AUB Group Limited (AUB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the AUB Group FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Emmett, CEO and Managing Director. Please go ahead.

Good morning, everyone, and thank you for joining Mark and I this morning. FY '20 was a really important year for AUB Group. Following a disappointing FY '19, we set out to not only improve the short-term financial performance of the group but also to put in place strategies that enable the group to achieve strong double-digit growth in underlying NPAT for the medium and long term. COVID-19 has had only a muted impact on the business, although we've been very sensitive to the effect of the pandemic on our teams and our clients, and we've taken a variety of actions to assist them wherever possible. I'm pleased to report that we performed very well. We made good progress against our objectives during FY '20 as reflected on Slide 2. Our underlying net profit after tax of $53.42 million grew by 15.2% from FY '19. This was our strongest growth in profit since 2013. Both organic and acquisition growth were strong contributors, and they were complemented by the benefit of our profit improvement plan, which focused on head office costs in FY '20. The acquisition of BizCover has performed well and contributed $1.8 million towards our FY '20 underlying NPAT before taking into account increased corporate funding costs and their JobKeeper receipts. At the beginning of FY '20, we outlined a set of execution priorities for the year. And we've made pleasing progress against these, and we'll continue focusing on them for FY '21. The momentum from these priorities as well as the resilience demonstrated in the business enable us to provide guidance for FY '21. And based on our forecasts, we expect to achieve an underlying net profit after tax for FY '21 in the range of $58.5 million to $61 million, and this represents growth of 9.5% to 14.2% compared with FY '20. On Slide 3, we've included a waterfall showing key elements that have resulted in the improved performance. Organic and acquisition performance is covered in more detail later. However, I would like to highlight some key elements shown on the waterfall. Firstly, the organic growth of $4.1 million was actually reduced by a further $4.1 million due to the impact of lower interest rates, AASB 16 lease adjustments and an increased STI provision. The profit improvement program is shown separately and delivered $1.5 million in savings during FY '20, and these represent full year benefits of $2.8 million. We had some technology investments, which have reduced the underlying net profit after tax by $0.8 million, and we've disclosed separately the JobKeeper receipts, which increased our profits by $1.3 million. The majority of these receipts relate to Procare and BizCover. We've also shown the impact of $1.8 million worth of items that could be considered one-off costs namely redundancy costs incurred during the year and an increase in the lapse provision to account for the current economic uncertainty. I'd now like to hand over to Mark to describe this financial performance in more detail.

