MACQUARIE GROUP LIMITED
Macquarie Group Limited
Annual General Meeting
Mr David Clarke, Chairman
Nicholas Moore, Managing Director and Chief Executive Officer
Wed, 23 Jul 2008 03:30PM
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David Clarke, Chairman; Nicholas Moore, CEO & MD
Wed, 23 Jul 2008
03:30PM Australia/NSW
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MACQUARIE GROUP LIMITED (MQG)
ASX code: MQG
Website: http://www.macquarie.com.au
Industry: Classification Pending
Principal Activities:
Global provider of diversified financial services
Address:
1 Martin Place, Level 7
SYDNEY
NSW
Phone: (02) 8232 3273
Fax: (02) 8232 4330
Executives & Directors
Mr David S Clarke, AO , Non Exec. Chairman
Mr Nicholas Moore , Executive Director, Managing Director, CEO
Mr Laurence G Cox, AO , Executive Director
Mr Peter M Kirby , Non Exec. Director
Ms Catherine B Livingstone , Non Exec. Director
Mr H Kevin McCann, AM , Non Exec. Director
Dr John R Niland, AC , Non Exec. Director
Dr Helen M Nugent, AO , Non Exec. Director
Mr Peter H Warne , Non Exec. Director
Mr Greg C Ward , CFO
Mr Stuart Green , Investor Relations
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Announcements from the preceding six months are shown below.
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MACQUARIE GROUP LIMITED (MQG) Events
Australia/NSW
MACQUARIE GROUP LIMITED (MQG)
| Notice Under Listing Rule 3.10.3 | Fri, 21 Nov 2008 |
| Interim Dividend | Fri, 21 Nov 2008 |
| GMP: Goodman `GMG` Japan Funds Update | Fri, 21 Nov 2008 |
| GMG: Japan Funds Update | Fri, 21 Nov 2008 |
| Becoming a substantial holder for GMG | Thu, 20 Nov 2008 |
| Ceasing to be a substantial holder for GMG | Wed, 19 Nov 2008 |
| Macquarie Specialist Funds Quarterly - September 2008 | Tue, 18 Nov 2008 |
| Employee Share Option Plan Supplementary Prospectus | Tue, 18 Nov 2008 |
| Interim Result Management Discusion and Analysis | Tue, 18 Nov 2008 |
| Macquarie Group Ltd Interim Result Presentation | Tue, 18 Nov 2008 |
Please note: This company appears on this website as a result of its listing on the Australian Securities Exchange. Boardroom Radio does not claim any association with any company listed on this site.
PRESENTATION BY DAVID CLARKE, CHAIRMAN; NICHOLAS MOORE, MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER, MACQUARIE GROUP LIMITED (MQG)
“Annual General Meeting”
http://www.brr.com.au/event/48062
WEDNESDAY, JULY 23, 2008, 3:30 PM
MQG Good morning ladies and gentlemen and welcome to the Macquarie Groups 2008 annual general meeting. I'm David Clarke, the Chairman of Macquarie
10 Group and I'd be chairing today's meeting. The company secretary has confirmed that the quorum is present so I formally declare the meeting open. As well as our shareholders present in person, the holders of 161 million shares were approximately 58% of the group's ordinary share capital represented by proxies.
15
Before we get on the way I’d like to introduce our directors and some of our senior executives. On my left Chief Executive Officer Nicholas Moore, next to him is the group's Chief Financial Officer Greg Ward and now executive directors John Niland, Kevin McCann, Cathy Livingston and Executive
20 Director Laurence Cox. On my right is your Company's Secretary Dennis Leong and next to him our non-executive directors Helen Nugent, Peter Kirby and Peter Warne.
Ladies and gentlemen, there are three major components to this morning’s
25 meeting. First, I'll present the board overview of our results for the past financial year. I’ll then hand over to Nicholas to discuss the results in grater detail, cover our first quarter performance this year and provide an assessment of the outlook for the remainder of the year. We then move on to consider the formal resolutions set out in the minute of the meeting.
30
I please to ask to be advised that recording devices, photographic equipment and mobile phones may not be used during the meeting. At the end of the meeting, you’re of course invited to join us to refreshments in the foyer.
35 Let me now turn to the results. Macquarie reported another excellent results for the year until 31st of March 2008. Profit of $1.8 billion was up 23% on the previous year, marking our 16th consecutive year of record profits. The result is even more gratifying I think in light of the challenging market conditions that we experienced in the second half of the year.
40
Our operating income continued to grow strongly up from $7.2 billion last year to 8.2 billion this year, an increase of 15% on the previous year. This set us to achieve a 13% increase in earnings per share from $5.92 to $6.71. Dividends also rise with shareholders receiving $3.45 per share, fully franked for the
45 year, an increase of 10%.
