AUB Group Limited (AUB) Earnings Call Transcript & Summary

Good morning, and welcome. Thank you for joining Mark and I as we take you through the first half results. We've released a presentation to the ASX this morning, and I will refer to selected pages on this call. There are 4 key messages for today, and these are shown on Slide 2. Firstly, AUB Group delivered very strong performance in the first half of '20 with adjusted NPAT up 25.3% to $21.3 million. Secondly, the strategically important acquisitions of MGA Whittles and BizCover announced on the 17th of February are EPS accretive and will accelerate AUB Group's capability and scale, enabling substantial additional synergy benefits to the group. Thirdly, we've made good progress against each of our 6 key execution priorities that were first communicated in August. And finally, as a result of the recent acquisitions as well as strong operational performance, we are upgrading expected growth in adjusted NPAT to 16% to 18% for FY '20. And this was previously 8% to 10%. In addition to the strong adjusted NPAT performance, Slide 4 reflects other positive performance trends in the business. These include a 5.9% increase in underlying revenue, an improvement in EBIT margin of 90 basis points and an increase in the adjusted EPS of 12% for the first half. I'm also pleased to announce an increase in the interim dividend of 7.4% to $0.145 per share. On Slide 5, we've included a waterfall chart to indicate the main items impacting the adjusted NPAT. Reading from the left, we've added back costs relating to the Canberra fraud that were included above the line in FY '19 in order to normalize the first half '19 adjusted NPAT to $18.6 million and to more accurately reflect the underlying growth rate. Strong organic growth for the first half of '20 of 17.9% and acquisition growth of 7.1% were slightly offset by the impact of reduced interest rates. And as a result, we achieved an exceptional underlying profit performance of $22.8 million, representing a normalized increase on the first half of '19 of 23%. On the right-hand side of the chart, we show a reduction of $0.9 million for redundancy costs and $0.6 million for the first year impact of the change in accounting for lease costs to get back to the adjusted NPAT of $21.3 million. Mark will now run through the results in more detail.

Thank you, Mike, and good morning, everyone. Firstly, let me touch on the first half '20 divisional performance snapshot compared to the first half of financial year '19. The underlying revenue and EBIT margin here represent the aggregated 100% view of all of our business holdings, whether controlled or associates and then adjust for controlling interest to arrive at profit before tax attributable to equity holders of the parent. In the half, all 4 divisions had increased underlying revenue and all 4 divisions had increased profit before tax attributable to equity holders of AUB Group Limited. I will comment in more detail on the individual performance of each division in the following slides. Firstly, Slide 7, Australian broking. If we exclude Canberra from first half '19 and exclude redundancies and lease accounting charges from first half '20, the divisional profit contribution grew 10%. Underlying commission and fee income grew mainly due to average commercial premium rate increases of 6.2%. The Australian broking EBIT margin grew 50 basis points to 25.5%. Turning to New Zealand on Slide 8. The profit contribution from the division was $4.9 million, up 55.2%, largely reflecting the impact of the increased holding in BWRS to 100% on 1 January 2019 as well as the full-period impacts of a number of smaller acquisitions. Underlying commission and fee income grew 24.1%. New Zealand had 8% organic growth in client numbers and 9% growth in client numbers through small bolt-on acquisitions towards the end of the period. New Zealand saw some premium rate growth, albeit this tapered to 0 at the end of the half. Expense growth of 27% is also reflective of the acquisitions, but also importantly reflects investment in people, processes and infrastructure, including technology, to cater for further growth. NZbrokers continues to perform well with growth in members and an improved membership proposition, including enhanced technology. Agencies, on Slide 9, had pretax profit contribution to the group of $5.5 million, up 8.8%. Underlying commission and fee income grew 1.9%, driven by strong premium rate growth in most agencies of 7.8%, partially offset by poor performance in the strata businesses. Turning to Slide 10, Health and Rehabilitation Services. Procare was moved to Australian broking, and we now refer to the Allied and Altius businesses as Health and Rehabilitation Services. The pretax contribution to the group from health and rehab rose 125% to $1.8 million. The improved performance was the result of improved utilization, reduced costs and a more diverse set of services. Looking at the balance sheet on Slide 11. Cash balances reduced since 30th of June 2019, mainly due to repayment of interest-bearing loans. The last slide I will look at is group debt on Slide 12. This slide considers debt on a look-through basis, including share of associates' debt. A third column in the top chart illustrates the impact of the acquisitions announced on February 17. At 31 December 2019, the leverage ratio was 1.3:1, the gearing ratio was 19.9% and the interest cover ratio was 10.4:1. Post completion of the acquisitions, these ratios on a pro forma basis at the end of FY '20 would be a leverage ratio of 2.5:1, a gearing ratio of 33% and an interest cover ratio of 8.4:1. Post completion, these ratios will trend back downwards organically. And post completion, we will have remaining debt capacity of $44 million. Thank you. Over to Mike.

