have looked at that FUA growth and use that as a proxy for revenue growth. That’s just no longer the case given the variety of structures that are in place, including those balance sheet structures that have much lower margins. So there was a lot of it.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst [15]

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Okay. But you can’t give us any — I get the argument around the margin. I’m just trying to figure out the actual revenue impact.

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Christopher Green, Perpetual Limited – CFO [16]

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No. I haven’t got that here. But look, when we talk later, maybe we can work through it. And we’re going to be coming back with a deep dive later in the year on the businesses again, and we’ll try and provide more granularity than we have in the past.

(technical difficulty)

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Unidentified Analyst, [17]

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Australian equity outflows improving into that fourth quarter in the Perpetual Investments business.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [18]

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Yes. We — so I alluded to this. We did see in some of our Aussie equity strategies an improvement in relative performance relative to benchmark, not across the board, but in some strategies. So that was helpful. We also had some institutional inflow from preexisting clients, which is pleasing to see. One of them is quite notable. So it was probably — it was on both sides really, I guess, and that was that the level of redemptions had steadied or improved. And we had some new money coming into the book, too. So that combined to lead to that moderation.

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Unidentified Analyst, [19]

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And to what extent are you looking at fees within the Australian equities business as a potential for review given the lower — given the excess capacity you now have due to some outflows?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [20]

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I think it would be fair to say, particularly with the new leadership in our distribution team under Adam Quaife, whereas perhaps historically particularly when the book was at or close to capacity, Perpetual, prior to my time, would have been harder on price. I think we’re open-minded as we consider new business opportunities. I think you have to be. I think we want to take more of a partnership approach with the institutional market in particular. I think now that we have the Trillium capabilities and soon we’ll have the Barrow Hanley capabilities, we’re now in a position where we can have those sorts of multi-capability partnership relationships. And you do talk — yes, you can — you need to have a flexible approach to those partnerships from a pricing perspective. So yes, I think we’re more open-minded in that regard.

And the final comment I’d make is that in some areas of our business, we — sorry, I would say we will always look at the relevance of our pricing. So for our credit and fixed income products, we’ve bought back some pricing to be more competitive and introduced that recently. So yes, it’s pretty dynamic. The other thing I would say is we’re not getting huge pressure from our incumbent client base at this stage, but I think we do need to be open-minded on pricing.

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Unidentified Analyst, [21]

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Great. And if I could just ask a final question. On the nonmarket revenues within Perpetual Private, to what extent should we be looking for some bounce back due to pent-up demand around estate administration and the Fordham revenues?

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Christopher Green, Perpetual Limited – CFO [22]

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We’re actually doing some work on that at the moment. The honest answer is we don’t have the answer yet to how much of that business is now forgone versus how much is delayed. Some of that answer depends on what happens from here with COVID. But I think that the summary would be a lot of work that we typically get in the fourth quarter is foregone and won’t return. And so it’s not so much that we’ll pick it up this quarter. What we are hoping for is a more normal fourth quarter in FY ’21.

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Catherine Buckmaster, Perpetual Limited – Senior Manager of IR [23]

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Great. Next question is coming from Lafitani Sotiriou from Bell Potter.

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Lafitani Sotiriou, Bell Potter Securities Limited, Research Division – Senior Analyst [24]

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Can you hear me?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [25]

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Yes.

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Lafitani Sotiriou, Bell Potter Securities Limited, Research Division – Senior Analyst [26]

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I guess my question is in relation to the cost guidance of 27% to 29% on the back of Trillium and Barrow Hanley and then also flagging additional investment. I was wondering if you could provide additional information on what in absolute terms was the — what did Trillium finished for the last year in terms of their cost base; roughly, where did Barrow Hanley finish? And how much in absolute terms are you anticipating investing to build out the distribution team?

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Christopher Green, Perpetual Limited – CFO [27]

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Yes. And at the moment, Laf, the reason we’ve given you that consolidated view is probably twofold. One, we don’t own Barrow Hanley yet, and we still need to do work to complete the transaction and to bring that through. I think the other one is that we are still working through the distribution model. We’re building out a U.S. distribution team — and Rob will probably want to contribute to this — that’s going to obviously support Trillium and Barrow Hanley. There will be some distributed salespeople sitting in the businesses, but there’ll also be a central Perpetual sales capability. And how that is, if you like, divvied up between the different businesses is still to be worked through.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [28]

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I think, Laf, in the Trillium deal, we had baked into our forward-looking model building a distribution team in the U.S. out by 6 people. At Barrow Hanley, of the 94 staff, 26 people are in a broader definition of distribution. So there certainly is the headcount there. To Chris’ point, as we go through this period to completion over the next few months, we’ll be finalizing exactly what the best structure for distribution will be going forward, and then we’ll be a bit clearer on these things.

