Insignia Financial Ltd

Good day and thank you for standing by. Welcome to the Insignia Financial Limited first half 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Renato Monmar. Renato Monmar, please go ahead.

Good morning, everyone, and welcome to Epinga Financial's first half 2023 results. It's a pleasure to be here and really appreciate you taking the time. I'm here today with Andrew Illich, our GM of Corporate Affairs, as well as David Chalmers, our CSO. So look forward to spending about half an hour or so going through the result itself before opening up to questions. So just to kick us off, and just before we sort of kick into the result in earnest, I think it's worth starting by reflecting on the progress of Insignia Financial since the acquisition of MLC, which was about 18 months ago. And at the time of acquisition, we set ourselves some clear goals. And as we've successfully progressed through these commitments, I think the broader macro opportunities our industry provides are becoming increasingly more tangible for the group. The targets and growth associated with some of the key trends are increasingly clear, whether it's servicing one of the largest retirement savings pools in the world, which continues to compound in size, and it's supporting one of the richest per capita populations in the world, Whether it's supporting an increasingly complex lives people live, which require ever increasing levels of expert support and advice, and advice that's scarce in supply, or whether it's in fact the compounding of these trends in an aging population, which has more complex needs for longer. So all this reinforces really the unique position that Insignia Financial finds itself in. And it's one of the few organisations that's got the business diversity to cater for these lifetime financial wellbeing needs holistically. Our ambition of creating financial wellbeing is what binds our three separate business lines. And it's the unique combination through a client lens of these lines that ensures we can deliver the right outcome at the right point in time for the right client, irrespective of the client's station in life, age or complexity of needs. As we look to simplify our businesses, these three capabilities will be able to leverage off contemporary technology, data platforms and a common purpose to deliver consistently through whole life. Whether it's supporting someone who's joined us through a workplace and seeks financial guidance or helping a MySuper member access more customised retirement needs, it's the linking of these diverse capabilities in support of financial wellbeing outcomes that delivers the growth of the business. So as we step through today's presentation, really the key message is that while we continue to build the capabilities for tomorrow, we're delivering on our commitments today and ensuring we continue to translate size into a competitive growth advantage both short and long term. Moving to the highlights, and whilst it's pleasing to report a 67% increase in impact, that's $45 million for the half, I think we need to recognise the impact of volatile markets through 22 on our underlying net profit after tax, which is down 17% to $94 million for the half. Whilst there's no doubt the markets had an impact, it is pleasing to be able to offset some of this impact through synergy realisation with our operating expenses down 7% on PCP to $518 million for the half. We're also declaring an interim dividend of 10.5% per share. Pleasingly, we've met our commitment of completing our integration synergies 18 months ahead of schedule, as well as exiting the aims of TSA or the Transitionary Services Agreement from that acquisition. We continue to increase the focus of our portfolio through select divestments, and we saw this in the previous half through the sale of AET, which completed in November, and more recently, the final divestment of our stake in Janet. Part of building the foundations of the organisation is ensuring that we're attuned to the sustainability of our business, and there are two call-outs worth making. The first one there relates to our environmental credentials and it's pleasing to have received the Climate Active Certification for Indignant Financials. And the second one there relates to governance and ensuring governance is embedded in our operating environment and our conduct, which is particularly important given the level of change that we're experiencing as a business. We expect this to continue to be an area of focus and one that will also include making sure we satisfy the ADRA licence conditions on our superannuation businesses. Switching to the right-hand side of the page and looking at the three segments, financial advice, while we continue to change the business and improve the sustainability of that business, it's really pleasing to see our advisors continue to be recognised, some of the leading financial advisors in the country. In the platform space, again, it's really pleasing to report a nearly $1 billion improvement in net flows, period on period, or certainly in comparison to the prior corresponding period. Our focus in enhancing, continuing to enhance our expanded RAP offer is paying dividends through momentum and certainly gives us confidence in our goal to position ourselves in the top two or three platforms in the market. In terms of asset management, and again off the back of continued strong investment performance and despite investment markets, we've seen this business really deliver strong resilience from an economic perspective. We've seen some growth in higher margin business lines, offset some weakness in lower margin business lines, which has been pleasing in a particularly volatile investment perspective. Moving to digging a bit deeper in each of the segments and starting with platforms. Certainly a key feature of our platform segment is the diversity of channels to market. And we see that across workplace, personal and advisory. I think