AUB Group Limited (AUB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the AUB Group Limited FY '21 Full Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Emmett, CEO and Managing Director. Thank you.

Good morning. Mark and I are pleased to be with you this morning to share AUB Group's performance for FY '21. Before I begin, I'd like to say how proud I am of the way in which the AUB family have dealt with the personal and commercial strategies of the past year. The business continues to demonstrate a remarkable resilience, although one we do not take for granted. Our teams have worked tirelessly to support our clients and each other, and it's an honor to share in their success today as we announced a very strong result. There are 3 key messages I'd like to call out on Slide 2: Firstly, the transformation of AUB Group has continued to pace during FY '21. Revenue and underlying net profit after tax grew strongly and the EBIT margin expanded. Underlying NPAT of $67.1 million pre-SaaS adjustments, we'll talk to later, exceeded the upgraded guidance range of $63 million to $65 million set at the half year. The second point is that the strategic initiatives and remedial actions we're taking to improve the portfolio and drive growth by delivering strong returns. Our exit from Health and Rehabilitation Services is complete. The performance improvement in Austbrokers has accelerated. BizCover continues to grow both revenue and profit at an impressive rate, and the remediation of agencies is starting to deliver results, with both margin and profit improvement during the period. We are, however, far from done. Our New Zealand operations are still in the early stages of transformation. This plans to run until FY '23. We've restructured key elements of the New Zealand business. We have a technology investment underway there and plan a series of acquisitions that enhance our breaking product and geographic capability as well as to grow scale in New Zealand agencies. The final point, given these changes, we expect FY '22 to be another year of solid growth. The progress we're making with our strategic priorities are providing a positive trajectory, supporting growth plans for FY '22 and beyond. We anticipate underlying net profit after tax in FY '22 of between $70 million and $73 million, representing growth on continuing operations of 15.7% to 20.7%. Continuing operations exclude JobKeeper receipts and profits from the now disposed Altius Group. Slide 4 shows the high-level results for FY '21. Revenue growth of 11.6% on prior year, a significant 360 basis point strengthening of the EBIT margin and underlying NPAT growth of 25.7% before accounting for the SaaS accounting policy adjustment. As you also observed from this slide, underlying revenue, margin, and profit growth have all accelerated over the past few years. The Board has determined a final dividend of $0.39 per share, resulting in FY '21 total dividend of $0.55 per share, an increase of 10% on FY '20. Please note, Slide 4, 5 and 6 reflect underlying profits, excluding the impact of the change in accounting policy relating to SaaS configuration costs described more fully in Slide 7. On Slide 5, we've provided a high-level waterfall, reflecting key contributions to profit growth. I'd like to highlight a few items as follows: Strong organic profit growth contributed $8.7 million to underlying net profit, representing 16.3% growth from prior year and arose from increased revenue and carefully managed costs; $4.7 million of a total of $5.8 million of growth in profits from acquisitions was contributed by BizCover and Experien, both of which are proving to be excellent acquisitions. JobKeeper receipts contributed $0.5 million to profit growth. Most of these receipts relate to Procare, a people-intensive services business, which was particularly impacted by COVID-19. [ AutoKeepers ] ceased at the end of September 2020. Slide 6 shows the half-on-half growth in underlying net profit after tax, indicating a 54.2% weighting in the second half. During FY '21, premium placed through the network, grew 17.6% to $4 billion, bolstered in part by premium rate rises of 6.2% for the full year and 5.5% in the second half, in line with our forecast of 5% to 6%. Our premium retention has lifted further to a new all-time high of 93%, surpassing expectations set this time last year. I'd now like to hand over to Mark.

Thank you, Mike, and good morning, everybody. In April 2021, the IFRS Interpretations Committee issued a new interpretation requiring that configuration costs for IT projects utilizing software as a service be fully expensed rather than capitalized and amortized over 5 years as was previously our practice. AUB Group has adopted this change in the FY '21 results and adjusted underlying NPAT in FY '21 and prior years accordingly. On Slide 7, we've indicated the additional expense impact on both FY '20 and FY '21 underlying NPAT. The line graph in the middle of the page shows that the main impact is to reduce FY '21 and FY '22 results, reversing out in future years. Slide 8 shows the waterfall from Slide 5, updated to reflect the impact of the SaaS adjustment on underlying NPAT for FY '20 and FY '21. FY '20 restated from $53.4 million to $53.2 million and FY '21 restated from $67.1 million to $65.3 million. On this basis, underlying NPAT for FY '21 of $65.3 million represents adjusted year-on-year profit growth of 22.9%. Slide 9 provides more detail on the cash flow and funding of the AUB corporate entity. We can see a strong operating cash inflow of $60 million, including dividends from Altius, which was sold in the financial year. It is also worth noting that the group's balance sheet remains strong as we ensure the debtor book remains clean, and we prudently managed capital in response to an uncertain business environment. At the end of FY '20, we had access to $89.5 million of cash and debt. Our gearing ratio was 28.5% and leverage 1.99:1. The strong cash generation and balance sheet strength position us strongly to fund organic growth initiatives and disciplined acquisitions in FY '22. On Slide 10, we present our shareholder returns. We can see that the group's underlying earnings per share grew by 22% in comparison to FY '20. 