AUB Group Limited (AUB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the AUB Group 1H FY '21 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Emmett, CEO and Managing Director. Please go ahead, sir.

Good morning. Mark and I are pleased to be with you this morning to share AUB Group's performance for the first half of FY '21. Before I start, I'd like to thank our brokers and staff, who, despite facing tremendous adversity and difficulty, have pulled together to help us deliver an excellent financial result. I'd also like to acknowledge our clients, whose resilience in the face of the pandemic and their continuing confidence in our services and advice, is crucial to our business. We've summarized the key messages for our first half year FY '21 performance on Slide 2. The main point I'd like to leave you with today is that the benefits of disciplined execution of our strategic initiatives are starting to be realized and will enable us to achieve multiyear profit growth. The underlying net profit after tax for the first half of $30.7 million reflects year-on-year growth of 44.2%, including very strong underlying organic profit growth of 22.5%. We are pleased with this result, and specifically, with the performance across our Australian Broking businesses, together with exceptional revenue and profit growth in BizCover since acquisition. We continue to make very positive progress with our strategic initiatives, including the rollout of our 2 key technology platforms, ExpressCover for broking and Sentinel for agencies. We made further strategic acquisitions and continue to consolidate and scale our existing broking and agency businesses. These strategies have enabled our continued revenue growth and margin improvement and position us well for future performance. In December, we announced the restructuring of the agencies, in part enabled by the acquisition of 360 Underwriting Solutions. We see significant potential to grow agencies in the current market and also to improve agency profit margins through consolidation and technology deployment. We anticipate the financial benefits of this to flow through in FY '22. As announced in January, we've agreed the sale of Altius and expect this to complete before the end of April. This finalizes our strategic withdrawal from health and rehabilitation services, having exited Allied Health in April 2020. In November, we upgraded our underlying net profit after tax guidance to a range of $60 million to $62 million. Given our strong performance in the first half and the momentum we're observing in the business, we are further upgrading our guidance for FY '21 to be in the range of $63 million to $65 million, reflecting growth in FY '20 underlying net profit after tax of between 17.9% and 21.7%. I'll talk more about guidance later. Slide 3 shows the high-level results for the first half. Our focus has been to improve EBIT margin by efficiently growing revenue whilst also leveraging scale to reduce costs across the business. During the first half, we delivered strong revenue growth of 14.3% whilst also improving the underlying EBIT margin by 640 basis points to 31.3%. This margin improvement, together with savings from the head office cost reduction program, have resulted in a strong underlying net profit after tax of $30.7 million for the half, an improvement on H1 '20 of 44.2%. The Board has determined that an interim dividend of $0.16 per share be paid, an increase of 10.3% on the prior year, reflecting our confident outlook. Slide 4 summarizes the financial performance of each division. As you'll note, the performance of Australian Broking is excellent with strong revenue growth and a significant improvement in profit margin to 32.9%, an improvement of 740 basis points. Revenue growth arose from a combination of factors, including increased remuneration from new insurer arrangements, including on the ExpressCover platform; increases in products and services delivered to clients; and revenue from new clients and partners. In New Zealand, our platform and brand position us well to take advantage once the market returns to growth. At present, premium rate growth in New Zealand is flat. However, we remain on the lookout for acquisitions to complement our current geographic footprint as well as to expand customer segments. At the AGM, we foreshadowed that several of our underwriting agencies are performing poorly. There are varying reasons for this, including top line impacts from COVID-19, issues with binders, together with the lack of operational efficiency, driven by subscale and manual processes. Our acquisition of 360 Underwriting, together with related synergy benefits, will reverse this trend. In addition, our operational improvements and deployment of the Sentinel technology will reduce our cost to serve and enable both revenue and profit margin improvements in agencies. In the medium term, we anticipate the profit margin in agencies to exceed that of broking. Given our imminent exit from health and rehabilitation services, we will cease to report this as a division. In acknowledging the strategic importance of BizCover and our related investments in platforms like ExpressCover, we will commence reporting these platform businesses as a separate division in August. Slide 5 unpacks the excellent performance in Australian Broking, which is clearly our key profit driver. Our strategy for Austbrokers has been to implement