Insignia Financial Ltd

Good day and thank you for standing by. Welcome to Insignia Financial first half 24 results conference call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising 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 first speaker, to Renato Motta, Chief Executive Officer. Please go ahead, sir.

Thank you and welcome everyone to our first half 2024 financial results presentation. I'm here with our Chief Financial Officer, David Chalmers, and I look forward to stepping through both the financial and the business performance for the half. Really, the overarching theme for the half is that the effort for the last six months has really delivered three key outcomes, the first being the strong performance, financial performance for the half. We've delivered against key strategic milestones and pleasingly, we're also now in a position to upgrade our outlook for the full financial year. If I move forward onto slide three and the first half highlights, please to report underlying net profit after tax of $96 million for the half, which is up 1%. on prior corresponding period. A net profit after tax, or a net loss in this case of $50 million, which factors in remediation and strategic investment costs. Net revenue, $696 million, which is up 1% on prior corresponding period, really off the back of improved investment markets. which is also reflected in our closing funds under management and administration at $301 billion, up 5% on PCP. And also declaring an interim dividend of 9.3 cents per share for the period. I think at the back of this, and really pleasingly, I think, in setting the foundations for the periods to come, is the strategic execution during the period. So we remain on track with our National Australia Bank separation as a result of the MLC acquisition, and pleasingly also on the Master Trust build has also commenced, which we'll touch a little further on this in the presentation. We're excited by the establishment of Rhombus Advisory, so the entity and the initiative previously described as the Advice Services Code, so basically the de-merger of our self-employed licensee business. Really pleasing progress there, which has also allowed for the creation of a new division and a new area of focus in our client wellbeing division, which I'll touch on a little further as well. And we're looking forward to the completion of the MLC RAP migration in April of this year. Reflecting on some of those initiatives and their progress, it is also pleasing to see $18 million of cost optimisation flowing through in the first half and giving us confidence to be on track to 60 to 70 million of in-period gross benefits for the full year. And we continue on working on our licence conditions and progressing to plan there, which, again, pleasing. And particularly pleasing is the outcome of a positive EBITDA in our advice division, which is the first time in a number of years, and certainly only possible as a result of the significant restructuring and repositioning of those capabilities, leaving our advice business, I think, with real focus on growth into the forward period. We talk regularly about our transformation as a business, but I think it's equally important, if not more important, just to also recognise the quality of the franchise. And I think that's certainly the objective of slide four, where we're pleasingly able to outline that with our level of award-winning performance and capabilities across the value chain. So whether it's in advice, And great to see our Shadforth advisors ranked as some of the best in the industry in the Barron's survey. Whether it's in platform or asset management, there is no question that this business has top tier capabilities across the value chain. And I think it's this position as a high quality business across all three aspects of our business that will ultimately drive future funds flows and revenue growth. So it's really the backbone of our competitive advantage. Turning to the segment analysis and starting with our platform segment, really the story here for platforms over the last couple of years has been unlocking the benefits of scale and growth through simplification and improved client experience. Case in point, I think, has been the effort around the Evolve 23 migration of MLC wrapping to expand, which remains on track for April 24. bringing an additional $38 billion and 96,000 clients into our more contemporary and improved client experience, and really bringing an end to the current transitionary dynamics that we're seeing in net funds flow around the MLC wrap. Workplace continues to be an important source of client growth, combining this with greater strategic focus on client well-being, I think is a real opportunity going forward for the business to unlock unlock the opportunities of what is a large and growing franchise, and we'll touch a little further on this. Managed account funds flow, which includes SMAs, is something that's continuing to grow in importance for the business, which is really pleasing. I think this plays favorably to a broader industry dynamic, and I look forward to seeing the franchise take more share in this space. And finally, it's just pleasing to be able to confirm that we're targeting the higher end of our net revenue margin in the 44 to 45 range, which is a function of good net revenue resilience and product mix. Focusing a little just on our platform strategy specifically and Our announcement middle of last year around our platform strategy really highlighted a decision to center our strategy across two discrete offers, customized to different markets, but really supported by one technology data and client infrastructure. And just maybe just to delve a little deeper into that, our platform strategy and structure revolves around what we would term a master trust structure, so effectively a platform administration offer to retail clients distributed through employer plans administered in a third-party technology but really made up of a cost-effective bundled solution in a tax-paid environment really akin to most other superannuation funds in the market This represents around $123 billion in funds under admin in excess of the million clients or members with an average balance of around $107,000. Alongside that, we also have a specific structure and administration offer that is far more customized and tailored for financial advisors, which we call our WRAP structure. And this is housed on our proprietary technology, which we think continues to give us a competitive advantage in our ability to remain agile. It's a tax-exposed structure, which really plays to the demands of financial advisors in that level of customization. In our RAP environment, we have $92 billion in funds under