TOWER MD, James Boonzaier

Monday 27th August 2001

Following is a ShareChat Investor Interview with TOWER (NZSE: TWR) Managing Director, James Boonzaier. This interview was conducted during August 2001 and posted on ShareChat on August 27th, 2001.

SC Investor: On the subject of Australian franking credits and New Zealand imputation credits and the fact that neither government recognizes the others - how do you feel about the idea of splitting TOWER into "New Zealand" and "Australian" class shares to overcome this?
James Boonzaier: The first point I would make is that TOWER has been active in lobbying Government and the Treasury in both New Zealand and Australia on the issue of mutual recognition of tax credits. Consequently we were encouraged by the announcement in mid June 2001 from Finance Minister Michael Cullen that New Zealand and Australia have made a breakthrough in a long-standing debate over double taxation on trans-Tasman company dividends by striking a framework for mutually recognizing tax credits. Dr Cullen said the two Governments had agreed the new system should allocate both franking credits and imputation credits to shareholders in proportion to their shareholding in a company - a mechanism known as "pro rata" allocation. A final agreement on this basis would be positive for TOWER's shareholders in both countries.
As with any changes in legislation, the timeframe for the commencement of any agreement based on the new rules is uncertain and TOWER in the meantime is continuing to consider and assess other options, which could overcome the current situation in relation to the double taxation of dividends to shareholders. These options include the creation of "New Zealand" and "Australian" class shares, implementing a dual listed company structure, and shifting TOWER's domicile to Australia.
SC Investor: How do you see the marketing of TOWER managed funds through Post Shops being affected by the rival(?) "People's Bank" which is to be set up through the same outlets?
James Boonzaier: TOWER has formally signed a strategic alliance with New Zealand Post to explore opportunities to provide managed funds products through the nationwide network of Post Shops. TOWER's relationship with New Zealand Post remains strong but there will be some delay in the further development of the strategic alliance while New Zealand Post addresses the People's Bank initiative at the request of the Government. My view is that the development of a strong financial services capability is likely to enhance prospects for the successful distribution of managed funds by New Zealand Post (via the People's Bank) in the longer term.
SC Investor Questions Relating to TOWER's China Strategy:
- Given the "success" of other New Zealand based companies forays into China, how specifically are you dealing with the business culture in that country? Would you please expand on the "Clear Plan of Action" for China mentioned by your Chairman in the AGM speech of 20 February 2001? How is the plan going?
- Has TOWER fully assessed the risks of doing business in China? In particular, how is TOWER planning to cope with China's primitive commercial law and corrupt and xenophobic legal system when there is a dispute?
- Can you describe when you are likely to start business in China and describe the business model you propose to use (for example, joint venture with a Chinese company)?
- Given the terrible track record of overseas companies in China (Lion Nathan, Milburn, Fletchers, as well as many other international names) who have failed to thrive, what are the things that will make TOWER succeed where so many other companies have failed?
James Boonzaier: TOWER studied a number of markets in Asia over recent years before concluding that China offered the greatest potential. China's insurance market has been growing at 50% per year, and a high propensity among Chinese citizens to save has produced personal savings estimated at 16% of income. The opportunities in China are enormous but careful assessment of risk will precede any substantial expansion by TOWER in this market.
The first important steps in establishing a presence in China were taken in early 2000 when TOWER applied for a life insurance licence to operate in China and James Wong was appointed TOWER Chief Executive for China. Resident Representative Office status was granted to TOWER, in relatively rapid time, by the Chinese Government in May 2000 and TOWER's office in Beijing was formally opened in October 2000.
Since then, considerable work has been undertaken to assess potential investment opportunities and joint venture relationships. TOWER will proceed carefully and only once we have a detailed strategic plan in place. Investment is modest at this preliminary stage ($2-3 million pa).
We continue to work closely with the regulatory authorities to ensure that TOWER's credentials are clearly understood and we remain well placed in the queue of foreign companies waiting on licence approval. I recently visited China as part of a successful Prime Ministerial delegation to progress TOWER's quest for priority in gaining a licence and am hopeful we may achieve that aim in 2002.
While anticipating strong competition from foreign companies, TOWER believes that with its heritage, ability to adapt well to change, and an excellent reputation as a developer of tailored insurance products, it has the where-with-all to make significant inroads into the Chinese life insurance market.
SC Investor: By NZ standards there is a huge time gap between announcing your dividend and paying it - why is that?
James Boonzaier: TOWER generally pays dividends twice a year - in January and July. If a dividend is to be paid to shareholders, it will be announced at the same time the financial results for the full year or the half-year are announced.