Shareholders will be aware that an increase in proportion of our income has now been derived offshore and hence a decrease in proportion is subject to a Australian income tax. As we expect this trend to continue, the franking rate on future dividends is expected to fall to 80% for the interim dividend to be paid in December. Franking beyond the December dividend would depend on the future composition of income, but should the trend observed in the 2008 year continue, it is likely that franking levels will have to be further reduced
5 going forward.
During the year, we increased our assets on the management by 88% to $232 million. These assets are located throughout the world and spread across a large number of asset classes including infrastructure, real estate
10 and securities. This reflects our focus on business diversity, a key factor in our ability to deliver consistently strong results.
The truly global nature of our business is demonstrated by the continued growth of our international income which was 14% to $4.3 billion.
15 International income now constitutes 57% of our total income, up from 55% in the previous year and more than 5600 staff which is over 40% of the total are now based outside the Australia. The Asia Pacific region was the highlight in our international performance reporting a 71% increase in income.
20 As part of our long-term approach, we have consistently grown capital ahead of our business requirements in order to facilitate future growth. Our capital rose 33% during the year to $10 billion and has almost quadrupled over the past four years. At 31st of March, we maintained a buffer of $3 billion of capital in excess of our minimum capital requirements and this buffer has
25 since increased. We believe this is a prudent policy in the current economic climate.
Significantly, our return on average order in the shareholder's funds was 23.7% of the year just passed. We’d be pleased with the results I have
30 outlined in any environment, but we’re particularly so in the challenging conditions of the past year. I think it’s fitting at this point to revisit some of the key events that affected global markets during our period.
As the group's financial year drew to a close in 2007, global markets were
35 performing strongly. However, the first indications of the difficulties ahead were beginning to emerge. In particular, there is growing concern about the magnitude of the subprime process in the United States. By August, liquidity and funding markets had virtually dried up as banks stop lending both to each other and to the corporate sector. Central banks in Europe and the US
40 injected more than $300 billion into the system in a matter of days, this being the largest injection since the September 11 incident in 2001. While this restored some confidence to financial markets, it did little to resolve the problems in the financial services sector. In September, Northern Rock which is Britain's fifth largest mortgage lender was near collapsed, unable to source
45 funding. Six months later, the US Federal Reserve had to step in to rescue Bear Stearns from a security crisis.
By now, the subprime issue had developed a contagion effect affecting a wide range of financial institutions, public companies, modern line insurers, some corporates and of course the equity market overall. This was confirmed as US investment banks reported large write-downs and the Wall Street stock market recorded its worst June performance since the depression. Just weeks ago shares in Fannie Mae and Freddie Mac, which guarantee almost
5 half of America's home mortgage debt, lost half their value while another lender Indy Mac was taken over by federal regulators.
During this time, Macquarie Group share price has closely tracked that about the global financial institutions. This is despite the very strong operating
10 performance we have achieved relative to our global peers. The Australian share market has also included reflected the global volatility. In effect, the global current crisis and resolving market turbulence has wiped out the returns of the past two years in Australia's leading stocks. Regretably, many of you would have felt the impact of this. Overall, losses would have been
15 even larger were not for the very strong performance of the resources sector. On the chart, you can see the extent to which resource stocks have outperformed the rest of the market over 12 months, resource stocks being the top line on the chart.
20 By contrast, financial stocks had a particularly difficult year. While no financial institution is immune from the effect of adverse market conditions, there are I think several reasons why Macquarie has performed well relative to its peers even in very tough market conditions. Firstly, we derived most of our operating income from the provision of products and services to clients.
25 Underscoring a secured capital and funding position is our long-term risk management framework, as the result of which we have no problem trading exposures and no material problem credit exposures. As I mentioned earlier, one of our great strengths is the diversity of our business. We are regulated by it as a bank and as the holding company of a bank with aspects of our
30 operations supervised by more than 100 authorities around the world. We continually adapt to change, and in the past, market downturns have created opportunity for Macquarie. We are therefore confident that we will continue to perform well relative to our peers even in very tough market conditions. We also have some long-standing key philosophies that have guided our
35 business since inception. I think these are worth repeating at this meeting.
We have six core goals and values which direct the way we do business. We work hard to deliver value to our plans. We aim to act with the high standards and with integrity in all situations. We encourage teamwork amongst our
40 people. We strive for profitability. We aspire to provide fulfilment to our staff. We encourage our staff to use the entrepreneurial skills within the framework of prudent risk management. Freedom within boundaries. which is what we call it, is an important feature of Macquarie success. So true is our remuneration system which rewards our staff for their success, encourages
45 long-term commitment and seeks to ensure line of interest between staff and shareholders. This remuneration system enables us to attract and retain the highest quality staff and is therefore a key driver of shareholder returns. I will of course present the remuneration report (inaudible) (10:15). As well as delivering value to clients and shareholders, we also work to deliver value to the communities in which we operate. All these factors I believe made Macquarie well positioned notwithstanding the challenging conditions in which we currently operate. We believe our global platform has never been stronger and we are confident we can continue to perform well.