Thank you, Mike, and good morning, everyone. On Slide 4, we have summarized the FY '20 divisional performance, including revenue, EBIT margin and attributable profit before tax for each of our operating divisions. Key items I'd like to highlight are the improvement in EBIT margins for Australian Broking and for Health and Rehab. Our Australian Broking division performed strongly, delivering growth of 14.6% in pretax profit, underpinned by a pleasing improvement of 130 basis points in underlying EBIT margin. The margin improvement is a result of our ongoing focus on organic growth and increased efficiency, plus the impact of our 40% investment in BizCover as well as an increase in commercial lines insurance premiums. New Zealand performed well, delivering a 31.9% increase in pretax profit, which was in part due to the full year impact of our additional 50% acquisition of BWRS in FY '19. The Agencies division was profitable, and the majority of businesses in the division performed well. However, this was offset by ongoing weakness in Strata, together with the impact of COVID-19 on the hospitality industry. In response, we're implementing a series of initiatives to enhance performance, which have made good progress, and we anticipate seeing the benefits flow through in FY '21. A strong focus on Health and Rehabilitation Services in FY '20, resulted in a significant uplift in the performance of the division, with improvements in revenue and a sharp reduction in expenses. We exited our investment in Allied Health on the 1st of April 2020, and we're very pleased with the progress made to transform the performance of Altius, which has strong momentum entering FY '21. Not specifically reflected on this slide, but the strategic priority to streamline our head office and reduce costs has so far delivered an annual run rate benefit of $2.8 million after tax, complementing our divisional performance with further benefits to be delivered in FY '21. As we are well aware, 2020 has been a difficult year so far for the economies in which we operate and more broadly. At AUB, we've been comforted by the innate resilience of our Australian and New Zealand businesses. The diversity of our businesses and our client base, combined with our financial strength, has meant we have been able to provide a robust response to the impacts of the COVID-19 pandemic, and this is reflected on Slide 5. Our clients placed their trust in us, which is reflected in a historically high premium retention rate of 92%, and in the past few months, there have been substantial increases in inquiries from new clients and new brokers. We remain highly cash-generative with a strong balance sheet to support our growth aspirations. We have not been complacent about the difficulties that COVID-19 is causing for our people, our network and the communities in which we operate. Across our network, we have prioritized retention of staff, ensuring that they're kept secure and employed. We're also pleased at the efficient way in which our teams and systems seamlessly transitioned to a work-from-home model. We've embraced the new normal and implemented a 4-in-1 work-from-home trial, enabling teams to collaborate in the office 1 day per week. For many, we anticipate this will become their new normal. A range of technologies, including workstation booking and dynamic staff engagement tools together with policies that enable teams to receive financial incentives mean our people are working productively whilst sharing in the savings the company will experience. Our aim is to fundamentally change how staff engage and how we engage with our clients by using technology more creatively than ever before. We envisage that our physical footprint will continue to reduce, providing further opportunities to make investments in people and technology and reduce premises spend. Slide 6 provides more detail on the cash movements of the AUB corporate entity. We can see a strong operating cash flow of $50.6 million. It is also worth noting that the group's balance sheet remains strong as we ensure the debtors books remain clean, prudently managed capital in response to an uncertain business environment and increased our long-term corporate debt facility by $100 million. At the end of FY '20, we had access to $94 million of cash and debt. The strong cash generation and balance sheet strength positions us strongly to fund organic growth initiatives and disciplined acquisitions in FY '21. On Slide 7, we discuss shareholder returns. As a business, we're committed to improving returns to our shareholders. We can see that the group's underlying earnings per share grew by 8.7% in comparison to FY '19 with the 15.2% year-on-year growth in underlying net profit after tax, partially diluted by the full year impact of the equity issuance in FY '19. The Board has declared an increased final dividend of $0.355 per share, giving an 8.7% increase in total dividend for FY '20 to $0.50 per share. Thank you. I look forward to speaking with many of you in the coming days and would now like to hand back to Mike.