pleasingly, each of these individually have a clear market opportunity and clear strategic intent. And we've seen that translate through funds flow profile for each of these businesses. Importantly though, collectively, they also provide business resilience to that diversity, which we think is a real feature of our business model in the platform space. As I've already touched on, we've seen nearly a $1 billion improvement in net fund flow compared to prior comparative periods, which really underwrites our confidence in our target for FY23 of reaching net fund flow positive for the full financial year. Also, just to put the scale of our business into context, we've highlighted there the reported $10 billion in gross flows for the half, which again, demonstrates the strength of the franchise, but also recognises the work yet to be done to make sure that we improve the retention of our funds flow and making sure that we're continuing to challenge ourselves from a service perspective, from a product offering perspective to improve retention and ultimately have that translate through to improved net funds flow. From an advice segment, and I think for advice more than ever, the delineation and strategic intent in each of our segments and each of our businesses is clearer than it's ever been. And really, I think advice really is a tale of three stories at the moment. I think if you start with Shadforth in our professional services channel, a really mature business, a really strong business that's getting back into focusing on growth, which is probably the first time in a number of years. So it's really pleasing to see the momentum that business has been building. In Bridges, again in our professional services segment, we're really working through the establishment of a new business model, bringing together the MLC advice business and the former Bridges model to create a new model and one that I think has a really compelling proposition into that mass market arena. And the third real area of focus, which we've spent some time discussing in the past, is that self-employed model. where there remains some work to be done around ensuring we can meet our commitments around the sustainability of this business model, which is also a key focus. Probably lastly and importantly, our focus on remediation I think is really imperative. It's pleasing to see this work sort of enter its final stages of the program for a couple of reasons. One is it's a pivotal piece of work from a reputational perspective and making sure we deal with any issues of the past. But importantly, putting this behind us also allows us to put more focus on the future. So I think finalising this piece of work I think will be a real catalyst for us putting more effort into the opportunities and advice going forward. Turning to asset management and as we all know asset management lives and dies by investment performance and it's pleasing to see the depth of capability and the team shine through our investment performance in our key flagship products and portfolios. This is certainly underpinning the growth in our retail channels and our managed account program as well as our multi-asset capability which is really pleasing. And as I've already mentioned, I think the growth in retail and particularly given the higher margins here is providing strong business resilience in the face of volatile markets. Also worth touching on the resetting of the relationship with Jonah, which included the divestment, the final divestment of our stake in that business, The sell-down of equity to management is something that had begun prior to our acquisition. It was certainly in train well before our acquisition of MLC and the recent announcement really represents the completion of that process. I think it's really important to recognise that for all parties it's important that the partnership with JANA continues. It is a strong one on a range of activities and we've got a lot of respect for the team at JANA. Turning to flows and focusing in on platforms to begin with. Again, really pleasing to report a positive trajectory there on funds flow, particularly in comparison to PCP. And I think, you know, special mention must go to the workplace team that is clearly building some very strong momentum and has done for the last couple of years. This is off the back of a real focus around client proposition, service, the right product offering, as well as investment performance. And I think it's through the combination of both new client wins and strong retention that we've seen this momentum build in the business. Pleasingly, however, it's also great to see improvement in Net1's flow on PCP, both in personal and the advisory channels. I think particularly in advisory, it's great to see momentum build in the expand offer, in our contemporary wrap offer on our proprietary technology. I think this gives us real confidence for the future and also confidence that once we get through the transitions of our other RAP offer, our flagship offer, albeit on legacy technology in MLC RAP, it'll give this Evolve ecosystem and our RAP ecosystem a real dedicated focus on growth going forward. And turning to the asset management flows, again, it's a really pleasing story and positive story, again, underpinning our confidence on our commitments around flows. I think the top right-hand chart there really tells the story and the shift in momentum, particularly from retail, which again, pleasing not only because it's building some real momentum, but also the higher margin nature of this is a really attractive feature for us. This is coming from renewed work with our advisory channel, some increased momentum around our managed accounts program, and we expect that to continue going forward. It is worth highlighting that our flows data, we're presenting the flows data here, excluding the JANA flows, given the divestment of that business and really looking to create an appropriate baseline. I'll hand over to David.

