IPH Limited (IPH) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to IPH Limited 2020 Annual General Meeting. I would now like to hand the conference over to your first speaker today, Chairman, Mr. Richard Grellman. Thank you. Please go ahead.

Thank you and good morning, ladies and gentlemen. The health and safety of our shareholders and our people is of paramount importance. In light of the current restrictions on people gatherings during COVID-19 pandemic, and to protect the health and safety of persons attending this meeting, the Board has decided to hold the 2020 annual general meeting as a virtual online meeting. There are several matters I need to mention with the format of our meeting but -- being different as it is to previous years. Every effort has been made to ensure the meeting is delivered in a way that allows you, our shareholders, to participate. However, if you experience technical difficulties during the meeting, which preclude you from attending this meeting live, this meeting will be recorded and will be available to review after the meeting. Shareholders and proxies, attorneys or representatives of shareholders can ask questions in this virtual meeting format. However, we'll need to get a voting card first before submitting questions. You can do this by clicking the Get a Voting Card button located at the bottom of your screen. If you have a voting card and wish to ask a question about an item of business, please click on the icon Ask a Question and click Submit the Question once you've typed in your question. If you have a question already prepared, please submit it now on the platform so that I can answer as many questions as possible when I come to the relevant agenda item. You do not need to wait until the relevant item of business. I ask that you please keep your questions brief so that as many shareholders as possible have an opportunity to ask a question. Questions sent via the online platform will be moderated to avoid repetition. If questions are lengthy, we may need to summarize them in the interest of time. To assist with the smooth running of the meeting, questions submitted via the online platform will be moderated by our company Secretary, Mr. Philip Heuzenroeder, who will read out the name of the shareholder and their question. We'll give all shareholders a reasonable opportunity to ask questions, that -- it is possible, but not all questions will be answered today. If you have not already done so, you may vote on the resolutions at today's meeting using the online voting function. You may cast and submit your vote at any time, but you should ensure that you have submitted your vote before leaving the online platform. The online platform will close 5 minutes following the closing of the meeting. It is now past 10:30 a.m., and as there is a quorum present, I declare the meeting open. I also declare the polls open. I'd like to take this opportunity to introduce you virtually to a number of people. Firstly, your Board of Directors. We have 3 nonexecutive directors, in addition to myself: John Atkin, Robin Low and Jingmin Qian; our CEO and Managing Director; Dr. Andrew Blattman; Group General Counsel, Company Secretary, Philip Heuzenroeder; Chief Financial Officer, John Wadley. And I can also confirm that our external auditor from Deloitte, Ms. Harriet Fortescue, is present, being the engagement partner for the audit. A table of the notice of meeting dated 14th of October 2020, topics of the notice of meeting and annual report have been made available on the IPH website. I suggest that we take the notice as read. I will be keeping the audit set out in the notice of meeting. So before moving to the formal business of today's meeting, the Managing Director and then -- Managing Director and I will provide you with an update on the group's highlights for the year. These presentations were lodged with the ASX prior to the commencement of this meeting. So my address as Chairman. In this short address, I'll provide an overview of our financial results for the year ended 30th of June 2020 and outline the manner in which we continue to implement our growth strategy to deliver value creation with the shareholders. Our performance in FY '20 demonstrated the ongoing resilience of our business, despite the difficult environment in the second half of the year due to the global COVID-19 pandemic. We retain a solid balance sheet and continue to generate strong cash flows. As a result, we remain well placed to manage the short-term business disruption while delivering sustainable returns to our shareholders over the medium term. So an overview of the FY '20 results. For FY '20, the statutory net profit after tax increased by 3% to $54.8 million, equating to diluted earnings per share of $0.258, down 3% on the prior year. While many Australian companies have suspended dividends, our strong financial position and consistent cash flow generation enabled the continuation of dividends to IPH shareholders. That included a final dividend of $0.15 per share, 100% franked, bringing the total full year dividend $0.285 per share, which is up 14% on the prior year. The full year dividend is in line with the Board's dividend policy to pay 80% to 90% of our cash net profit after tax as dividends. As I mentioned, IPH retains a strong balance sheet to manage through the current environment while undertaking investments, which supports our strategy for medium-term growth. The company's net debt at 30 June '20 was $68.3 million with a conservative leverage ratio, net debt as measured against earnings before interest, tax and depreciation, of 0.6. We have no refinancing commitments until February 2022. Implementing our growth strategy. In FY '20, we continued to implement our acquisition strategy. As shareholders will recall, we successfully acquired Xenith IP Group on the 15th of August 2019. This was the largest acquisition in IPH's history since our listing in 2014 and it marked a major milestone in the continued implementation of our vision to be the leading IP Group in secondary IP markets and adjacent areas of IP. We have successfully integrated Xenith IP into IPH, with the delivery of net cost and revenue synergies of $3.5 million, which was in line with the guidance we provided at the time of the acquisition. A key initiative in this integration was bringing together the firms of Watermark and Griffith Hack to create 1 firm operating under the name Griffith Hack -- operating under the Griffith Hack brand. This integration was undertaken during the course of the second half, and notwithstanding the challenges of the pandemic, was successfully completed in July 2020. More recently, in June 2020, we announced that AJ Park had acquired agreement to -- had reached agreement to acquire the New Zealand intellectual property firm Baldwins Intellectual Property. Baldwins is a well-known New Zealand IP firm, with high-quality IP professional staff. And this acquisition strengthens AJ Park's client service offering in New Zealand. The transaction completed in October 2020. Again, we are pleased to be able to continue to execute on our strategy, notwithstanding the escalation of the pandemic and the impositions that resulted. Our CEO, Dr. Andrew Blattman, will provide more details of our growth strategy in his address shortly. Sustainability. In a challenging year, IPH continued to progress our stated sustainability focus areas of good governance, our people, supporting our communities and minimizing our impact on the environment. We recognize that a sustainable business is one that provides a safe, rewarding and diverse environment for our people, while operating in an environmentally and socially responsible manner. This has obviously been a particular focus during COVID-19, ensuring the safety of our people, our clients and our communities. We continue to engage with our stakeholders in developing our sustainability agenda, and I encourage shareholders to read our second stand-alone sustainability report, which details our progress in this area, and which is available on the company's website. In closing, I would like to acknowledge IPH's CEO and Managing Director, Dr. Andrew Blattman, his leadership team and all our people across the IPH Group for their hard work in FY '20. In particular, I want to thank our employees for their ongoing efforts during COVID-19 in supporting each other and to continue to provide outstanding service to their clients. I would also like to extend a warm welcome to Baldwins' employees who are now part of AJ Park and the IPH Group. On behalf of the Board of Directors, I would like to thank you, our shareholders, for your ongoing support of the company. I will now ask Andrew to present the Managing Director's report. Andrew?