changes that grow revenue and improve profit margin. And on this slide, we've depicted EBIT margin improvements already achieved as widening jaws and provide examples for each strategic initiative. I'll run through some of the first half achievements now. We're making good progress with consolidating businesses in our network to improve scale and specialization. Recent examples include the establishment of new partnerships with MGA to run the InterRISK SME portfolio and, separately, to run the HCI broking business with further examples in the second half. Our acquisition approach is delivering strong benefit to the group, adding not only profits but also enhancing our capabilities. Our investment in Experien has significantly enhanced our market position in the medical and dental industries and strengthened our capability in life advisory. Austbrokers Comsure is now well positioned. It was created by merging CityCover and Comsure and acquiring Bestmark. Austbrokers Comsure is now the leading broker and risk adviser to the motor dealership industry in Australia and the largest Austbroker in Queensland. Our implementation of technologies to support our brokers is paying dividends. ExpressCover is now widely used by Austbrokers to process high volume, low premium value policies for clients. Volumes placed on the platform are in line with our first year targets, albeit that we set these at relatively modest levels. We have also recently launched a range of bots and automated interfaces to further improve customer service and to reduce manual effort for brokers. Our early success in identifying and removing costs, both at the head office level and in businesses in which we are majority owners, has continued. In the first half, we achieved after tax savings of $1.2 million against our full year target of $2.4 million. The reduction in central costs enabled us to also reduce recoveries to partner firms assisting the EBIT margin improvements across the network. As we've said previously, these initiatives are about building multiyear momentum in profit growth. Whilst we are pleased with progress to date, we're confident that each initiative will continue to deliver benefits over a number of years with continued improvement in profit. Our investment in BizCover was an important strategic step for AUB. We include more detail on the business in the slide deck to help you understand its performance and tremendous growth potential. Slides 6 to 8 describe the performance of BizCover since our investment as well as other additional information about the business. On Slide 6, you'll note the excellent growth in revenue and profit achieved by BizCover since our investment in February 2020. We also describe, on the right side of the page, current initiatives underway to ensure the sustainability of growth in the business. These include current initiatives to expand in New Zealand as well as to increase BizCover's share of wallet for existing customers by offering personal, home and motor on the Australian platform. Slide 7 summarizes why we believe BizCover is special. BizCover's market position is the consequence of 10 years of technology investment and business model refinement. This is not to be underestimated. The business has a massive addressable market in Australia with strong prospects for growth in New Zealand and other international markets. Exceptional NPS scores at 71 in December are testament to the service levels and value proposition offered to customers. At 31 December 2020, the business had an attractive lifetime value to customer acquisition cost ratio of greater than 3. On Slide 8, you'll see a graphic depiction of the 4 primary channels through which BizCover delivers services, including the Austbrokers' exclusive ExpressCover platform. Currently, there is a comprehensive commercial insurance product offering to clients, and this will be extended to include personal lines offerings later in 2021. These products are offered in partnership with a strong portfolio of insurance partners shown at the bottom of the slide. Slide 9 reflects the new structure to reinvigorate agencies, as announced in December. We're making good progress, although we do recognize that our agency's division is subscale. In order to address this, we've restructured the division into 3 parts with the largest, General Commercial, spearheaded by our investment in 360 Underwriting Solutions. We will look to continue to expand agencies across each of these 3 parts. Improvement in performance of the agencies division is a cornerstone of our profit plans for FY '22. The investment in 360 Underwriting Solutions is an important element of these plans and will enable not only growth from the acquisition itself but also from synergy benefits that crystallized during FY '22. On Slide 10, we cover the exit from health and rehabilitation services. You'll recall that we sold our ownership in Allied Health in April 2020, and as announced in January 2021, we've agreed the sale of the Altius Group, which we expect to complete before the end of April. AUB Group's cash proceeds from the sale net of tax and transaction costs will amount to $57 million. These proceeds will be used to reduce AUB group's corporate borrowings and provide capacity for acquisitions. This will have the effect of reducing our banking covenant ratios, gearing to circa 30% and the leverage ratio to circa 2:1. I'd now like to hand over to Mark.