Thanks, Renato, and good morning to everyone on the call. Let's start with an overview of the financial results for six months into 31 December 2022. The first half of 23 UNPAT, including discontinued operations, was $98.6 million. The result, net revenue of $691.3 million and operating expenses of $517.7 million. Net profit after the tax period was $45.1 million, with a series of items adjusted between NPAT and UNPAT set out in the appendices. The most significant of these being the $48.4 million profit from the sale of AET and transformation costs of $57.6 million. As Rinaldo mentioned, the performance of financial markets during first half 23 was a significant factor in the period's performance, with average firmer down 7.1% compared to the previous corresponding period. Closing claim was down 10.4%, but it should be noted that this includes the removal of $7.6 billion of funds associated with JANA. When comparing first half 23 to first half 22, net revenue or gross margin is down 8.9%, mainly driven by this decline in average FURMA. OFFEX pleasingly fell by 7.3% as the benefits from annualised energy use continues to translate into actual P&L benefits, and together these led to a 13.3% decline in EBITDA and a 17.6% decline in UNPAT. In terms of our key ratios, net revenue margin fell from 47.9 basis points to 47 and EBITDA margins from 12.6 to 11.8 basis points. Looking now at the segment contribution on the next slide, we see some differences between the drivers of the results between the two of our segments where income is directly related to the performance of investment markets, that being asset management platforms, and our advice segment, which is far less exposed to investment market volatility. Platforms saw a 16.4% fall in unpack, with falls in gross margin partially offset by OpEx reduction. The main driver of gross margin decline in platform were the impact of lower FUA as a result of investment market declines over the period, and also contributing were the price reductions that we flagged at last year's results back in August. The impact of these was offset by initiatives focused on some of the costs and fees that sit between the gross margin and net margin line, and the impact of some small provision releases. OpEx in the platform segment fell by more than $15 million, thanks to the synergy benefits being realised. Moving to advice, advice grew unpat by 22%, despite seeing a $10.5 million fall in net revenue, largely caused by the integration of MLC advice into Bridges, which resulted in some of the lower-value clients being off-boarded. Offsetting this fall was a 16.7% reduction in OpEx, with the advice business continuing to make progress towards the elimination of losses from the acquired MLC advice business. The $48 million of MLC advice that was noted in FY22 will now be tracked as part of an overall profit improvement target in our advice segment, given the integration of this business, and the details of that is noted in the appendix on the advice segment slide. Asset management impact was down 8.9% year-on-year, albeit with actually quite strong underlying performance, given most of the $9 million net revenue decrease can be attributed to the significant PE performance fee set in first half 22 and the lower revenue of $3 million following the sale of Cosima. So effectively delivering flat underlying revenue despite lower fund was the result of improved fund mix with outflows from lower margin products and positive inflows into higher margin products. The corporate segments saw UNPAT broadly in line, improving by 1.9%. Here, a decrease in operating expenses due to synergy benefits, offsetting the annual REM increases and other CPI increases. At the UNPAT line, this reflects an increase in funding costs, partially offset by lower impairment charges, again, based on the previous corresponding period. It's worth calling out borrowing costs that increased by 9.3 million due to increased base rates, the higher margin of the new facility and a higher drawn average balance. Turning back to the group result again on the next slide, we see here a bridge between first half 22 UNPAT and first half 23 UNPAT. And this chart highlights the impact of the lower FURMA performance, again, mainly due to the decline in investment markets, with $45.2 million of net revenue attributable to lower FURMA, and a further 27.3 linked into pricing. Offsetting these declines was the 40.8 we mentioned before, with revenue synergies of $5 million in RPAT, generating $94.4 million, with AET's contribution of $4.2 million in the first half, called out as discontinued operations. At least on the last five, one of the highlights of the first half of 23, the result was the improvement in OPEX, with costs reduced by a net $40.8 million. The way this is made up is effectively we have salaries and other cost increases of $15.2 million and cost reductions due to the synergies from the P&I and MLC acquisitions of $56 million. As we committed at the time of the full year 22 results, we've managed salary inflation through additional cost reductions beyond the committed synergies, resulting in a net salary increase of $10.7 million, which is in line with our usual historic wage inflation. Continuing on the topic of synergies, management