admin across 370,000 clients. And as you can see, they're clearly a higher average balance and a strong source of I think the main point to make here, certainly from a financial perspective, is that there are different margins to be generated in each of these segments. And when you look at the economics of the platform segment as a whole, it's really a combination of these two separate and discrete offers that make up our platform segment. And we're confident that this customized approach to really looking to address the client need is actually our best opportunity to deliver both a leading solution in each discrete market, but equally doing it in a scalable way, leveraging off common infrastructure around technology, data, and client experience. Turning to advice and as I said, it's particularly pleasing to be sitting here talking to the advice segment and providing an update that includes a positive EBITDA contribution. It's been quite a while in the making and I think now positions us in not only do we have a sustainable business model, operating model, I think it's a model that is absolutely focused on the future. having significantly improved the quality of the advice provision and significantly improved the sustainability of the economics. If I reflect on the creation of Rhombus, our new advice services business that will be separated from Insignia Financial, but pleasingly all the work we've done there in terms of advisory engagement and now the business, standing up the business in its own right, gives us real confidence that this business will be positive, profitable in its first year of operation. So again, we're standing up a business that will be sustainable and profitable in its own right, and I think be a real competitive force in the marketplace. So when you look at the advice business the Insignia Financial now represents, we've got a business that has two discrete business models that are complementary, fit for purpose, and centered around capitalizing on future growth. And in fact, it's been pleasing to see some of that future growth start to be realized through the Bridges business over the past six months. It's also worth highlighting the completion of the XANZ fee-for-no-service remediation, which, again, is pleasing to have that behind us and a key milestone that allows the business to continue to focus on the future. Turning to asset management, and this segment's actually been a reliable and mature segment for the business, and that's been particularly important when we've had so much change happening both in the advice and the platform segments. That economic performance has really been off the back of strong investment performance and congratulations really have to go to the investment team who work tirelessly in ensuring that we're delivering to our clients. And that's really showing up at the moment with 89% of our funds are under management performing, outperforming target or the benchmark. It's also great to see this translate through to our managed account offers with strong research ratings. And again, I think this represents a source of future growth for the business. Finally, the asset management segment also has benefited from strategic simplification, which helps improve the focus of the business, which has certainly been the case with the divestment of the Friendly Society business and significant investment and investment structure simplification during the period. Turning now to flows, And I think I described the last sort of period or two of flows as being one of displaying or actually being a function of a lot of strategic change and transformation in the business. And I think that's certainly been evident in the MLC WRAP transition. But equally important is the diversification of the different channels that we operate through. And I think that can be seen with the workplace net funds flow providing opportunities diversification and Net Funds Flow resilience whilst we've been working through some of the platform transformation in the advice side of the business, and as a consequence have had to deal with some disruption to Net Funds Flow. I think during the period, that's probably been a little bit camouflaged by the one-off inflows into our private label. But nonetheless, we remain confident that beyond the completion of the migration of MLC WRAP to the expand offer, we expect to see a net funds flow in the advisory business to return to more normal levels. If we delve a little deeper on funds flow, I think what the chart at the top really demonstrates is that this business reliably takes in inflows, $10 billion a half or $20 billion a year. And that is a substantial opportunity for the business. If we reflect on the opportunities it presents, it actually presents the opportunity by way of retention and client engagement. And so when we focus on our efforts in that space, part of that does relate back to the MLC RAP migration, and we're certainly confident that the migration of MLC RAP will assist in engaging with those advisors and clients in a more contemporary way, with a more contemporary offer. But likewise, the creation of Client Wellbeing Division and setting up a strategic focus specifically designed around improving the client lifetime value of existing relationships, as well as the establishment of new services and new opportunities by way of the quality of advice review, I think presents a significant opportunity to see a positive trajectory with net funds flow across the platform segment. In terms of asset management, We've continued to see strong momentum in the underlying multi-asset flow, albeit it's been partly offset by some of the downstream impact of the MLC RAP platform flow into the wholesale trust in the asset management division, which again I think does some disservice to the underlying momentum in the multi-asset net funds flow. And as we've mentioned in the past and can happen from time to time, I think in this period we've seen some outflows in the institutional segment as a result of client rebalancing, which has occurred as a result of the shift in the interest rate cycles. Just before handing over to David, I think it's worth framing the first half results in the context of our three-year strategy, which we laid out last year. And during the half, we've made meaningful progress against each of the strategic pillars that not only reinforces our execution track record, but also underpins the financial performance for the half, but importantly, the financial performance for this business in 24 and beyond. So it is pleasing that alongside producing a strong half performance, what is most pleasing, I think, is how we're setting ourselves up for the full year and 25 and beyond. I'll hand over to David.