Thanks, Mark. Slide 8 lists the execution priorities we outlined at the start of FY '20 and progress against these has been strong. In addition to the BizCover investment, we made several other bolt-on acquisitions and varied our shareholdings with existing AUB network members. Our focus and progress on leveraging technology as a key strategic driver is well underway, and I'll talk further to these on Slide 10. I've showed the progress on Item 3 with reference to the profit improvement plan, but I'd now like to highlight progress for Items 4, 5 and 6 on this slide. Firstly, Item 4. Our approach to pairing and merging businesses within the AUB network has led to a number of consolidations. We are already seeing improved margins from the strategy. In FY '20, we had 94 distinct businesses in the network. And the actions we've put in place will mean that by the end of FY '21, this number will have consolidated to about 75 operating units, enabling us to increase scale, improve efficiency and enhance our specialty offerings for clients and staff. Item 5, the restructure of Risk Services and the resulting focus on Health and Rehabilitation businesses resulted in a significant uplift in the performance of the division. As part of this, we realigned Procare with Australian Broking to enhance our core claims proposition. We exited Allied at the start of Q4, and we made strong progress with the evolution of Altius. The division has achieved improvements in revenue and a disciplined reduction in expenses during FY '20 and is enjoying strong momentum as we enter FY '21. As previously mentioned, we anticipate exploring options regarding our investment in Altius during FY '21. And finally, Item 6. We've worked closely with our insurance partners to enhance our proposition for clients. In addition to new arrangements for ExpressCover, which we've agreed with 6 insurers, we've also announced 2 significant new agreements with 2 of our major insurance partners that provide much improved benefits to clients and brokers. Turning to Slide 9. Our investment in BizCover has positioned us for success in the attractive micro SME segment. Although the segment was impacted in the early stages of COVID-19, it has also been the first segment to respond positively as COVID-19 uncertainties have waned. The investment in BizCover has also enabled us to secure the technology that underpins our ExpressCover platform. BizCover has performed well since acquisition and was accretive in FY '20, and we are seeing strong performance and anticipate that the investment will prove to be accretive in FY '21 and strongly accretive in future years. Slide 10 summarizes our technology progress during FY '20. The launch of ExpressCover, our new high-volume quote platform, and Sentinel, our new underwriting agency system promised significant improvements in process efficiency and an enhanced user experience for the benefit of both customers and AUB teams. These systems are already live with 25 brokerages already using ExpressCover to bind policies, and Sentinel is already in use on a day-to-day basis in 2 agencies, piloted in a third just recently and with further rollouts scheduled for the rest of this year. In addition, we've leveraged improvements to our core broking platform, CBS, made by individual members of our broking network over the years and have now rolled these out to the benefit of numerous other members of our network. As shown on Slide 11, our focus for FY '21 is to continue the momentum built in each of these areas and deliver further benefits to improve the group's profitability. Given the progress with Risk Services and the Health and Rehabilitation businesses, we have replaced Item 5 with a new focus, which is to improve the performance of the Insurance Agencies division. Additionally, I'd like to highlight a very recent bolt-on acquisition that we've completed. Effective 1 August, we acquired 73.15% of Experien. Experien is a specialty life and general insurance broker focused on the medical and dental professions. This is not a material acquisition for AUB Group, and we would ordinarily not disclose this. However, we thought it beneficial, given the timing of the transaction and also the part of the consideration is for AUB scrip. We exited FY '20 with strong momentum and are seeing early evidence of this continuing in FY '21. As described on Slide 12, we are currently projecting underlying net profit after tax for FY '21 of between $58.5 million and $61 million, representing growth of 9.5% to 14.2%. We've prepared this guidance based on a number of assumptions listed on Slide 12. However, I'd like to highlight a few of these. Firstly, we are predicting that premium rates will increase in the range of 5% to 6%. We're assuming the COVID-19 impact on the economy and on the Group will be the same as the impact felt from COVID during the second half of FY '20. We've assumed in our forecasts that we will continue to make smaller bolt-on acquisitions and to vary our shareholding and members of the AUB network. However, any major acquisitions, which are material to the group's results, are excluded from this guidance range and will be specifically disclosed if and when they occur. As always, I'd highlight that June is a significant period for renewals for the group. And we are assuming that renewals in the June 2021 period will perform in line with our historical performance. Thank you. And I'd now like to hand back to the moderator for questions.

[Operator Instructions] Your first question comes from Tim Lawson with Macquarie.

Just, Mike, on that Slide 12, you've got that split out, the 4% to 6% acquisition growth. Can you just talk about how much of that is already completed and how much you're assuming within small bolt-on acquisitions in that component?

Thanks, Tim. So it's either all completed or it's all known. So we're not speculating that we may or may not make some additional ones. So these are planned increases, and in fact, it's a net number. So it's increases and decreases of shareholdings already discussed and agreed with network members or other smaller bolt-ons that have either taken place already or obviously includes things like BizCover, et cetera.

Okay. I think you used the word muted sort of COVID impact in the last 6 months. Can you just sort of talk about your thinking around impact of stimulus given you're assuming the same sort of impact from COVID in the guidance?

Yes. So firstly, obviously, on the smaller end of the SME market, the stimulus has been really important. And so the opportunity that the government has provided the economy through additional stimulus and -- although it's a more concentrated version of JobKeeper, the fact is that the -- our clients that are most susceptible to it will be supported by that. So there's also a piece which is around confidence. I mean fundamentally, insurance is a required expense for operating businesses. And so our risk is more around if we have clients that cease operating. So the -- our current view of the macroeconomic environment is that while it will be challenged, that, by and large, our client base will not be impacted by it materially to the extent where it rolls through to them not being able to continue operating.

