Alexander Forbes Group Holdings Limited (AFH) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Alexander Forbes FY 2025 Interim Results Presentation. I have with me today Dawie de Villiers, CEO; and Bruce Bydawell, CFO. And with that, I will hand over to Dawie.

Thank you very much, Cynthia. And everybody is sitting, everybody is online. Welcome, everyone. Really excited to share our half year results with you at a very interesting time, obviously, in the industry, specifically for us, but also in the industry with all the two-pot news and all that's happening in the industry. So hopefully, we can have a nice engagement and talk about those things. We'll certainly allow some time for questions at the end. Let me start with what we tried to deal with today. Obviously, a few highlights as an intro. We'll go into the detail of the different areas of the business in terms of why the returns was like it is and what happens in those businesses. Bruce will cover the financial performance, and then we'll have a little bit of an outlook into the future as per normal. And maybe I should start by just saying it's been a very exciting year, not just as a result of two-pot, but certainly, two-pot dominated our world. In my view, my personal view, this is the biggest change in the retirement fund industry ever, including DB2-PC, including some of the other changes, regulatory changes, that has happened. And mostly because it affects a lot of members. It affects the industry. It affects government. It has wide-ranging effect in the market. It's a place where the employee benefits market and the retail market now intersects. Every individual is now truly a DC member, truly thinking about his own values and with two-pot, he can interact as an individual with a pot of money and through an administrator directly. So this is a massive change for the industry, and we're excited about it because we think we're perfectly positioned as a retail consultant and an EB provider with a big book of clients, obviously. And the biggest change for me in it is that retirement fund members now actually start to care about retirements. We all talk about engagement and we all talk about how many members are talking to us now and how we're set up to deal with that, but the crux of the story is that members now care. Members care about how much money they have to withdraw. They care about what's left to save and they actually care about how that grows, which was not the case in the past, and we'll discuss that a little bit into the future. And then we've got a really well-established consulting business, administration business, investment business, the core businesses that we talk about. And they continue to add a lot of value to clients. We've seen that from client feedback. We've seen that from the new business gains that we've had in the last number of years. And from a monetary point of view, by growing the book plus by earning our inflationary-like increases on those businesses, we see a sustainable business that's growing very, very nicely and delivering to the bottom line as it should be. And then lastly, I think the machine, the Forbes machine, according to the strategy that we've set out, is now working well. We've got a platform to leverage off, we've got a platform to build other initiatives off, and that excites us really for looking into the future. As can be seen from the numbers, very pleasing revenue growth very pleasing profit and certainly, still very good new business. Bruce will go into the numbers in more detail, so I won't talk upon that for now, but this ties in very nicely with our year that we've had and certainly, the growth that we've seen. And then we have a slide here just to show the recognition that we've achieved in the past 6 months. And what is pleasing with this is it's across the board, from people being acknowledged and the culture in the business and how we operate and the trust within the business through the top employer status to specific product awards across the countries and certainly, in our core areas, which is key for us in terms of growing; and then also on a note of CSI and impact and really making impact in the market. So across the board, and we're very proud of what we've achieved there. But let's run into the segmentals and the different businesses, and I want to start with retirements. Retirements is certainly one of the big areas. It includes the consulting business, the retirements consulting business, and the administration business. And you can see a pleasing growth there of 19%. A lot of that is -- no, sorry, not a lot of that. That consists of good new business growth of specifically in the last 1.5 years, which leads to the growth in this year. Two-pot revenue is in there, so that helps quite a bit; and then the more than inflationary increases in our client base without losing clients. All of that compounds to a very positive return. And I do want to highlight the umbrella fund growth. It's a very competitive market. All the providers fund their umbrellas and think that they're the best. And we obviously think that ours is the best. But to have a 36% growth year-on-year in a very mature market is exciting for us because you can see that that's a lot more than market growth and some good new business. So this excites us because the next wave of clients that will go into the umbrella funds are the largest clients and the larger clients, and you have to be really attractive on all fronts from a return perspective, from an admin perspective and an individual client servicing perspective to be able to offer this, and we seem to be really well positioned there. One of the other things that is key for us in retirements and going forward, and you'll see me talk about it at the end as well, is efficiency. We've got the scale now. We've landed in the last 2 years with acquisitions and new business, about 300,000, 400,000 members on that base. And now through the