Thank you, Richard, and good morning, ladies and gentlemen. I want to commence my address by acknowledging and thanking shareholders for your continuing support of IPH. Today, I'll provide additional detail on our financial results for FY '20 and further context on our growth strategy. I'll also provide an update on current trading for the year-to-date. The FY '20 result. IPH delivered a solid result in FY '20 despite some impact to our business due to the COVID-19 pandemic and the integration of Xenith IP businesses into the IPH Group. On an underlying basis, earnings before interest, tax, depreciation and amortization was $126 million compared to $89.7 million for the prior year. Underlying revenue for the year increased by 44% to $369.6 million, while underlying net profit after tax lifted by 24% to $77.7 million. In our Asian IP business, like-for-like revenue increased by 6% and like-for-like EBITDA improved by 8%. In Australia and New Zealand, like-for-like revenue declined by 5%. The like-for-like basis is, of course, before adoption of accounting standing -- standard, AASB 16, and adjusts for the impact of foreign exchange movements and also for the acquisition of the Xenith IP businesses, which was effective 15 August 2019. Despite the weaker market conditions in the second half, the preexisting IPH business delivered a solid result, with revenue declining by 1% and EBITDA down 2% on the prior year. As anticipated, the level of merger activity caused some disruption to Xenith IP businesses during the second half of the year. Together with the reduced client filing activity, like-for-like revenue for the previous Xenith IP businesses declined by 5%. However, the delivery of corporate cost synergies resulted in like-for-like EBITDA increasing by 7%. Managing our response to COVID-19. Following the escalation of the pandemic, we implemented comprehensive COVID-19 response plans across all offices, with our continued focus being on the safety and well-being of our people, our clients and our communities. Our robust IT systems enabled all IPH employees to work remotely while still delivering the high-quality IP services that our clients know and expect from us. We did experience some slowdown in workflow, new filings, instructions on existing matters, for example, due to disruption amongst some clients and the general economic and market uncertainty. The temporary closure of IP offices in some of the jurisdictions our group businesses service also impacted workflows. However, the flow-on effect of previous filings and the level of new filings enabled IPH to avoid making any redundancies, stand-downs or pay reductions for our staff as a result of the pandemic itself. We continue to closely monitor and adjust our business operations as required and to act in accordance with the latest government and regulatory health and safety advice in each of our jurisdictions. Implementing our strategy. We continued to implement our growth strategy successfully during the year. As Richard just mentioned, the acquisition of Xenith IP was completed in August 2019. We successfully integrated Xenith IP into IPH with the delivery of net cost and revenue synergies of $3.5 million, which was in line with our initial guidance. As part of this transaction, the integration of Watermark into Griffith Hack was achieved on schedule, as planned in July 2020. Following a detailed review of the Glasshouse Advisory business, we divested the R&D tax and incentive business of Glasshouse to Grant Thornton in May 2020, and the remaining aspects of the business ceased operations on 30 June 2020. In October 2020, our AJ Park business completed the acquisition of New Zealand IP firm Baldwins for a total consideration, including deferred payment, of NZD 7.9 million. This acquisition provides the expanded AJ Park business with greater depth of expertise, enhanced career opportunities for its people and will also provide clients with access to a complementary team of experienced IP professionals. Evolving the IPH network. Since the formation of our business and subsequent listing on the ASX in 2014, in fact, 6 years today was the listing, IPH has undergone a period of rapid growth and change. As our business has grown and matured, we have recognized the need to review our brand and business proposition to reflect where our business is today and to ensure we are best harnessing the combined power of our group businesses. To implement this, IPH will further evolve into a more active network that supports its individual businesses through systems and service models that capture new commercial opportunities, help our firms to work smarter and ensure they're able to perform at their best. In 2021, we will signal this renewed focus with a refreshed brand that represents the evolution of the group and its ambitions. Our new logo, previewed here, will be a cornerstone and we hope in time it will come to represent a standard of quality in IP services globally. We look forward to sharing more of this with our shareholders at our half-year results. Our people. We continue