Okay. And just 2 quick questions. You talked about an increase in the new broker inquiries and also new agreements with 2 insurers. Can you just expand on what you meant by -- or maybe some detail behind that sort of new broker inquiries and expand on what you meant by that new agreements with the 2 insurers?

Yes. So the new broker inquiries. So from time to time, we will have unsolicited inquiries from independent brokers who are interested in joining the AUB network and particularly the Austbrokers network. The number of those unsolicited inquiries has increased in Q4 compared to other periods of last year and the previous year. So that's what I referenced around that. So it's opportunities for us to explore considering additional members to the network. In terms of new insurer agreements, so we entered into 6 new agreements in the last 6 months -- sorry, 8 new agreements. Six of them relate to ExpressCover. So these are pretty standard agreements entered into with 6 insurers in terms of them placing business and participating in the ExpressCover platform. And then 2 other agreements we entered into with 2 of our major insurance partners, very different agreements, which relate to a fundamental reshaping of the way in which we partner with them for business. So these are agreements that affect the type of product and premium options that we have for our clients, the type of remuneration that our brokers enjoy and the type of terms and the periods of those relationships with the insurers.

And what happened to the remuneration side?

Well, it's -- I'll be slightly sheepish and say delightedly it clearly improved for our benefit and for the insurers' benefit.

And how does that work?

Well, it goes up and we'll give them more business.

Your next question comes from Julian Braganza with JPMorgan.

Just a quick couple of questions from me. So just in terms of the premium rate increases, I think you said you had achieved about 6.3% of rate increases over the period. And I think your guidance is assuming 5% to 6%. So I mean that implies basically a 0.8% upside if you take the current position. Just in terms of the reasons why you've been slightly conservative there in terms of what you're assuming. And also -- and this is thinking about the impact and sensitivity to NPAT to FY '21. What would an additional 1% on rate do to that?

Thanks, Julian. So firstly, if you look at the last 18 months, I've termed it to be a slightly conservative version of the rate increase piece. And the reason is 3 things: one -- and I'd sort of like to say, I think I've been more accurate than some of my colleagues around the market. So we did see 6.3%. However, if you took out some unusual reverse trending in the last 6 weeks of FY '20, the general slow progression has been a slight decrease each month. And so what we're not sure about is will the increase in terms of the rates, i.e., the increased -- the acceleration of the increase continue. Our view is that actually, it was an unusual June phenomenon. And that -- therefore, the slight decrease, the second half being lower than the first half in terms of the rate -- of the premium rate increase for renewals, that we anticipate that, that will continue. And therefore, 5% to 6% is where we see the rate increases. In terms of your question around sensitivity, so at a very broad brush, about 60% of our income relates to commission rates that correlate with premium rates. And so about 60% of our income is obviously, therefore, sensitive to a change in the premium rate increase. So that's the first thing. I think the other point I'd make, however, is that there isn't a direct correlation because what we do find is that in periods of significant rate increases, so -- although we're talking about a general statement across all premium rate increases, in reality, there are some policy classes and risk classes where the rate increases are substantially higher than that. We do find that our brokers tend to use commission rates as a way of ameliorating the impact on clients. And so we'll actually have a lower commission earn rate. Ironically, when rates are going up more slowly and lower increase rates, we'll actually have a higher earn rate from our commission. So we find that our response to commission -- premium rate increases is again quite muted through the cycle. So while there clearly is an element of upward pressure, we don't see that as a material component to the increase in revenue.