efficiencies and automation that we bring in, we must get the economies of scale in this business. And in itself, that is a massive opportunity to drive our -- to curb our growth in expenses into the future and certainly drive the jaws for the results going forward. So a very nice picture in one of our largest businesses. And obviously, as I said, two-pot falls in here, and I want to spend a little bit of time on two-pot. Most importantly, this isn't just a benefit for the members that they can withdraw money, which everybody is talking about. It is also a benefit for members because they can now preserve the money they have, to preserve their money into the future. So it's now compulsory and therefore, almost guaranteed to lead to better retirement outcomes. And our modeling, in 20, 30 years' time, is that, on average, the retiring members will be 2 to 2.5x better off. And that is massive. That doesn't only help those members. It also helps the industry because we grow, and it also helps the government because less onus on them in terms of funding retirement deficits and minimum requirements for those people that doesn't have a decent retirement. So very excited about the implementation of two-pot and where it's going. As I said, the biggest benefit, though, on top of those numbers, are the increased engagement. Certainly, for us at Alexforbes, we've been gearing up for 2, 3, 4 years to have better engagement with our members, to build tools to have better engagement, and to have a positive experience with our individual members and not just with the Boards of Trustees and the corporates. And these numbers just show the absolute magnitude of the type of engagements that we now are having. To put it into context, we've had 4 million log-ins in the 2 months since two-pot. And that is continuing, not just for claims into the future, but also for now seeing what their values are, how the growth is, what's happening in the portfolios and doing even beneficiary changes and those type of things on the portfolio. So a lot of interest. And to put it into context, a year ago, we had 20,000 to 30,000 interactions on our digital tools. This is not a marginal shift. This is a massive shift. And that is exactly what we want as a provider. We want individuals to want to engage with us, to want to engage with their retirement fund, to want to engage with their savings and actually understand. And we're geared. We've got counselors, we've got planners, we've got advisers who understand the employee benefit side and the retail side, the individual side. This intersection is such a tailwind for us as a business, but also, I think, for the retirement fund industry into the future because it's just much more important. I wouldn't say my lifelong dream and legacy that I wanted to leave is that retirements become sexy. So I wouldn't say this makes it sexy yet, but it's certainly a step in the right direction. About 50% of the people that we interviewed in a post two-pot survey used it to pay off debt. Now yes, we would have wanted only people that want to pay off debt to access their two-pots. But as I said, the whole idea is for people to be more aware of their values. And even if you think essential living, if they had to buy those things and they didn't have two-pot, they would have to go into debt. So I actually think the survey shows that the two-pot is working, that the two-pot is allowing people free cash in a time of need. And because it comes with preservation, we don't have a problem with people accessing that money. And over time, people will be more educated and hopefully, use the money for better or leave it in the savings because they understand the long-term nature of the compound interest in the savings. And then just another interesting stat from that survey is that almost 50% of people plan to claim into the future as well. Of those that claimed now and those that didn't claim, if you add them together, those that said it, it's about 50%. And that's an interesting stat. That shows to us that there is a need for the cash. Firstly, people think that they're going to save enough in order to be able to withdraw into the future, and it is business as usual. And it's now business as usual for us as administrators and for people belonging to pension funds. It's not part of the stat on the table, but we've also seen that people are actually thinking about contributing more to pension funds and more to their retirement fund because they now know that it's not locked in because you have access to 1/3 for a rainy day and they also understand the massive implication of saving more into the future. So really very, very positive news for us, for the economy and certainly, for the members. This is the part on the economy. I'm not going to go into it. You as analysts would understand that even better than we do. But certainly, if between ZAR 30 billion and ZAR 100 billion is withdrawn, we estimated, before two-pot, about ZAR 50 billion for the whole industry will be paid out. And the claims have been bigger than we thought, so maybe between ZAR 50 billion and ZAR 70 billion in the industry in the first year. And that's a massive injection to the economy and therefore, a good thing for the market and for the economy as well. And even though the percentages are small, it does have a positive influence. Then I want to go to health care. And health care is, I think, about 2 years ago, massive new business. And since then, we haven't had a lot of net new business. We've had new business, and we've had some clients rotating out. But we've stayed at that very high level, which is commendable, a ZAR 350 million, ZAR 400 million revenue business, which we're very excited about, firstly. And secondly, high margin. And then thirdly, which is probably more important, it's part of the holistic offering. We talk to corporates about retirements, about health, about investments. And we are the best, we are the