Thank you, Mike, and good morning, everyone. On Slide 11, we've provided a high-level waterfall, reflecting key contributors to first half profit growth of 44.2%. I'd like to highlight a few items as follows. Strong organic growth contributed $4.8 million to underlying net profit. This resulted from both increased revenue as well as carefully managed costs. $3.5 million of the $4 million growth in profits from acquisitions was contributed by BizCover and Experien, both of which are proving to be excellent acquisitions. JobKeeper receipts of $1.7 million are disclosed separately. It is worth noting that only 5% of JobKeeper receipts relate to companies in which AUB Group has a controlling stake and also, that the majority of receipts, circa $800,000 relate to Procare, a people-intensive services business, which was particularly impacted by COVID-19. Excluding JobKeeper, first half underlying net profit after tax growth on the first half of 2020 was 36.2%. JobKeeper receipts by the group substantially ceased at the end of September 2020. Our corporate cash flow for the half is set out on the following slide. The information presented covers the period to December 31, so it does not incorporate the Altius sale. You'll note ongoing strong operating cash generation at the group level reflecting the health of the underlying business as well as our ongoing monitoring of cash flows across the group. Borrowings at group entity level during the half amounted to $40 million, which, along with strong operating cash inflows, funded acquisitions and the payment of dividends to AUB shareholders. At the end of the period, our gearing ratio was 34% and leverage was 2.3:1, both well within covenant requirements of 45% and 3:1, respectively. Shareholder returns are set out on Slide 13. Underlying EPS growth for the half was 43.2% versus the prior corresponding period. In view of the strong performance and the healthy operating cash outcome, the Board has determined that an interim dividend of $0.16 per share be paid, an increase of 10.3% over the first half of financial year '20. Please note that further detailed financial and business information is included in the appendices to our presentation released this morning. I would now like to hand back to Mike to discuss guidance and to close this presentation.

Thanks, Mike. I'm now on Slide 14. As we've described, we delivered stronger business performance in the first half than forecast. The continuation of the momentum into the second half gives us confidence to upgrade our guidance for the year. In the waterfall chart at the top of the slide, we've depicted our estimate of the contribution for the second half from 3 profit components, namely organic, premium rate and acquisition. As you'll note, the vast majority of profit during the second half, namely $26 million to $28 million, is from organic performance. We've estimated that premium rate increases will generate a contribution to underlying net profit after tax of $2.9 million in the second half. This is based on assumed rate increases in the range of 5% to 6%. The estimated profit contribution from acquisitions of $3.4 million is primarily from 360 Underwriting and Experien. In the graph at the bottom of the slide, we reflect, for completeness, the guidance upgrades provided during the year. Considering first half performance and progress with strategic initiatives, we now expect FY '21 underlying net profit after tax to be in the range of $63 million to $65 million, representing growth on FY '20 of between 17.9% and 21.7%. I'll now hand back to the moderator to open the line for questions.

[Operator Instructions] The first question comes from Naveen Patney from Evans & Partners.

Congrats, firstly, on the great set of results today. I had just a couple of questions on your guidance, firstly. In terms of the first half, in terms of the guidance, you assumed rate increases for the full year around 5% to 6%. But in the first half, you noted rate increases on commercial lines of 7.4%. So are we talking like-for-like here on rates? And if so, why do you expect the rate [ of Harding ] to slow into the second half?

Yes. Thanks, Naveen. So obviously, pleased with the results. So thank you very much. So again, this is based on a bunch of things. Historically, we found that because of the May-June weighting and the March renewals in New Zealand, the second half effective rate increases are normally lower than the first half. But the reason we called out the premium rate impact in our guidance for the second half specifically and explicitly is because it's an assumption. So that $2.9 million after-tax impact on underlying net profit that we've called out in the guidance for the second half is based on a calculated 5.5% premium rate increase. We thought the first half, at the beginning of the first half, we see 5% to 6% as well, and so we undercooked it. And so it's possible that, that continues in the second half. Probably worth emphasizing though, we're a relatively conservative organization naturally in terms of the way we forecast. There is obviously economic uncertainty in the fourth quarter as a result of JobKeeper receipts ceasing for the broader economic environment. By the end of the third quarter, no one knows, us least of all, what that fourth quarter looks like. But given its historically important seasonal impact on our business and the importance of renewals, that's factored into our estimate of 5% to 6% as well.