Thanks, Rinaldo, and good morning to everyone on the call. I'll start with a summary of the financial results for the six months ended 31 December 2023, where first half revenue was $695.7 million. 0.6% increase on first half 23 and that's due to higher average swimmer balances of 0.9% and an uplift in advice revenue from our Shad Fork and Bridges professional services businesses. These increases helped offset declines in asset management revenue which were mainly due to the loss of ongoing revenue from the restructuring of the Jana relationship in first half 23 and the completion of the sale of IOOF Limited midway through first half 24. Operating expenses were broadly in line with first half 23 and pleasingly flat on second half 23 with the impact of annual salary increases from 1 July and the increased cost of cyber and governance investments being offset by the first wave of benefits from the cost optimisation program that commenced in early FY24. As a result, first half EBITDA was up 2.3% to $177.6 million, and unpat up 1.2% to $95.5 million. It should be noted that the unpat effective tax rate for the first period was 31.5%, which is meaningfully higher than our typical rate, which is normally around 26%, 27%. As a result, tax expense increased by 23% to $43.7 million, but is expected to normalise in the second half. The driver for this increase in our effective tax rate is a $6.7 million capital gains tax expense on the disposal of IOOF Limited, which is not normalised out of UNPAC. Turning down a net profit after tax, we saw a loss of $49.9 million for the six months, a decline of $95 million PCP, thanks to first half 23, including a $45 million gain on sale for the exit of AET Limited, and increased transformation separation costs in first half 24, as well as an increase in remediation expenses. Turning now to our key metrics, net revenue margin of 47 basis points was consistent with that of first half 23, while EBITDA margin increased from 11.8 basis points to 12 basis points, a change also reflected in the small improvement of the cost to income ratio of 0.4 percentage points. Looking next at segment performance on the next slide, firstly, platforms saw a fall of $10.6 million of revenue during first half 24 despite higher average FUA due to a decrease in platforms' net revenue margin from 46.7 basis points to 45.7 as some of the planned price reductions took effect. On the OPEX side of things, the increased cyber and governance costs I mentioned earlier are largely allocated to the platform segments, which helps to explain the increase in platforms OPEX. Moving on to advice, as Renato has already mentioned, Renato, advice recorded a significant turnaround with a small unpapped loss of $700,000 for six months, compared to a loss of $21.9 million the first half of 23. Pleasingly, this reflects both an increasing revenue of $3.9 million as well as a $24.6 million reduction in costs, with the first benefit of that restructuring program being delivered. As Renato also noted, it's worth remembering that as recently as FY22, advice unpat losses were $55.3 million, so we're pleased to see the changes in that business over the last couple of years and the platform that's being built for future growth. It's also important to note that this first half advice result fully includes the results of the self-employed or the advice services businesses, which we intend to restructure with ownership from Bronbus Management, the advice practices themselves and Insignia going forward. Asset management unpat reduced from $34.8 to $30.2 million, largely due to the loss of $9.5 million of ongoing revenue associated with the divestment of Jana, and IAAF Limited over the comparison period. Expenses are broadly flat in asset management and the underlying business continues to perform well. And finally, corporate losses increased by $4.9 million due to both annual salary increases and the increased interest costs associated with the group's bank facilities, a cost that was offset across the group by increased interest income, which is recorded in other segments, mainly in platforms. Turning over to the next slide now and back to the group result, this slide shows an unpacked bridge from first half 23 to first half 24. You can see that there's a net $7.3 million impact of divestments, which is the sum of the gains on sale from IFF Limited and M3 being offset by the loss of ongoing revenue from the divestments of Jana and IFF Limited. As discussed earlier, margins fell by 8.1 million, a fall that was offset by a $19.8 million increase in FUMA, thanks to healthy market returns during first half 24. The last driver to call it on this page is the net OpEx change of $0.4 million, which I'll now step through on the next page. So this slide shows a bridge in OpEx from first half 23 to first half 24, and is largely the product of annual salary increases and the offset of the first wave of benefits from the optimisation program. Now, as I'll cover on the outlook slide, we expect a significantly higher contribution from the optimisation program in the second half of 24, and the $17 million of cost reduction here are the results of a program that started early in FY24, and therefore there is not a full six months of benefit inside the first half result. The other category of cost increases is large increase of cyber and governance, which is offset by other cost savings in areas such as marketing. And taken together, all of these contribute to increased costs of $400,000. Turning now to our two structured remediation programs, product and advice remediation, first half of 24 saw an increase in the provisions of these two programs of $72.6 million, which will be partly funded by a successful indemnity claim and through trustee-approved funding, leaving a balance of $24.8 million that will need to be funded through corporate cash or through debt facilities. In addition, we've lodged a $20 million PI insurance claim relating to