biggest in the health care space. And with NHI coming on, clients want to know. We've built toolkits. We try to advise corporates and certainly, individuals into the future as to this uncertainty that the health care bill brings. And therefore, we think we're very well positioned to hopefully make some extra money but, most importantly, get new clients onboard in order to help them navigate through this. On the multinational side, very pleasing to see that all 3 of the countries, Namibia, Botswana and Jersey, have contributed very nicely to the growth and all 3 of them actually achieving it through good new business: good new business on the asset side in Namibia, Botswana delivering health care and also on the asset side, asset consulting side, and then Channel Islands just growing through increasing their advisory. So that is really exciting for us that all 3 of those businesses are growing nicely. And then we must spend a little bit of time on investments. We can answer some of the detailed questions for those of you that model, but I'll first tell the general story. Firstly, assets under management increasing by 25% year-on-year, which is obviously a massive highlight. Some of that new business is definitely platform business, which is at a lower margin. You're talking 5 to 10 bps versus normal asset management margin, but it is pretty scalable and falls through to the bottom line. So we're still excited about that part of the growth; and then in the 6 months, obviously, operating income growing by 11%, helped by the market in excess of our assumptions and coming off a very high year-end number. Obviously, this market growth also then pulls us nicely into the next year because it leaves a nice high assets under management value if the markets stay at these levels. Margin coming down slightly, and the underlying product margin actually didn't decrease, it actually increased slightly. But the blended margin, with all the platform assets coming on, has decreased a bit, and that makes 100% sense. So a very exciting part for new business with investments and really, really good growth. This is our standard asset buildup slide. And as you can see, pleasing new business, pleasing net new business, which is very important in this market with all the outflows, with the normal withdrawal benefits actually increasing, and that's also understandable because of the markets rising so much in the last year or 2, the positive markets, which means that the payout is at retirement and switching jobs have been increasing. But then the market is helping us to get to this very high level of ZAR 570 billion assets under management. And then I want to spend 1 minute on investment destination, where we as Alexforbes want to be, in the not-too-distant future, a place where certainly, every one of our clients and hopefully, more wider, into the wider South African, and most South Africans must want to discuss and think about and be top of mind as to why are we not invested with Alexforbes, not just our retirement fund is with Alexforbes, but why are we not invested with Alexforbes. With such a track record, with such an influence in the industry, with such a trusted brand, great service, why would you not invest with Alexforbes? And certainly, our drive will be to make it very exciting for every individual into the future to say, "I want my investments, whether it's discretionary, compulsory or retirement investments, with this powerhouse Alexander Forbes," or Alexforbes. So we're really looking forward to this drive over the next number of years. And then about 2.5 years ago, we launched the transformation policy. We had a lot of questions on that, obviously, and a lot of interactions with all the asset managers in the market over the last 2 years and continue to have. It's stated there. It's not just asset managers, also stockbrokers and the rest, suppliers. And there on the slide, you can see, just as a refresher, we want not just the BEE level, but we also want representation for the industry as Black professionals, Black women in the investment markets, and also senior management. So it's about having more diverse people managing our money. And I want to say that the intent with this policy is to drive diversity in the asset management industry. We firmly believe that with more diversity, we'll get better returns. And if we do it more measurably and sustainably, and with the right intent, and over the right time and in the right way, by growing talent, by teaching, by getting the right people in the market and excited about the asset management market, it will be great for the industry, and it will be great for the members. And that's the drive. And we've seen massive improvements over the last 2 years already. And this is on very high levels. You can see here, 20% female representation on investment teams, 84% having a BEE Level of 1 to 3. So some of these improvements are remarkable in a market that has had a bad press in terms of transformation. And I think the asset management industry should be commended in terms of the progress that's happened. Also, one must remember here that it includes niche, smaller managers like hedge funds, which is very difficult to just transform quickly, and they are on their journey. And the positive thing about this whole transformation policy for us is the way that the market is engaging with us on it. They see it as an imperative. They want to change. They're sharing their plans with us. And together, I think we'll make a big impact in the market with regards to transformation over time. And then I want to end off with our retail business, our individual consulting, very good growth of 9% in the 6 months, new business growth of 18%, again, that's our focus, off a record year of the previous year and certainly, going to surpass that record and do another record. And then our [ AFR ], which we call our institutional retirement fund, our institutional living annuity