Thanks, Mark. Last week, on the 17th of February, we announced that AUB has agreed to acquire the balance of shares in the MGA Whittles group for $140 million. This price is reflecting an EBITA multiple of 10x, and the details are reflected on Slide 14. We anticipate this will be 8% EPS accretive on the basis we had owned it for the full year FY '20. As disclosed previously, the transaction is being funded by a combination of cash and the issue of fully paid shares. Slide 15 highlights the quality of the MGA Whittles group. MGA Whittles has achieved a 9% compound annual growth rate in revenue and operates at a significantly higher profit margin than the rest of the Austbrokers portfolio. As a result, we anticipate additional synergy benefits can be achieved by leveraging the MGA Whittles processes and operations to improve efficiency in the Austbrokers network. We have not included any revenue or cost synergies in our accretion calculations. As described on Slide 16, on the 17th of February, we also announced the acquisition of 40% of BizCover for an amount of $132 million. Given the calendar year '20 forecast EBITDA for BizCover of $17.7 million, this price implies a multiple of 18.6x. Considering that BizCover has delivered revenue growth of 35% compound per annum, profit growth of 60% compound per annum; and is a highly profitable business with margins substantially higher than the Austbrokers portfolio, we are comfortable that this is a reasonable acquisition multiple. The consideration is payable in cash and funded from AUB's debt facilities. In addition to the growth in BizCover profits, AUB is targeting additional synergy benefits which will positively impact future performance. If we had owned the BizCover holding for the full year, it would have added 3% to adjusted NPAT for financial year '20. BizCover has enormous capacity to grow in the micro SME segment, a very large and expanding segment with little overlap to Austbrokers' target clients. Slides 17 and 18 describes this opportunity and why we believe that BizCover has significant and continuing revenue and profit growth potential as well as further synergy benefits across the AUB Group. At the FY '19 results presentation in August, we included a list of 6 execution priorities that we focused on and we've included an update on each of these in Slide 20. These strategies are designed to improve our growth and profitability. I'd like to specifically discuss 3 of them, namely: Redefining the risk services strategy; optimizing our portfolio, and delivering market-leading tech capabilities. Firstly, risk services. As you've seen, business performance and specifically Health and Rehabilitation Services has improved. This has resulted from key actions that management took into diversifying services, improving utilization and reducing costs. We are working with the relevant management teams to further improve business performance and to determine a medium-term strategy for each business. Secondly, we've made progress with optimizing and consolidating the Austbrokers portfolio. Specifically, we have formed a new merged operation, Austbrokers Comsure, from the merger of 3 Brisbane-based businesses, namely Comsure; Citycover; and a newly acquired business, Bestmark, to form our largest operation in Queensland. Secondly, we've consolidated Austbrokers Central Coast into Markey Insurance Brokers, another Austbrokers member. And thirdly, we have transferred portfolios between Austbrokers members to enhance the alignment of products and segments. And finally, technology. We're in the process of rolling out 3 different solutions. Firstly, to improve our core broking system functionality. These updates, known as CBS+, have already been rolled out successfully to 19 Austbrokers members. Secondly, to continue with project Sentinel, the implementation of a new agency platform. This previously challenged project is now on track and went live with the first agency in January, with further rollouts for the rest of 2020 and to complete in '21. Slide 21 describes our third and most ambitious technology initiative. Austbrokers Express Cover is a quote-to-bind system for use by Austbrokers members to simplify and improve the buying experience for their customers. The platform is powered by BizCover technology but is distinct from BizCover and designed for use by Austbrokers members to assist brokers at the point of sale with the customer. Express Cover is already in pilot with several members and will be launched nationally to the network at the Austbrokers conference in March. Over the next 4 years, we are targeting achieving an annual placement of $450 million of premium and 350,000 policies on the platform. I'd like to emphasize that the costs for these new technology initiatives are contained within our normal cost budgets. The cost of CBS+ and Express Cover are being fully expensed with no costs being capitalized. The Sentinel agency project continues to be capitalized and amortized in accordance with the historic treatment for this project. On Slide 23, we describe the upgrade to guidance in relation to both adjusted NPAT and EPS. The top waterfall describes the walk from our original guidance of 8% to 10% growth in adjusted NPAT to our new upgraded guidance of 16% to 18% growth. The upgrade arises from both an expected increase in organic growth together with the impact of additional forecast profits from BizCover and MGA Whittles. This will represent a level of profit growth for the AUB Group not seen since 2013. We have also included an equivalent waterfall, reflecting the impact to EPS in FY '20, noting that EPS growth in the current year is impacted by the full effect of the FY '19 share issuance. In summary, our strategies to increase AUB's long-term earnings potential are delivering encouraging early results. First half growth in adjusted NPAT of 25.3% together with the execution of 2 major complementary acquisitions which enhance AUB's scale and capability have underpinned an upgraded expectation for full year growth of adjusted NPAT of 16% to 18%. Furthermore, we anticipate significant additional revenue and cost synergies from the recent acquisitions. And these, together with other opportunities to optimize the portfolio, deliver technology-driven efficiencies and to improve products and services to brokers, are expected to drive long-term growth and outperformance. There is significant latent potential in AUB's network of businesses. The acquisition of MGA Whittles and BizCover will enable us to unlock this potential. This is a significant moment in AUB's progression as a company. We have taken steps to significantly enhance the long-term performance potential of the group and have already made material progress to achieve this. Thank you very much. And we'll now open the call for questions.