Okay. Great. Now just to touch briefly on the impacts on the FY '20 result. I think in that waterfall chart, you called out a number of one-off impacts. I think it was a $1.3 million benefit from JobKeeper and then some impacts from redundancies and a lapse provision, which was worth about $1.8 million. Is there anything else, and particularly in that technology investment bucket, that we should be thinking about as being one-off that perhaps won't come through in the '21 numbers? The reason I'm asking is because I just want to get a very accurate underlying starting position for '21 in order to get the right number for next year.

Yes. So Julian, I guess we're nervous of -- I referenced them as one-offs, particularly the redundancies and increased lapse provision. Firstly, I'll comment -- so the short answer is, apart from what we've called out, we don't believe that there are other unusual items worthy of emphasizing. I would make 2 comments about JobKeeper firstly and then what I've called one-offs. So firstly, on JobKeeper, we anticipate -- so again, it's -- there's no direct certainty of this. But based on the current articulation of the rules, we would envisage those businesses that receive JobKeeper allowances in FY '20 will receive roughly the same amount in Q1 of FY '21 because the JobKeeper structure as it's currently positioned or articulated continues until 29th of September. And then JobKeeper 2.0 kicks in, and then we don't believe that we qualify for any of those. So a reasonable assumption would be that a large proportion of the JobKeeper allowance we received in FY '20 we will receive again in FY '21, in Q1, but it won't continue after that. In terms of the redundancies and increased lapse provisions, it's a very difficult piece for me to comment on in terms of whether these are one-offs. And the reason I said it, if I talk about the lapse provision. So this is an increase in an annual lapse provision that we provide for. It is based on our view that there is increased uncertainty and risk around cash receipts. Now the way it works -- and apologies if I'm [indiscernible]. So the way it works is we'll raise the revenue and the premium for an insurance policy. But if 6 weeks later or 8 weeks later, we don't get the cash for it, then the insurer cancels the policy, and we reverse our commission or whatever income is related to that. And hence, why we call it a lapse provision because it's basically a policy lapse that results in us reversing income. Now what's relevant here is, clearly, this income we recognized in FY '20 that would potentially reverse in FY '21. And what I don't know is when we review this at the end of Q1 or at the end of the first half, whether we will conclude that the lapse provision should reduce or increase. And therefore, it's possible that we will maintain this lapse provision at that level for the next 12 months. So therefore, it's -- while it wasn't something, it's different to in FY '19, for example, it's hard for me to categorically say it's a one-off. And then secondly, redundancies, again, we're disclosing this. I know that there are various ways of disclosing redundancies. We'd like to disclose this so that you can understand that the $1.5 million profit improvement program is net of the redundancy costs. And then you can conclude from that what the annualized benefit is. It is possible or probable that we will have further redundancies in FY '21. However, these will relate to different benefits and different savings, which we'll then disclose separately either in the half year or the full year result.

Okay. No, that makes sense. Perfect. And last question for me. I know you haven't provided any numbers for cost side going into '21. But in terms of just thinking about it, I know you mentioned $2.8 million run rate savings. And if I look at just the tenancy, certainly, I mean, you've done a lot in reducing your geographical footprint for the broker side. And I think there's also been some staff reductions. But in terms of the size of the improvement, relatively speaking, versus '20, is it similar? Or directionally, are you able to provide a bit more context on how we should think about that?

I guess the short, unpopular answer will be no. I think the best planning assumption we can provide is what we've said around the $2.8 million, which is the full year benefit from the profit improvement program. Clearly, as we continue through FY '21, we are continuously looking for ways in which we can improve the margin and the operations. But those are the benefits that we can categorically determine we've evaluated, and we're comfortable to conclude and therefore, provide that guidance.

Your next question comes from Nick Burgess with Baillieu.

Two questions for me. Wondering perhaps if you could give us a little bit more detail around some of the action, remedial action targeted for the agency business and what the sort of expected time line of perhaps a recovery there might be? And then secondly, just on acquisitions, how should we think about MGA Whittles, the proposed -- previously proposed acquisition of the 50% that you did not own? How should we think about that in the next 12 months?