fund, where currently just Forbes advisers write into, with a growth of 33%. And why it's so exciting is it's Forbes investments, Forbes advice, Forbes clients wanting to retire into this vehicle, which has got a perfect blend between institutional pricing systems and retail advice. So very exciting for the future and hopefully, will be the avenue to a lot more client growth into the future. And then I want to just end on some of the strategic rationale for the retail business and what we're doing there. And we know it's all about digital transformation. We learned a lot of lessons on two-pot and during two-pot as to what's needed, what clients really want. We were still [ kamikaze ] semi-institutional even when two-pot started. And now we realize just how different retail is, how different the requirements are, how different the member behavior is. And we're happy to have learned that, and we're excited about the even better digital journey that we can now build for our clients. So we're excited about that. And the other thing that's happened is the launch of our DFM. And again, the excitement about the independent IFAs who we've never had any engagement with in the past, was talking to us now about using our systems, using our investment expertise, using our research and wanting to engage with us; already ZAR 2.5 billion of assets under management in a very short period of time and a lot of interactions in the market. So that's really exciting. And then obviously, our direct angle with AF Invest, which was the old OUTvest, is busy being integrated. And I think even our own consultants are really active on that platform, using the platform, and it will make the whole journey of onboarding new clients and investing a lot easier into the future. And then I just want to add by saying how exciting it is to have 45% of our adviser force as females. We think this is a massive market. We're well positioned. And this was not even a drive. It was a natural phenomenon happening. And when we looked at the stats, we saw 45%, so very well worth sharing, and I think will do us well into the future. Enough from me. And over to Bruce to tell you a little bit more about the detail of the results.

Thank you.

Good luck, Bruce.

Thanks very much, and welcome to everybody online, and thanks for joining us. I'll take you through all the numbers and some of the specific nuances and things that we want to highlight through the journey. I think it's a good set of results in general, 12% on the top line, which I think is commendable in terms of the industry that we're in and the key drivers that we have behind us, and I'll take you through some of the detail there. A 13% growth on the profit from operations, which implies an 11% growth in expenses, and I'll take you through some of the specifics around that. 3% on HEPS, largely because of things that happened below the profit line, and I'll also provide some detail there. 10% increase in dividend, which I think is a great outcome. It is within our dividend policy range of 1.5, 1x cover but more importantly, signals our confidence for our year-end results, which we'll continue to show growth and growth in our dividend projections. Good cash flows and certainly a sound capital position post the distribution of our special dividend, which essentially distributed the majority of our available cash. And so that has been well managed over the period as well. And then just, of course, on shareholder returns, an impressive return to shareholders over the period of 32%. That's a 1-year period, but also over the last 4 years. And just to be fully transparent there, 4 years ago was essentially the lowest point almost in our share price. So there is a significant increase in our share price over that period, plus 3 special dividends in that time, as well as the normal operating dividends that have been paid out, so that amounting to a really good 47% almost return per annum for shareholders over that period. If I then take you to the operating income, the top line, Dawie had spoken through most of the segmental on this, aggregating to 12% growth. Importantly, acquisitive growth adding 2% to that 12%, but then also the tailwinds that we've had with the markets growing fairly well on 53% of our income with the key driver of the assets, and then 33% of the underlying growth also through inflationary type increases, through payroll and per member per month. And as Dawie said, we are in a fairly good period for Alexander Forbes where those tailwinds are helping us on our top line. Two-pot, obviously, coming into the equation, being recorded under the retirement consulting, the two-pot fees as well as the administration fees in terms of the fees by type, that being fees just for the month of September, of course, as it was only live for 1 month in the 6 months over this period. Then on operating expenses, a growth of 11% of which 3% relates to acquisition and acquired costs coming into our business over the period, or sort of when compared year-on-year; 11%, of course, being above our targeted growth in expenses, and so we are very cognizant of that; 8% being more within the range, being BAU. And specifically, if we go into the details on personnel costs, that 12% growth in personnel costs comprises of 2% acquired costs. The underlying payroll costs for our permanent staff was only 6% growth, and that is close to the inflationary increases that we've given. So definitely, that coming under control. The difference, of course, being other personnel costs where we did take on a good number of temporary staff, which are included in the other personnel costs for two-pot and for the implementation process, managing call centers, managing walk-in centers, et cetera. And certainly, that was fairly well managed through the implementation process. As well as the fact that those are temporary staff and the intent is obviously to wind that down now over the short to medium term