Okay, great. And just a follow-up and a question on guidance. You've sort of explicitly spoken about expected guidance excludes any major acquisitions. So I'm reading between the lines, if there's something there in the pipeline there in the near term. So if you are able to provide some color there on what you're looking at, potential sizes of opportunities. And also just related to that, your headroom now, and obviously, you got quite tight at December '20, but you've sold Altius. So what is the headroom you've got now at a group level for acquisitions?

Yes. Naveen, so firstly, so please don't read anything into the fact that it excludes it. We explicitly call that point out every year, which is to be very clear to make sure that people -- it's not about the fact that we're not going to do acquisitions. It's more about we only include in our guidance what we know and anticipate, right? The unknown is excluded. And the reason for emphasizing that is because a couple of years ago, we were asked about -- to clarify whether our guidance includes, I guess, unknown acquisitions. So to achieve the guidance, we'd need to buy something. And so we've -- we reinforced the discipline we've got, which is we only include in acquisitions, known businesses that we either have already invested in or are small buy-ups or sell-downs in our existing network that we're absolutely certain about. So please don't read anything. It's not code for -- "and actually look out for this big surprise next week." It's literally just clarifying the nature of what we have guided to and what we have estimated.

Okay, great. And also just looking at your guidance, if we look at historic seasonality, I appreciate that Altius comes out in April, but looking at historic seasonality, it would imply your full year numbers could be quite ahead of or at least a bit ahead of guidance. I mean is there any reason to think that historic seasonality of the business is any different this year to prior years?

Yes. So a couple of comments I'd make. The first is 1H '21 is, from a guidance and proportion point of view, an unusual half because it includes a full half of BizCover and Experien, which wasn't in 1H '20. So that's the first thing. But if you were just looking at a half-on-half, firstly, from FY '22, we anticipate that our natural seasonal difference between the first half and the second half is going to reduce because BizCover, for example, as a fast-growing but quite significant part of the business going forward, doesn't have the same seasonal mix that we've historically had. So that's the first point. I think the second one is there are also an unusual set of circumstances in FY '21 compared with FY '20. So -- and the 2 key ones, if you were doing a 2H '21 on 2H '20 comparison, you need to normalize the guidance for the fact that 2H '20 included $1.4 million of after-tax JobKeeper receipts, so an increase of $1.4 million on underlying net profit after tax. And secondly, it included a full 6 months of Altius, whereas we've obviously made an assumption that we'll only have Altius profits for a portion of the third quarter. I mean we're conservative in calling out that we believe the deal will complete by the end of April. So if you normalize for those 2 things -- and then one other phenomenon I emphasize, which is we also are forecasting a fairly sizable increase in the group's insurance costs because what we've seen is financial lines, which is predominantly the nature of the cost of our insurance, the nature of our financial lines insurance is going up. So if you normalize for JobKeeper in 1H -- sorry, 2H '20, if you normalize that out, if you normalize the difference between the Altius piece, you would get to a normalized second half on second half '20 growth of 7.5% to 15.5%. However, if you further normalize for the insurance difference, it's actually somewhere in the order of 10% to 19% normalized year-on-year growth, which is not shabby.

Okay. Great. And my final question was just on BizCover. BizCover is clearly gaining some good momentum, and we're seeing the operating leverage coming through. You've announced that you're looking to launch into more personal lines, but it is a more commoditized space, as you know. But just interested in what you think the opportunity there is on personal lines relative to your existing business.

