Perpetual sets the scissors in motion
Perpetual's languishing model made serious cost cutting unavoidable, and if Geoff Lloyd's solution succeeds he'll be able to prepare the business for future growth.
The key structural change Lloyd unveiled today was the decision to sell Perpetual’s mortgage servicing business, which will reduce the group’s headcount by about 280. As significant, however, is a restructuring and simplification of its corporate centre, including the outsourcing of non-core functions like IT, which will see another 300 positions go.
While it might not appear a radical approach, the $50 million a year of cost savings by 2015 that Lloyd says the program will deliver is equivalent to about 18 per cent of the group’s cost base. Included in the savings is the board’s gesture to the market, a 30 per cent or $500,000 a year reduction in directors’ fees that includes a 42 per cent 'haircut’ for the chairman, Peter Scott.
Perpetual has been under pressure from the market – and under renewed threat of another approach from private equity – because it was seen to be carrying a far fatter cost structure than its peers while experiencing a steady shrinkage in its funds under management. It was those pressures and the perceived lack of urgency in responding to them that lead the board to truncate the tenure of Lloyd’s predecessor, Chris Ryan.
Lloyd’s strategy is predominantly and understandably prioritising the cost cutting in a program that will initially shrink and simplify the group before it starts placing greater emphasis on growth strategies from 2014.
As he said, Perpetual’s operating model and structure were neither sustainable nor optimal after 10 years of expansion that hasn’t delivered and which has added costs, complexity and duplication in areas that aren’t core to its funds management, wealth management and corporate trust businesses. He said Perpetual has 11 distinct businesses today; after the program it will have fewer businesses and he will have only six direct reports.
External circumstances aren’t going to be helpful. Perpetual has suffered a continuing haemorrhaging of its funds under management. Five years ago Perpetual was managing almost $38 billion. Today it has $22.9 billion of funds under management.
While the global financial crisis has obviously played a major role, it is known that the Perpetual board considers the company has been poor at leveraging and marketing its 125-year-old brand in a system that has the underlying and long-term support of compulsory superannuation. Its reliance on individual star brands was also exposed earlier this year when its long-time and very high profile key fund manager, John Sevior, left the group.
The funds management business, Perpetual Investments, is focusing on an incremental growth strategy at this stage, adding products, expanding its distribution and extending a fledgling relationship with Wellington Management that it struck last year when it handed over its international equities business to the giant Boston-based group.
Perpetual also has a potentially very good but under-developed business in its private wealth division and a solid corporate trust business, both of which will benefit from an increased focus and lower cost base.
Lloyds’ strategy, while at this stage fairly one dimensional, has produced greater potential cost savings than the market anticipated – the broad expectations was for about $30 million a year of savings.
While it will disfigure this year’s earnings – after-tax costs from the program of $25 million to $28 million will reduce statutory profit to between $22 million and $29 million – the $70 million investment ($50 million of it cash) in a lower cost base will, if Lloyd can execute effectively, be an investment in a more sustainable future.
If he can get those costs out, and dodge another tilt from private equity, Lloyd will be in a far better position to articulate a more positive and more growth-oriented story. If he fails to deliver, it is unlikely the current regime will be given any more chances.