5
As many of you would know, Allan Moss who retired in May have for 15 years as Chief Executive Officer and overall an outstanding career with Macquarie spending more than 30 years. We are truly grateful to Allan for his immense contribution and we wish him well in his retirement. Nicholas Moore has been
10 appointed the new Chief Executive Officer and the board considers him to be an outstanding choice for this role. Nicholas has given 22 years of excellent service to the group, principally as the leader of the Macquarie Capital business which has provided more than 60% of Macquarie's profits and operating income over the past seven years. Without doubt, he is recognized
15 as a word-class investment banker and I have the pleasure now in inviting him to speak to you. Thank you.
MQG Thank you very much for those kind comments David and I’d like to add my welcome to yours for everybody here today. I'd like to thank you all very much
20 for coming to our meeting this morning and thank many of you for the support of Macquarie over the years.
Now, my presentation this morning as David said, I will be covering three broad areas. Number one, I will be talking about the record year of 2008.
25 Secondly, I'll be talking about our first quarter and having a look at the broader market and economic conditions out there, and finally, I’ll be talking about our outlook for the remainder of the year.
So turning now to the record 2008. As you can see from the slide in front of
30 you, there was a whole range of record performances coming through the broad range of businesses at Macquarie. We had record volumes in foreign exchange, record volumes in commodities, record volumes in terms of transactions in investment banking, and record volumes in our securities businesses, our institutional securities business in Australia and Asia, and
35 also our retail securities business here in Australia. We have record performance fees from our funds under management, and as you'll see, as of March 31, they’re up to $232 billion as well as that we had in expanded capital base that provided further earnings. We did have a write-down that we have communicated to market already in terms of our listed rate exposure
40 where we wrote down approximately $300 million off the value of those assets resulting in a bottom line impact to about $90 million. Importantly, we have no significant trading or credit write-downs.
Where did that record result come from? It came from two broad areas.
45 Number one, investment across all other businesses, across the businesses across the different geographies we carry on business over the years that we have been growing our business. Secondly, it came from favorable market conditions where we found great amount for the products of Macquarie we're producing. Accordingly, good contributions from all our groups with the exception of real estate as I mentioned earlier and our mortgage business that suffered from the decline of the securitization market that took place as part of the global credit issues that David was talking about earlier and we of course continue to grow our businesses.
5
The next slide is a cut from our annual report giving an indication of the diversity of the Macquarie businesses. As you can see, there's a lot of different income lines there. What we have done for today's meeting was we’ve actually grouped those so they reflect the underlying businesses that
10 we have. This we hope will give you a better understanding of the diversity of our business and therefore its strength. You'll see that these securities businesses on the right hand side, both the cash equity and the derivatives. Together institution and retail add up for almost 30% of the group's income. A very substantial contribution and a contribution that has grown over the
15 years as we've grown our business both in Australia and of course more recently in Asia. On the top left hand side, you'll see our commodities resources and foreign exchange businesses, businesses that are experiencing very good conditions at the moment. At the bottom right hand corner, you'll see our specialized funds business, a very important business
20 from Macquarie, a very growing business from Macquarie, important to recognize though its 20% of the total Macquarie business. So we have a very, very diversified business in terms of where our income is coming from.
Secondly, this slide gives another cut of that diversification from a geographic
25 viewpoint. You'll see from the slide that Australia still represents our largest business and have the $3 billion of income coming in, but you'll see that Asia Pacific is rapidly growing to almost $2 billion last year. I’ll step up to Sydney 1% over the years. So very, very substantial step up. Europe and the Middle East you'll see is very - a very substantial part of the business at $0.5 billion
30 and America at just a bit under $1 billion.
Now, importantly, in terms of talking about 2008 is risk management. Risk management obviously has served Macquarie well in the past and in 2008 was now exception. And looking at 2008, we have a list of the things that we
35 don’t have onboard as a consequence of our strong risk management culture. It’s also a function of the fact that our main business is actually providing returns by providing services to clients rather than principal trading activity. Accordingly, it should come as no surprise that we don’t have trading - problem trading exposures, we don’t have problem credit exposures, we don’t
40 have exposures to things like structured investment vehicles or subprime lending. So we came through 2008 very strongly as a consequence of our strong risk management system in terms of what we didn’t take onboard.