to focus on attracting, motivating, developing and retaining our people across the group. A key component of this focus was the delivery of the employee incentive plan for eligible staff across IPH. For FY '20, 97% of fee-earning eligible employees received an award. We are pleased to deliver this opportunity for our people in a difficult business climate. Despite the uncertain conditions, we are also pleased to provide continued career advancement in 2020 with client-facing promotions are made across the IPH Group. Leadership capability remains a priority for our business, and we have appointed new managing directors in AJ Park, Spruson & Ferguson and Griffith Hack over recent months. Pleasingly, 2 of these appointments have been from within the IPH Group, and we are delighted that we've been able to support our people to grow and progress their career within the group. Update on trading. In what has been a challenging economic climate for many businesses due to the global pandemic, IPH's first 4 months of trading has resulted in group underlying like-for-like EBITDA growth against the prior corresponding period. This growth has been predominantly driven by the synergies generated from the acquisition of the Xenith IP Group, in particular, the integration of Watermark into Griffith Hack. With AASB 16 reflected in both the current and prior year, the like-for-like basis excludes the impact of the Xenith IP acquisition and the impact of foreign exchange. The average AU dollar to U.S. dollar for the first 4 months of FY '21 of $0.715 compared to $0.684 for the first 4 months of FY '20. Based upon the prior year currency profile and the year-to-date average exchange rate, a $0.01 weakening of the U.S. dollar equals a reduction of $1.9 million in annual service charges, the majority of which falls to the EBITDA line. Asia. The Asian business has continued its resilient performance in the current environment, delivering like-for-like EBITDA growth against the prior comparative period. Singapore patent filings continue to be robust, reflecting the group's leading position in that market, which continues to be a key hub for our network offering across the region. Preliminary data for calendar year '20 year-to-date August indicates a 4.7% growth in IPH Singapore filings and 4% growth in total Singapore patent market filings compared to calendar year '19 year-to-date August. We also continue to see strong growth in our China practice, which is further down the recovery path from the initial pandemic disruption, with 21.6% patent filings growth based on internal data for the first 4 months to 31 October against the prior corresponding period. Australia and New Zealand. For the first 4 months to 31 October 2020, total Australian patent filings, excluding innovation patents, which will no longer be available from August 2021, decreased by 1% compared to the prior corresponding period. IPH Group filings, again, excluding innovation patents, declined 8%. While we have not had any significant client losses over this period, we are seeing some large clients who are filing less at this time. Additionally, we have the local market's largest exposure to U.S. clients, which, as you would expect, has experienced some short-term disruption due to COVID. As we stated at the half year results, the integration of Watermark into Griffith Hack has caused some disruption to Griffith Hack. These business units appear to have been more greatly impacted by COVID-19 due to their greater local client exposure and the larger Melbourne presence, where there has been an extended lockdown period. As we have seen in previous integrations we have done, some clients may not always go forward in a new, combined entity. However, we expect this to settle as we move further into FY '21. Notwithstanding the decline in Australian filings, underlying like-for-like EBITDA in the Australia and New Zealand business has increased compared to the prior corresponding period, reflecting the continuing capture of synergies from the acquisition of the Xenith IP Group and the integration of Watermark into the Griffith Hack business. We continue to expect to achieve corporate costs and Griffith Hack Watermark synergies of $2.5 million into FY '21. In New Zealand, AJ Park completed the acquisition of Baldwins on 16th of October 2020. Based on the financial metrics outlined at the announcement of this transaction, and our initial assessment of expected synergies. The 8.5-month EBITDA contribution in FY '21 is expected to be between AUD 2 million and AUD 2.5 million. In summary, while the COVID-19 pandemic means we continue to experience some level of market uncertainty in the short term, IPH very much remains a resilient business. In conclusion, ladies and gentlemen, in a year with a number of challenges across our business, I want to thank all of our people for their hard work, their adaptability and continued focus on client service as we've navigated through these unprecedented times. Once again, let me acknowledge and thank our shareholders for your continuing support of IPH.