The financial results for the year end 30 September are generally announced in early December and if a final dividend is to be paid this is announced at the same time. To date, TOWER has set the actual payment date for this dividend to be late January for the following reasons:
- To avoid sending correspondence (including cheques in many instances) to shareholders over the busy Christmas and New Year period when there is a greater risk of it being mislaid
- To coincide with the mailing to shareholders in late January of the Annual Report and Notice of Annual General Meeting thus reducing the costs associated with 2 separate mailings
The financial results for the half year 31 March are generally announced in late May/early June and if an interim dividend is to be paid it is announced at the same time. Similarly, to date TOWER has set the actual payment date for this dividend to be mid July to coincide with the mailing to shareholders of the Half Year Report.
SC Investor: Why does your company post out 2 dividend statements and company reports to shareholders that hold both fully paid and partly paid shares under the same names and shareholder numbers as well as 2 cheques? Is this inefficiency by the company or the share registry or both?
James Boonzaier: TOWER has a legal obligation to send a copy of its Annual Report and Half Year Report to each individual security holder on its Share Register (unless that security holder has elected not to receive these documents). TOWER's fully paid shares and partly paid shares are deemed to be two separate security classes and consequently holders of both types of shares are sent two copies of each Report. As the dividend statements/cheques were included with the Half Year Report in July 2001, two of these would also have been sent holders of both types of shares.
Once TOWER Limited partly paid shares are paid up on 1 October 2001 this situation will cease to occur as there will be only one class of security holder.
SC Investor: How serious do you believe Ron Brierley is in acquiring a major chunk of TOWER? To what extent do you regard a possible takeover by GPG as positive for TOWER shareholders?
James Boonzaier: TOWER's policy is not to comment on speculation.
SC Investor: You have talked before of updating your client database and being able to cross-sell products to your clients. How is this scheme working?
James Boonzaier: TOWER's Australian and New Zealand customer information has been consolidated onto a central database. The Customer Relationship Management (CRM) databases in both New Zealand and Australia are now being used for the first time for cross-company sales campaigns and to comprehensively manage the "whole" customer relationship better. There is a big "learning curve" in effective cross-selling, but TOWER is making steady headway in terms of products, technology and training to make this a viable long term strategy for growth.
SC Investor: TOWER seems to have been a very consistent performer for the past 10 or so years. However, the large banks and other financial institutions now also seem to be getting serious about looking after their customers and cross-selling into non traditional products. How can a small company like TOWER continue to compete in that environment?
James Boonzaier: TOWER's strategy is to be a multi niche provider of non-Bank retail financial services. TOWER is seeking to differentiate itself on the basis of sound customer understanding and product quality. Product and service differentiation is seen as a sustainable way for a mid-sized Group such as TOWER to compete effectively with the large banks and other financial institutions. To achieve this strategy, TOWER's business model is based on seeking scale from the whole Group without losing focus at operating company level.
SC Investor: What financial performance measures do TOWER managers have in their contracts?
James Boonzaier: Short-term bonuses for Senior Executives are determined by growth in assets under management/revenue and profit versus Plan. TOWER Senior Executives have been awarded performance linked share options requiring share price performance benchmarked against competitors.
SC Investor: Why have sales declined and what is being done to arrest the decline? Do you expect better or worse results in sales this year?
James Boonzaier: The main area of TOWER's business where a sales decline has been evident in recent times is in single premium products. For the six months ended 31 March 2001, single premium income decreased 27% compared with the previous corresponding period. This partly reflected an industry wide trend away from lump sum investment and insurance products towards retail superannuation funds, unit trusts and mastertrusts. With TOWER's investment performance now much stronger in competitive terms and the business restructure of TOWER in New Zealand and Australia complete, TOWER is positioned to improve its single premium sales in future months.
TOWER's focus in the wealth management area is however on developing more "modern" lines (superannuation funds, unit trusts and mastertrusts). The acquisition of Bridges in Australia, the establishment of TOWER Distribution Management in Australia and Goldridge Financial Planners in New Zealand, and the launch of the mastertrust Portfolio ONE in New Zealand are all recent initiatives supporting this focus. Fees derived from these products form part of operating income (with the exception of fees from superannuation business in Australia which is included in premium income). However most of the funds attracted into these products are included as funds under management. Operating income increased 58% in the six months ended 31 March 2001 compared with the previous corresponding period. A major contributor to this growth was the inclusion of income from Bridges in Australia in the latest six months result.