Yes. So I probably don't want to put numbers to it. I think I'd emphasize, though, this is a proposition. And in fact, this is true across the whole of the Austbrokers business. What we're trying to do is identify the right service model and product proposition for each of our customers. So we're not trying to have a massively increased number of customers. We're trying to increase and deepen the nature of the relationship. So our SME customers in BizCover, so BizCover's customers, are buying personal lines insurance and they're buying commercial lines insurance from BizCover. This is about adding to our share of wallet with those customers. So this is not about trying to go out there and compete and sell personal lines in competition with other aggregators. This is very much about additional cross-sell opportunities to our existing customer base. And the same thing applies using ExpressCover as a platform into the Austbrokers' network. And so do we see it as a strong opportunity? Yes, we do. Are we at a point where I'm comfortable to put numbers or forecast to it? No.

The next question comes from Tim Lawson from Macquarie.

I appreciate the guidance explicitly excludes large acquisitions. But can you just remind us on MGA Whittles and any other deals that didn't complete due to COVID? And has the strategy changed on your end or their end? Just be helpful.

Yes, Tim. So I guess I'd emphasize relationship -- you're tired of me saying this when you asked that question. Relationship between the 2 organizations is fantastic. They're a really important member of Austbrokers. As I spoke about in my presentation earlier, we did 2 deals, partnering with them about how we leverage their operational capability to manage other parts of our existing network. So very, very positive about the nature of the relationship. Clearly, if and when we have further news about any additional change in the equity relationship, we'll let the market know. But for now, it's business as usual.

But there's nothing in either group's strategy that would preclude something proceeding?

Sorry, Tim, just say that again. There's nothing what?

There's nothing in the strategy. The -- your strategy hasn't moved in a direction that would stop you doing it or they haven't moved in a particular way that would -- not set it apart as an equity proposition?

No. The fact is that our strategy is about how we grow the business. Broking is core and critical to what we do and how we do it. Having said that, leveraging the owner driver model where we rely on parts of the business to grow and naturally leverage that entrepreneurship and sense of ownership is important. And at times, it makes sense for us to change our investment holdings in businesses. But certainly, as you'd see from the first half results, performance is going well.

And then just on -- with the disposal of the sort of health and rehab segment, is there -- are there any stranded costs that might take some time to come out? Or is that effectively just sort of picked up and the whole thing goes?

There are no stranded costs, Tim. It's all gone.

The next question comes from Scott Hudson from MST.

Just a couple of quick questions. Firstly, in the broking business, can I get an understanding of what the other income line reflects and what was the key driver of the sharp growth in that number?

Yes. Thanks, Scott. The key driver of that was JobKeeper and BizCover other income, which we wouldn't have had in the prior corresponding period.

BizCover, other income. What is BizCover, other income?

So BizCover, the...

So BizCover generates various types of income, including from Austbrokers, we pay them a platform fee for ExpressCover. But they have other forms of income, and so that's the lion's share of that increase.

And then in terms of, I guess, the broking sort of PBT margin or EBIT margin is up fairly significantly on pcp. Does that reflect BizCover's margin profile as well? Is that a key driver of the uplift in the margin profile?

No. So if you look at the margin changes and improvements, it's actually across the board. I mean there are a number of pieces. So firstly, we have -- the consolidation piece is paying dividends. The technology deployment is paying dividends. There's a piece, frankly, around where we're optimizing and improving revenue. We're using data and analytics to focus efforts much more specifically on, I guess, I'd call it right service model for the right clients. So we are portioning and directing our efforts better in terms of which clients require which types of services and service model, which has made our cost model more efficient. So it's a whole mix of things, Scott. There's not a single silver bullet to it. BizCover's margin is strong, but it's not disproportionately different to where we've moved the margin across the network to.

And then in terms of the -- I guess, the renegotiated agreements with the insurers are, I assume that's provisional service fee changes. Is that a material contributor to the...

No. In fact, it's the opposite. So we've -- our professional services fees, we've actively negotiated to reduce or remove those. So this is much more about a mixture of commissions or broker fees, et cetera, et cetera. So revenue -- the proportion of our revenue that relates to professional services fees and commercial services fees has decreased significantly.

Okay. And then in terms of the agencies' business, can you remind me what the targeted synergies is to come through in FY '22?