Thank you, Andrew. Before I move to the business of today's meeting, I would like to point out that the minutes of last year's AGM are available for inspection via request to the company's -- to the company secretary. I've signed the minutes. The resolutions for consideration today may only be voted on by shareholders, proxy holders and shareholder company representatives. Shareholders online through the virtual meeting website have the opportunity to ask questions on each matter being put to shareholders. Now moving to the resolutions. I propose to call a poll on each of these resolutions. Each resolution, as set out in the notice of meeting, is to be considered as an ordinary resolution, and as such, must be approved by a simple majority of the votes cast by shareholders entitled to vote and voting on the resolution. So Item 2 takes us to the financial statements. Shareholders have the opportunity to discuss the company's financial report, the Directors report and the auditor's report for the financial year to 30th of June 2020. A resolution is not required, but I would welcome questions from shareholders regarding the accounts and the performance of the company in general. The Corporations Act specifically provides that reasonable opportunity be given at the AGM to shareholders to ask the auditor questions relevant to the conduct of the audit and the preparation and content of the auditor's report and the accounting policies adopted in the financial statements, and finally, the auditor's independence. Ms. Fortescue, the engagement partner with our auditors, Deloitte, is present at today's virtual meeting and will be available to answer any such questions. Questions may be initially addressed to me via the portal, and any questions will be answered by the auditor and should be restricted to the matters I have mentioned a little earlier. So Mr. Secretary, I'm not aware that there were any questions to the auditors before the meeting. Are there any questions that have come in since the commencement of the meeting?