as we feel that the processing and the volumes will come under control. Importantly as well, the technology growth in cost of 10% is higher than our original anticipation, and there were some sort of two-pot costs on that line as well. We do believe technology is the enabler, and certainly, it has worked very well through the period and through the implementation of two-pot, where most of our claims were actually paid on an electronic automated basis. And certainly, the volumes that we had to go through, which were fairly impressive, were dealt with on an automated basis. However, it has given us insight into what the opportunities are in terms of engagement with members. And we have recognized that there is definitely a need for further investment to make sure that there are no hiccups in that digital engagement with members. And so really anticipating further investments into our technology space over the next 12 to 18 months, which will come in the future. On the premises spend, you'll see that we've remained fairly flat for the period, on period growth. However, September was the end of our original 10-year lease on the sort of main head office building for Alexander Forbes, 115 head office building for Alexander Forbes. And as of October, we've moved on to our new and renewed lease in the same building, but with much lower floor space and also now sort of moving to market pricing, which was negotiated 1.5 years ago with our landlords. And so the actual cash cost of the property over the next 6 months will be less than half of what we've paid certainly, in the first 6 months or significantly less. So the benefits of that renegotiated lease certainly come through in the second half of this year and will have a significant impact on our numbers. Of course, the IFRS lease adjustments do overlay on that, but ultimately, the underlying cash cost has reduced. And all of that sort of results in an 11% increase. Certainly, our expectation for the end of the year is a little bit better than that in terms of the leverage. Just taking you further down the income statement or on other items on the income statement. Other income, which is related to sublease rentals as well as certain technology charges that we have with businesses that we've sold, that is decreasing as expected. And certainly, again, as we've moved out of this lease arrangement on our 115 property, that sublease rental will also decrease over the rest of the year. So the decrease will be accentuated. On net investment income, it's important to note that we did pay the special dividend out in July of this year. So the decrease in sort of available cash or the decrease in cash balances on our balance sheet has come down, but that would be only for 1.5 to 2 months off the 6-month period. In addition to that, based on the fact that we now have distributed available cash and our working capital cycle has historically been sort of managed through the surplus cash on our balance sheet, we have recently also drawn down on our working capital facility, which is short term. And that will be part of our sort of new capital structure going forward as we manage working capital cycle through the year, which has its peak in September and a trough in March, we will have variability on our borrowings that comes on to our balance sheet. But both of those have given rise to a lower net investment income for the 6-month period, a gain which will be accentuated for the year-end as there is only 1.5 months of that sort of capital change in the numbers. So that reduces our operating profit growth from 17% down to 10% prior in terms of profit before tax. Our effective tax rate is 27.5%, slightly higher than the same time last year but ultimately, still within the corporate tax range. So nothing untoward on that line. And then with regards to discontinued operations, still some expenses coming through as we are negotiating the close down of the AF Life business. So again, not material, but having an impact on our growth rates from a year-on-year basis. Highlighting changes on our corporate balance sheet, which exclude our policyholder balances and specifically noting the decrease in cash and cash equivalent, which is post the special dividend payout and the borrowings which have increased as a result of the drawdown on the working capital facility for the period. As indicated, that will vary at year-end. That borrowing facility is not anticipated to be drawn down. With regards to capital and available cash, just to highlight, our average equity has not decreased significantly from the ZAR 4.7 billion as at the end of March. And that is obviously based on averaging the dividend payout in July and that a full effect of that special dividend will come into the average equity certainly, by the year-end and then into the first 3 months of next year. And obviously, that decrease in average equity will improve our return on equity statistics for shareholders. And the same follows for the average tangible net asset value, the tangible net asset value, obviously, excluding goodwill and intangible assets for the period. And we prefer that stat because that has been in line with the equity that sits within the business. The largest part of the intangible asset is the goodwill that was associated to the take-private transaction back in 2017 within our business. And then just finally on the slide, to point out solvency capital requirement, which has remained relatively flat for the period and over the 12-month period. And essentially, given our long capital journey, we believe that this is really a level that I think is sustainable and will grow, therefore, with the growth in the business over the future and as our expenses in our business and our operations grow in time. So that clearly gives an indication of where we think the appropriate level of solvency capital sits within our business. I think that's it from me. I'll hand back to Dawie to close out.