client compensation and costs incurred on a small number of advisors for the completed phases of the IOOF fee-for-no service program. That potential claim is not included in these numbers and we're in the process of working through it with our advisors. Stepping through each of the programs now, starting with advice, there were client payments of $38 million and a half, along with program costs of $14 million. And pleasingly, during the half, we also completed what was the largest part of the original program, that being the XAMZ fee-for-no service files. There was, however, an increase in the provision of $35 million, and that cost increase is split evenly between expected increases in client compensation and external consultants, as the quality of advice files reviewed in the period were more complex than anticipated. There's also a significant amount of cash payments that we've already made in this third quarter of FY24 or that's waiting to be processed over the next few weeks. And so we expect a further $24 million of payments to be made in the third quarter, i.e. in between the 1st of January and the 31st of March this year. And we're still tracking to have the advice program substantially completed by 30th of June 2024. Product remediation also saw a significant increase of $37 million, mainly due to the cost of remediating ADA dual accounts for OPC clients and IML members requiring remediation for portability breaches. Both of these streams are subject to third-party review. The third-party review has already signed up on the scope and calculation methodology. And as with advice, there are also significant payments being processed in the quarter. and we expect $31 million of payments to be completed prior to 31 March. And as with advice, we also expect this program to be substantially complete by 30 June 2024. The next slide gives an overview of corporate cash and debt facilities with net debt of $440 million as at 31 December and available funding of $552 million as at the same date. As expected, senior leverage came in at 1.5 times net debt to EBITDA, which was expected in their first half peak due to the timing of remediation payments and the investment in the strategic program, as well as the timing of annual FY24 employee incentives, which occur once a year in September. We expect FY24 leverage to fall back into the 1 to 1.3 range, supported by a significant uplift in free cash flow expected in the second half. And the next slide really demonstrates this being a link between the free cash flow. Firstly, an overview of the first half. And you can see there the impact of remediation and strategic investment on overall free cash flow with an increase in drawn debt to support each of these initiatives. And while there was negative free cash flow in the first half, we expect more than $150 million of improvement in second half free cash flow due to a range of factors, including those annual incentive payments I mentioned before that fall only in the first half. the timing of an expected tax refund and the release of reserves following the migration of MLC WRAP to Evolve. Moving through now to the dividends, directors have declared an interim dividend of 9.3 cents for the first half 24, consistent with second half 23 dividend and the first half 23 ordinary dividend albeit 1.2 cents per share lower than the total first half dividend from first half 23, which also included a 1.2 cents per share special div. The interim dividend is unfranked and we expect the final FY24 dividend and the FY25 dividend to also be unfranked due to the unavailability of franking credits. Turning out to full year guidance, first half 24 has come in either ahead or in line with all the guidance metrics given at the FY23 results. Stepping through each in turn, we've increased our guidance on net revenue margins for the full year to 45.5 to 46 basis points, a smaller decline than expected on our FY23 results. Now, despite being a smaller decline, we still expect lower second half revenue in absolute terms across each of our segments. In platforms, this will be driven by the margin decline in pricing, for example, the MLC to Evolve 23 transition that's been flagged. We also expect a revenue decline in advice in the second half as the transformation of that business continues across that time. There'll be further divestments of smaller businesses, as we flagged last July when we announced ASC, with the subsequent loss of revenues. We also expect lower revenue from bridges in the second half as the flow and impact from the 2023 restructure works its way through the system. But despite these one-off movements in the second half of 24, we still expect the advice segment to exit FY24 with an annualized unpaid profit of $10 million as we committed to when the MLC acquisition was made. Asset management, we expect a small revenue decline due to the full year impact of the lost revenue from divestments, but the underlying business continues to perform well. And just as we expect a better net revenue margin for FY24 than originally guided, these improvements also cascade their way down to group EBITDA margin, where we're forecasting 11.8 to 12.2 basis points for FY24, and improvement on the previous guidance of 11.3 to 11.8, although it should be noted that we're still expecting the same delivery of cost optimisation in FY24. So in summary, while we're expecting lower revenue in the second half, we also expect this reduction to be more than offset by greater in-year, greater in-period benefits from the cost reduction and therefore higher second half EBITDA. Finally, for the strategic investment program, we saw $112 million spent in the first half with a similar second half spend to be offset by the expected capital release As outlined last July, there's no change to this outlook. Similarly, as mentioned before, we remain on track to deliver 60 to 70 million of gross and year benefits from the optimisation program. Back to you, Renato.