SC Investor: Why was there such a big drop in half-year investment income from $325 million last year to $82 million in the results that you put out recently?
James Boonzaier: The 75% decrease in investment income reflected the dual effect of the poor investment returns experienced across all equity markets in the six month period to 31 March 2001 compared to the higher investment returns (particularly in domestic and international equities) experienced in the corresponding period to 31 March 2000 as well as a higher level of investment in operations (Bridges, IOOF Trustees, AXA Health) rather than in portfolio assets (which generate investment income).
During the six months to 31 March 2001 there was a competitive improvement in TOWER Asset Management's investment performance in the context of major declines in global share markets. In New Zealand our "value oriented" wholesale global fund out-performed the market index dramatically - it was 12% ahead of benchmark over the 12 months to 31 March 2001. Also TOWER's flagship wholesale balanced fund topped the performance rankings in the Mercer wholesale survey for the year to 31 March 2001 while most funds posted negative returns. In Australia there was a similar if less marked lift in global performance and our Australian equities performance has been ahead of benchmark and ahead of other growth managers.
SC Investor: What would be the advantages of shifting your operation to Australia? Is there any timeframe for making a decision on whether you will make the move?
James Boonzaier: The advantages of shifting TOWER's domicile to Australia include:
- To better reflect TOWER's Trans-Tasman status
- To allow efficient use of franking credits and imputation credits
- To assist with inclusion of TOWER in ASX indices
- To assist with future capital raisings
While TOWER's New Zealand operations are very significant, in terms of assets under management and profit over 70% of TOWER's business is now generated in Australia. Stronger growth in the future is also more likely for TOWER in the Australian wealth management market with this market many times larger than the New Zealand market and faster growing as a consequence of the compulsory superannuation regime which operates there.
The current geographic split of TOWER's shareholders is approximately 50% New Zealand resident shareholders, 43% Australian resident shareholders and 7% resident in overseas countries. Under current taxation legislation, TOWER is unable to provide franking credits on dividends paid to our Australian shareholders.
Inclusion in ASX indices and a stronger presence in the Australian financial markets would assist TOWER in building its Australian institutional investor base.
TOWER's Chairman announced at the AGM in February 2001 that the Board agreed in principle domiciling in Australia was inevitable but that a number of factors including the status of intergovernmental discussions regarding mutual recognition of tax credits and the status of TOWER's licence application in China would have an influence on the timing such a move.
At the end of the day, it is a shareholder decision as to where the company is domiciled. TOWER would only put a proposal to shareholders to shift its domicile to Australia if it considered it was in the best interests of all shareholders. Any such proposal would have to be supported by 75% of shareholders who vote on the issue.
SC Investor: There seems to be talk at the moment of insurance premiums rising. Is TOWER planning to raise its prices and how will this effect its marketing?
James Boonzaier: Where justified by claims trends, TOWER has recently increased disability and health insurance premiums. Generally these changes reflect industry trends with limited impact on our competitive position.
SC Investor: Is TOWER continuing to actively seek acquisitions or are you in a "consolidation phase" at the moment?
James Boonzaier: Over the past 10 years, TOWER has made seven strategic acquisitions - six in Australia and one in New Zealand. These acquisitions have added value for TOWER in a variety of ways such as - building our operations in the Australian wealth management market, enhancing our range of products and services, broadening our distribution capability, increasing the size of our business operations, growing market share, delivering the Group economies of scale etc. TOWER has a good record in successfully integrating the acquisitions it has made to date.
TOWER's future growth strategy encompasses both organic growth and growth by acquisition. Potential acquisitions are continually assessed when opportunities arise. Any acquisition will only be considered if it can "add value" to the Group and achieve an acceptable return on investment within a relatively short timeframe.
SC Investor: Do you consider TOWER shares are undervalued at present? The only time they seem to have gone above listing price that I can recall is when there was a rumour of a takeover.
James Boonzaier: According to many analysts, TOWER is undervalued by most key valuation measures eg Price to Earnings ratios, Price to Net Asset Value, particularly relative to its peers. In order to ensure that the share price more accurately reflects the intrinsic value of the company and our expectations of future earnings and cash flow, TOWER is focused on delivering growth in financial measures and enhancing shareholder value.

ShareChat thanks James Boonzaier for taking part in this Investor Interview.

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