Thanks, Richard. There's no questions on this item.

I'll pause for a moment. And if that continues, then we can assume that there will be no questions for the auditors. Thank you. I'll move on to the next agenda item, and this actually relates to my reelection. So I've asked John Atkin, one of our nonexecutive directors, to take the Chair of this meeting for this resolution. John?

Thanks very much, Richard. The next item on the agenda is the reelection of Richard Grellman AM as a Director of the company. Mr. Grellman retires by rotation in accordance with the company's constitution and the Australian Securities Exchange Listing Rules, and being eligible, offers himself for reelection. Details of Mr. Grellman's skills and experience are set out in the notice of meeting. And the non -- the directors other than Mr. Grellman have unanimously resolved to recommend his reelection to you. The motion is open for discussion. Are there any questions on this motion? I should have said I put the motion and the motion is open for discussion? Are there any -- Mr. Secretary, are there any...

No, there are no questions.

There are no questions online. So I will put the motion to a vote. Please now select either for, against or abstain for Resolution 3 on the online voting card. I advise that the proxy and direct votes, as shown on the screen, have been received. All undirected proxies granted to the Chair will be voted in favor of this resolution. I'll pause for a moment for voting. [Voting]

Thank you. The results of the poll will be advised to the Australian Securities Exchange as soon as possible after the conclusion of this meeting. I will now hand back to Mr. Grellman, who will resume as Chair of the meeting. Richard, over to you.

Thank you, John. Thanks, ladies and gentlemen, gentlemen. The next agenda item is the approval of the award of performance rights to Dr. Andrew Blattman. The resolution, as outlined in the notice of meeting, is that the award of 163,613 performance rights to Dr. Blattman in accordance with the terms of the incentive plan and, otherwise, on the terms and conditions set out in the explanatory memorandum, be approved for all purposes. ASX Listing Rule 10.14 provides that the company may only permit a Director or associates of a Director to acquire securities under an employee incentive scheme, if the acquisition of those securities is approved by an ordinary resolution of shareholders. As a Director of the company, ASX Listing rule 10.14, will therefore apply to the issues of any performance rights to Dr. Blattman. Before moving this resolution, I'll just make some brief comments. The directors have considered the amount and composition of remuneration for Dr. Blattman, including against available remuneration benchmarks for like businesses and roles and the company's strategic short- and long-term objectives. Following such review, the directors consider a significant proportion of the total potential remuneration of Dr. Blattman should be in the form of long-term incentive opportunity, so as to further align the interest of Dr. Blattman with the interest of the company and its shareholders. I now move that shareholders vote in favor of this resolution. And I'll open the question -- open the meeting for any questions that might be sitting online. Secretary, I don't think there were any prior to the meeting, if any come in subsequent to the commencement of the meeting?

Thanks, Richard. No, there are no questions.

Well, having paused briefly, I'll put the motion to a vote. Please now select either for, against or abstain for Resolution 4 on the online voting card. I advise that the proxy and direct votes, as shown on the screen, have been received. I propose to vote all my undirected proxies in favor of this resolution. [Voting]

Thank you. Poll results will be advised to the Australian Securities Exchange after the conclusion of this meeting. I'll move to agenda item 5. This deals with the ratification of agreement to issue Baldwins acquisition shares. The resolution, as outlined in the notice of meeting, is that the agreement by the company to issue the Baldwins acquisition shares to the Baldwin vendors on completion of the Baldwins acquisition, and otherwise, as described in the explanatory memorandum, be ratified and approved for the purposes of ASX Listing Rule 7.4 for all other purposes. The issue of the Baldwins and its acquisition shares took place on the 16th of October 2020, as anticipated in the notice of meeting and as announced on that date. The number of shares issued was 335,016 ordinary shares, and these were issued at a notional issue price of 7.305 -- $7.305 each. Other details relating to the share issue are outlined in the notice of meeting. Are there any questions on this resolution?