The next slide deals with our funding positioned and this again is part of our
45 risk management approach. And you'll see that we actually stepped out our liquid assets from March 2007 of $6 billion to more than $20 billion in June 2008. So substantial increase in the amount of liquid assets that we have onboard. We think a very prudent things to be doing at this time. You'd also see that we have been broadening our funding sources and part of that is being the stepup of deposits. So we stepped our deposits up from $8.5 billion to about $15.5 billion. So a big stepup in deposits.
Our capital position is also very prudent. You’ll on the left hand side our
5 overall capital position. You see we have a little less than $10 billion of capital, $3.6 billion of that is surplus to regulatory requirements. So we are very well capitalized. On the right hand side is a description of how we are funding our long-term assets. Finally, most important markets like this you have sufficient funding for long-term assets. And as you'll see our long-term
10 assets of approximately $28 billion are funded by $32 billion of shareholder's funds in long-term finding. So again a very prudent approach to funding those assets. That place is well of course for growth going forward.
It is worthwhile in terms operator growth just reflecting on the history of
15 Macquarie and Macquarie's history of course is being one of growth and it's being one of growth across the cycle as the following chart will illustrate. As you'll see in red, we have highlighted the events that took place in the world that were not favorable to financial markets and what you'll see is that Macquarie wasn’t able to continue to grow across the cycle notwithstanding
20 weakness in financial markets from time to time.
Now, not surprisingly, we have a lot of growth initiatives taken place across the group at the moment. A lot has been spoken about carbon publicly and it will come out as no surprise that we are looking at carbon and we’re looking
25 at climate-friendly investments across the group today including our treasury and commodities group that’s looking at a business in trading carbon credits including our funds management groups that’s looking at investments in climate-friendly areas. Secondly, we’re using this time where many people in the market are pulling back to actually selectively grow our M&A and advisory
30 business globally. Markets like this give us a great opportunity to go and hire individuals and things that we think can really contribute to us on a longer term basis. Thirdly, if you look at our securities business, it’s growing well over the last few years in Australia and in Asia and last year you will recall we bought a business in Canada. We’re also growing a business now in New
35 York and in the United Kingdom focused on the securities space. Finally, our specialized funds business, our source of growth historically and we are continuing to grow that business with the whole range of fund initiatives in many different countries across the globe.
40 In terms of our specialized funds business, as I mentioned before, it’s the business we are very proud of. We are providing services totalling to more than 100 million people, essential services across the globe and these services are being delivered well and the communities are being well served by the delivery of the services that we are doing. Not only is the community
45 being served well, but our investors are also being served well. On this chart we have broken down out our 10 largest businesses, and given an indication of how much the EBITDA, the cash flow of the business has stepped up year on year. People often look to cash flow in terms of valuing businesses. So it’s a proxy in terms of a stepup in valuation. And as you can see, the three large businesses with enterprise value of more than $75 billion have stepped up over the period and in some cases have stepped up substantially. That is not an accident that has happened. That has come as a result of a whole range of initiatives (inaudible) (21:27) of more than 600 people are engaged in
5 across the globe today.
As a consequence of that good performance in terms of asset management, we’re seeing continued flows into our specialized funds. This chart indicates that we had over $22 billion of extra cash coming to our specialized funds last
10 year and we are underway with a range of different initiatives around the globe in both the infrastructure and the real estate space today.
Now, we all are very aware of what happened in the listed A-REIT sector. David mentioned it earlier and plainly it's a disappointing performance. The
15 underlying assets though aren't disappointing. Actually, the underlying assets are performing well. Occupancy level remains high across our REITs about 96% as you'll see here, and actually in some of the cases as leases expire, we’re actually seeing rentals increasing rather than falling. We've heard a lot about what's happening in the US real estate sector, but to date, our REITs
20 have been largely unaffected by many of issues that you’ve heard. Importantly, our REITs have no significant development exposure. We are looking at our REITs, REIT by REIT and each of the REITs have made public announcement about the initiatives they are taking. Some of these initiatives include focusing of course on asset performance, secondly at looking at some
25 assets and seeing whether it’s appropriate to realize those assets in the market today and secondly, looking at the overall leverage in the debt position in each of the funds and looking to extend and develop those facilities further.
30 Now, I’d like to talk about now the broader economic picture. The broader economic picture is the one that’s very interesting in recent times, but actually, it's been very interesting since about the year 2000 as this chart shows. There's been a two-speed global economy happenings since about 2000 where the developing world, largely China of course, has been growing
35 very strongly and the developed world has been growing less strongly as we can see on the chart, and as you see on the chart, the developed world in particular recently with what’s happening in Europe and the US has been particularly weak.
40 In terms of what is going to happ