committed to achieve a run rate of $218 million of savings from these two acquisitions by the end of December 2022, pleasing to this target that we achieved at the end of the year, with MLC synergies realised over 18 months rather than the originally committed three-year period. We will continue to track the flow through of these annualised synergies into in-period synergies to ensure the benefits are fully realised. And we expect $96 million of synergy benefits to be delivered in FY23, including those already delivered in the first half. And that will leave a further $10 million to flow into FY24, which is a slightly faster pace of synergy realisation than we expected at the full year, where we expected 20 to come through in 24 and about 85 in 23. So there's a slight bring forward in terms of those benefits. We do see continued cost opportunities beyond these targets, but rather than reporting these as synergies, they will form the business cases for the remaining phases of simplification as we embark through that process. Onto our two remediation programs, which continue to progress well with over $100 million of payments made to impacted clients over the period, mainly in the advice remediation workstream. Advice provisions increased by a net $17.9 million, this being an increase of $25.9 million, offset by an insurance receivable of $8.4 million. The increase in the advice provision raised relates to fee for no service programming for the ex-AMZ licensees, the work on which is concluded subject to final assurance. The remainder of the advice work focuses on quality of advice, which we expect to be completed by the end of FY24. The remaining product remediation provision mainly relates to MLC advice, again, which we expect to complete by the end of this calendar year. And this program saw a release of a provision of $22.2 million following a couple of the issues that sit within there being run to ground over the half. Moving now on to corporate cash and debt facilities. Senior leverage at the end of the period came in at 1.2 times net debt to EBITDA. And following the pay down in debt from the proceeds of the IET divestment, we now expect to remain inside our target 1 to 1.3 target leverage ratio for the remainder of FY23. And one aspect on the balance sheet we've been highlighting for some time is the build-up of the deferred tax asset associated with the remediation program. As of the 31st of December, the current tax asset and the deferred tax asset specifically related to remediation stood at $136 million, a balance that will be used to offset future tax payments and improve free cash flow. The deferred tax asset is transferred to a current tax asset once the client has been remediated. And so the increase in remediation payments over the last 18 months is what has led to the increase in the current tax assets. Moving through to the dividend, as Renato mentioned, directors have declared a dividend of 10.5 cents for the first half of 23, made up of a 9.3 cents per share ordinary dividend and a 1.2 cents per share special dividend. The dividend is 50% frank and the DRP continues with a 1.5% discount. This is the first period of some time where we've paid a partially frank dividend and we've noted here that we do not expect to frank either the second half 23 dividend or the FY24 dividend. I just want to touch on two of the main drivers of this. The first is that our dividend policy is based on UNPAC, which has been higher than NPAC for some time due to transformation activity. We've continued to pay a 100% frank dividend through this period due to our franking credit reserve. With the decline in that reserve as they used up, we're now reliant on franking credits and taxable earnings generated in each period. The second factor relates back to the current tax, as I mentioned before, generated largely through remediation payments. And assisted by this tax asset, our outlook for tax payments is nil to minimal over the next two years. Now, this reduces our ability to generate franking credits, but as mentioned, does give us the benefit of improved cash flow. And we'll continue to keep investors updated with the timing of returning to the franking of dividends. Lastly, I just wanted to comment on outlook. At the FY23 results back in August, we provided guidance to the market that you see there in the left-hand column. We've provided an update on a bit of a checkpoint on where we are first half 23. There are two changes that we're making to guidance. Firstly, in relation to group net operating margin, we're now expecting a decline of 0.5 to 1.5 basis points. The reason that this decline is lower than the original guidance relates to some of those offsets I've mentioned before in terms of some of the cost lines that sit between gross margin and net margin. but also due to the fact that with FUMA being lower than anticipated across the period, having a lower denominator in some of those fixed fees or tier pricing means that in times when FUMA declines, the margin percentage actually goes up. We've also updated our group EBITDA margin expectation from broadly in line to a decline of 0 to 0.5 basis points. And again, this is based largely on the lower FOMA that we've seen over the period. I'll pass back to you, Renato.