Pardon the interruption. We seem to have lost the presenters. Please stay on the line as we attempt to get them back. Thank you. Please stay on the line as we attempt to get the speakers back in. They are experiencing technical issues. [Technical Difficulty]

Hi, everybody. Thank you. Sorry about that. Our phones all just died, and we couldn't dial back in. It was just disconnecting us constantly. So anyone who's a shareholder in Link Market Services, FYI. So apologies about that. I'm not sure when we dropped off. And thank you for the 427 of you, who texted me to tell me you could still hear me talking. Appreciate that as well. Anyway, let's get going again on questions. And again, sorry, about that.

[Operator Instructions] The next question comes from Jason Palmer with Taylor Collison.

I had 3, if I could. I just want to double-check on this cost-out program that's run rating into next year. So you've -- I think you've delivered $1.5 million of the $2.8 million. Is that the best way to think about those 2 numbers?

That's correct, yes, Jason.

And then we form our own view on the provision for doubtful debts and redundancies going forward?

Yes, that's correct.

Okay. And then a couple of housekeeping questions, if I could. In respect of the divested business, Allied Health, how should we be thinking about the revenue and EBIT or PBT impact to the group from that divestment, I mean, if that's been disclosed?

No, we haven't disclosed. And in fact, we agreed with the purchaser that we wouldn't go into details. Jason, it was a small component. We did disclose some information in the -- I think in Q3 as well, but certainly in the half year. And so the best thing to do is to work back from that and conclude. But again, we've taken into account that reduction in our net acquisition growth component of our guidance.

Okay. And then lastly, if I could, in respect of, Altius, which is left and you've obviously -- in Risk Services, and you've obviously signaled the intention to sort of explore possible options on that business in the next 12 months. Can you give us an understanding on sort of your feel on what type of contribution that sell-down might make towards the group's gross debt?

Well, so we would anticipate of our shareholding -- it's a -- Jason, can I come back to you with that? I just want to make sure I don't disclose what I shouldn't.

[Operator Instructions] There are no further questions at this time. I'll now hand it back to Mr. Emmett for -- pardon me, we do have one more questioner. Terry Tolich with Fisher Funds.

Just for the benefit of those of us who couldn't hear what you were still saying when you dropped out of the call. Can you just give me the response that you gave with respect to the Whittles acquisition coming back on the agenda over the coming year?

Yes, Terry. So pretty much nothing has changed since we spoke about it earlier in the year. So great relationship with the MGA Whittles guys, remains a very important part of the network. Actually, some of the portfolio consolidation pieces we've done with MGA. So we've proceeded with some of our plans, working with MGA in any event. And so we have some portfolios that we have transferred into MGA from other Austbrokers businesses. What we spoke about and what we've agreed is given the current economic uncertainty, we would revisit what our future partnership looks like later in the year, we said later in the year. I think the term we used was kicking the can down the road for a bit. But I guess I'd emphasize rather than there is no definitive, definite deal or date, it's more of a very close working relationship that we continue to work closely and respectfully with each other. And we would envisage wanting to do more together in future.

[Operator Instructions] There are no further questions at this time. I'll now hand it back to Mr. Emmett for closing remarks.

Thank you very much. And thanks, everybody. Look, I'm terribly sorry about the technology challenges we had in the course of it. But I just wanted to reemphasize, we exited FY '20 with strong momentum, and we're seeing early evidence of this continuing in FY '21. The AUB of 2020 has far more to offer current and prospective members of our network and our diverse set of clients. We're very positive about the future. A continuation of affirming premium rate cycle, additional cost reduction opportunities, the increased take-up of our new technology platforms and enhanced insurer agreements will both enable improved income in our operating entities and create a platform for us to deliver consistent double-digit underlying profit growth for the foreseeable future. We're fitter, more complete organization than ever before and we're confident the group is well placed for continued accelerated growth in FY '21 and future years. So thank you again. I look forward to seeing or at least talking to many of you in these unusual times over the next week. Thank you again for joining us this morning. And goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.