Thank you. Thank you, Bruce. Just looking forward a little bit and maybe summarizing where we are as Alexforbes at the moment. Interestingly, we celebrate 90 years next year of Alexforbes. That is a major milestone. And hopefully, it will be a good year as well. I think the two-pot inflection point, as we talked about, is really at the heart of who we are, at the heart of what we want to get right and certainly, impacting our ability to interact and engage with members in a meaningful way into the future. And the point just below that will obviously then drive how we build our retail business, how we build growth in flows, growth in interactions and having meaningful interactions in terms of giving that advice at the right level to the right people early on in their life so that their outcomes can be better. And certainly, as I have explained, I think that two-pot will help the retirement fund industry and certainly retirement fund members. I do want to just reiterate again that investment destination. This is not only part of our strategy to get every individual to understand, it helps our retail business, but also funds and corporates and pension funds are saving with us throughout their lifetime. Those results have had phenomenal returns, very diversified, very stable, perfect for the retirement fund industry. And what we've lagged and not done well enough is to showcase how much value we're adding to members over time. And that certainly must become part of our DNA in order to live it out. You can't just have an ad campaign on your investments. You must actually be the investment as a company and as an organization, so that the outside world also believe that. And that is certainly part of our drive. And I think that the growth in engagement, as we've talked about, has certainly sparked new opportunities for us and will drive our retail business into the future, and that is exciting as can be. We need to live up to that expectation though through the trust that we have built up with clients and continue to build up and will hopefully, need to build up even more, the type of service that we gave, the type of digital engagements, as I said. So we'll have to now make it work and invest into that drive. And then our core lines of business, just so stable, so good, such a good bunch of people running those businesses at the front line, servicing our clients. And we will continue to strengthen that. We will continue to strengthen the machine so that we are really winning in front of the clients, so that the client wants to engage with us even more and obviously, want to pay us for the services that we do there. So certainly, won't stop trying to do more, do better in our core lines of business. And then lastly, I mean, or second to last, is automation. We've got the scale. We've got the platform. We're doing the admin very well at the moment. We've embarked for the last 2, 3 years on automation in our general admin systems. And now the time is there to stabilize everything and now the time is there to capitalize on it through every bit of new business, not needing extra hands, extra people because of the automation in the system; and over the next 3 to 5 years, getting that automation to actually lead to efficiency on the bottom line. And that's certainly a big driver for us. So if we can get that right, we can continue to grow the retail flows and the institutional flows in the core lines of business. You'll have a revenue growth. You'll have an efficiency drive on the expenses, which will keep on increasing our jaws, which is what we're about. And then I, lastly, just want to touch on sustainability and ESG and consulting. We've got the contacts with the corporates. We've built the capability now to really help corporates, and specifically pension funds, retirement funds, on what they should look like in the future, what they should debate, how they should think about it. And this is not about green investing. This is about, what we coined, the fund of the future, what should the fund of the future look like, what should trustees think about. And certainly, that is a massive consulting opportunity for us into the future, which we're excited about. But if we put all of it together, it's just pitching up in front of our clients, adding the value to our clients in order for them to keep us as partners. Thank you very much for listening. Hopefully, it made a lot of sense and inspired you as much as it did us. And then we will take questions.