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Lafitani Sotiriou, Bell Potter Securities Limited, Research Division – Senior Analyst [29]

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But can you understand — I mean, it’s not unusual for a company making a material acquisition to give us an idea as to what the historic run rate is in the cost base. And here, we’ve got 2 cost base for both Trillium and Barrow Hanley where we don’t know exactly where they’re tracking and you’re also investing. It’s hard for us to, I guess, later assess how accurate and how much costs you’re actually adding to the business.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [30]

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Well, I guess the 27% to 29% is pretty specific. And again, once we get closer to completion on Barrow Hanley, we’ll be in a position to provide you with more.

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Lafitani Sotiriou, Bell Potter Securities Limited, Research Division – Senior Analyst [31]

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That’s not on top of where they’re currently running. So how can we measure what changes you’re making within those businesses if you’re not going to give us the absolute numbers?

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Christopher Green, Perpetual Limited – CFO [32]

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I think as I mentioned, Laf, we’re going to be coming back to market with a deep dive on the 3 businesses. And I think what we’ll do once we’re closer to completion on Barrow Hanley is provide more granularity of that sort. But until we’re closer to completion, we’re not comfortable doing that.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [33]

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Just to be really clear, we will have no issue with showing you that full detail once we own the business.

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Catherine Buckmaster, Perpetual Limited – Senior Manager of IR [34]

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Next on the line is Nigel Pittaway from Citi.

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Nigel Pittaway, Citigroup Inc., Research Division – MD & Head of Pan-Asia Diversified Financials and Insurance [35]

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First question then, please, if I could, just on the — in Perpetual Investments. The margin on cash and fixed income, obviously, dropped 7 basis points in the second half. Presumably, what we’re seeing there is that relatively low-margin inflow in the first half and then the update to credit and fixed income pricing. Is that correct? Or is there anything else at play in that half-on-half decline?

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Christopher Green, Perpetual Limited – CFO [36]

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No, that’s it, Nigel.

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Nigel Pittaway, Citigroup Inc., Research Division – MD & Head of Pan-Asia Diversified Financials and Insurance [37]

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Okay. That was easy. Second question then. I think when you’re sort of going through the Barrow acquisition metrics, you were saying that the divi would be sort of 10% plus accretive, although there was some [direct] cost on that. Can you just tell us what the base is for that 10% accretion? Which dividend are you using for that?

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Christopher Green, Perpetual Limited – CFO [38]

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We are using the, I guess, the annualized dividend for PCT — for the company for FY ’20.

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Nigel Pittaway, Citigroup Inc., Research Division – MD & Head of Pan-Asia Diversified Financials and Insurance [39]

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So the annual dividend, so [not for] annualized second half? Is the annual sort of full year dividend for ’20 is what you’re using? Is that correct?

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Christopher Green, Perpetual Limited – CFO [40]

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Full year dividend for ’20.

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Nigel Pittaway, Citigroup Inc., Research Division – MD & Head of Pan-Asia Diversified Financials and Insurance [41]

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Yes. Okay. And then my final question was just on the sort of variability of costs in the existing Perpetual Investments business. I mean obviously, revenue has come down and costs have gone the other way certainly in the second half versus the first half. Is there any comments you can make on that?

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Robert William Adams, Perpetual Limited – MD, CEO & Director [42]

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Yes, we’ll show that variability in the next couple of weeks. But bear in mind, PI is not just Aussie equities. We have a credit fixed income team, which is proportionally and increasingly quarter-after-quarter, half-after-half, year-after-year be relatively more important to the group. Our multi-asset business as well and a small amount of assets in global equities. So when we’re looking at financial outcomes — sorry, remuneration-based outcomes, there’s a — it’s a blended result there. But the flexibility in the remuneration models that we have, whether it be for investment professionals or indeed anybody else, is inextricably linked to our financial results. So yes, you will see — we will see some relative reductions there.

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Nigel Pittaway, Citigroup Inc., Research Division – MD & Head of Pan-Asia Diversified Financials and Insurance [43]

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And does that also apply to the OpEx line?

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Christopher Green, Perpetual Limited – CFO [44]

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Yes, it does.

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Catherine Buckmaster, Perpetual Limited – Senior Manager of IR [45]

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Terrific. Well, I think that is the last question for today. So thank you very much for listening in and watching, and we look forward to talking to you later. Thanks.

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Robert William Adams, Perpetual Limited – MD, CEO & Director [46]

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Thanks, everyone.