[Operator Instructions] Your first question comes from Nicolas Burgess of E.L. & C. Baillieu.

Just a couple of questions. Firstly, just on margin performance, operating margins, I guess, for the group but specifically probably for agency. With rates up, as you say, 6-ish percent, it's probably the best opportunity for the business to demonstrate some good operating leverage. In agency, that -- in particular, that hasn't happened. So how should we think about operating margins? Are they at a level where it's hard to get them higher? Or I know there's a number of one-offs across the business which you've called out as they hampered operating margin performance. How should we think about the group from that perspective?

It's Mike here. So the agency is really a tale of 2 cities almost. The -- we've had very strong performance in the agency business, apart from our strata businesses. And so the challenge is that the business performance is offset by a very low-margin performance, where frankly our costs are high and not variable and our revenue has come off in the strata piece. So subject to fixing that, we see the agency business as having the opportunity to have the improved underlying EBIT margins when we address the strata piece. And the strata component of the business has been a longer hangover than we'd anticipated. We're now envisaging it will take us until the end of the financial year to remediate that part of the business.

Okay. Just a question on rates. The general feedback across reporting season from the underwriters seems that rates in Australia, if anything, is accelerating slightly. Based on your guidance, it doesn't appear that you hold quite the same view. I mean I guess the difference between the 2 is not huge, but any further sort of commentary around the next 6 or 12 months for rates?

So our forecast assumption is -- where we called out 6.2% rate increase half-on-half, we're anticipating a 5% -- we've assumed a 5% to 6% rate increase for the next 6 to 12 months.

Yes. Okay. And then are there any particular reasons why New Zealand seems to have flattened out late in the half, as you mentioned?

Yes. So we actually anticipated and, in fact, called out at the full year, we called out that we were anticipating very low single-digit increases, 1% to 2% for New Zealand. And that's really aligned with our expectation. So following remediation -- New Zealand entered into a remediation mode, the insurers there, earlier than Australia as a consequence of, [ they said ], natural disasters they had several years ago. And as a consequence, they have remediated their portfolios and now are moving into a market share growth phase. And because [ NZI ] has such a large market share in New Zealand, they've been first to move. And so as a consequence, simple analogy, but when an insurers come out of a period of remediating or move to market share growth, it tends to manifest itself in 0% rates. And so we are finding renewals with no increases at the moment in New Zealand.

Okay. Just last question for me. So you called out $2 million of cost savings at the head office level. Is this something that we would expect would be reinvested back into the business or something that should fall to profit, say, next year?

Yes. We do anticipate that the majority of that will fall through to profits for the next year.

Your next question comes from Tim Lawson of Macquarie.

Just in terms of the just focusing on the execution around MGA and BizCover. I mean, historically, you've been more investor in the sort of [ either driver ] model, but you're talking about rolling out various parts of what you learn from MGA across the network while having taken some costs out of the head office. I'm trying to understand what that means around execution and how you're going to effectively put the resources to that.

Tim, so probably emphasizing what we're not doing is taking what we learned with MGA and applying it elsewhere. This is about looking for portfolios, in some cases existing portfolios within the business, in some cases bolt-ons, and leveraging MGA's platform, i.e., putting portfolios and business into MGA, adding to MGA's scale. And so it's increasing the scope and scale of MGA to deliver those savings.