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. On Slide 12, we summarize the financial performance for each division. For the first time, we separately reflect BizCover as a new division. We also reflect for the final time, the now exited Health and Rehabilitation Services division. You'll note, we've added a subtotal column for continuing operations to aid future comparisons. I'll describe the performance of each division in more detail in subsequent slides. At the bottom of the slide, we've indicated the impact of the SaaS adjustment, making this predominantly affect New Zealand due to the new Lola technology platform project that commenced in FY '21. Slide 13 shows the positive outcome of actions we've taken in Australian Broking to manage costs whilst also growing revenue, partially by leveraging data and technology to better target and segment our clients and portfolios. On Slide 14, we show the cumulative growth in BizCover revenue of 34% and profit before tax of 69% since AUB Group's investment in February 2020 versus the prior corresponding period. BizCover customer satisfaction is at an exceptional NPS score of 72 and several initiatives have been implemented by BizCover to continue their strong performance, including the imminent launch of Blaze, a fully re-platformed version of the BizCover technology and a new referral portal to partner with professional advisory firms. Growth and expansion of the New Zealand business is building and is a priority for FY '22. Underwriting agencies. As you'll see from Slide 15, a new operating structure, the acquisition of 360 Underwriting in December and the rollout of the new Sentinel agency system are contributing to improved agency results. The profit before tax grew by 15% and the margin expanded by 100 basis points. We recently acquired TLC as a first step in the plan to expand our agency presence in New Zealand. During FY '22, we will focus on increasing the penetration of AUB-invested agencies into the Austbrokers and NZbrokers networks. Slide 16. New Zealand is an important market for AUB Group. Over the past 12 months, a new regulatory regime has been implemented to enhance professional qualifications and standards in the broking industry. We welcome this change and have applied significant focus and resource to meet regulatory milestones and implement the changes. Against that premium rate rises, our profit before tax growth of 3.6%, excluding the SaaS adjustment, could ordinarily be seen as reasonable. However, it doesn't meet our ambitious growth targets. To address this, last year, we commenced a restructure of the business, including making several senior broking leadership changes and commencing Project Lola, the new broking and fast flow platform for New Zealand. We're seeing some early market success with the recent win of a large corporate account from a global broking competitor. In addition to the restructure program, we intend to continue to grow by acquisition with investments in broking and agency. Moving to Slide 17. There's no question that pandemic has been challenging to workforces, and we've used this as an opportunity to transform our work practices and to implement policies that rely on the fundamental trust and employees. We've enabled our teams as a standard practice to work from home for 4 days per week, but with the desire that they will be together in a shared space on one preplanned day of the week. We've provided them with financial assistance to improve their home work environments, activated ongoing fortnightly allowances to cover additional personnel costs such as increased utilities, provided remote ergonomic assessments that bespoke of us and implemented a number of technology-enabled tools to support remote working. In addition to virtual productivity and video conferencing solutions, these tools include employee engagement, mental and physical health solutions, virtual fitness challenges and a workplace booking platform. We've added flexibility to our leave policies, including providing bonus leave for team members that have used up all of their leaves and also offering bonus leave as an incentive to those that are fully vaccinated. On Slide 19, we've listed our strategic priorities. These have been critical to the progress we've made over the past 2 years. And so I'd like to elaborate on several of these. Slide 20, network optimization. There are some simple reasons underpinning our desire to optimize the network. The fact is larger businesses have better margins and economies of scale while specialized businesses win new business in their chosen areas of expertise more readily and often, they operate at premium margins. The fewer businesses we manage, the lower the complexity and the lower the risk. It's equally important to note that many of our business leaders are ambitious. They want to grow and expand. We can cater for these ambitions with our partners by facilitating business combinations and acquisitions. Over the past 2 years, we've reduced the number of operating businesses from 105 to 75 through a variety of business mergers, realigned client portfolios, disposals, and entity rationalization to simplify the AUB Group. Consequently, we've improved the performance of low profit and in some cases, loss-making portfolios. We've created specialized businesses that are winning new clients in the market, and we've leveraged the scale and margin benefits of larger Austbrokers members. This is evolution, not revolution. We're evolving the network, optimizing it to grow, to improve margin and to reduce risk while also enabling us to meet the growth ambitions of our partners. Slide 21, acquisitions. Our approached acquisition has been to acquire or invest in businesses that complement and accelerate our strategic ambitions. To illustrate this, over the past 2 years, we've made the following investments: BizCover for their dominant position in the micro and small SME segment and their market-leading technology platform. Experien for their life advisory capabilities and dominant position in the medical and dental professions. Bestmark to complement and facilitate the merger and creation of Austbrokers Comsure. QRM to supplement our heavy motor industry specialist skills. 360 Underwriting to form a cornerstone of our drive to grow our general commercial agencies. YDR to build on our ability to deliver assistance to clients with complex specialist claims. And TLC to enable the expansion of 360 Underwriting into New Zealand. We have a disciplined approach to acquisitions, and we expect to make further investments to accelerate our strategy. Slide 22. The transformation and deployment of technology across AUB Group has been rapid over the past 2 years. Enhancements to our core broking system have been implemented. Our infrastructure and various operating software components have been upgraded. New systems such as ExpressCover and Sentinel have been widely rolled out, and new enabling solutions such as the AMS analytics service and the portfolio of bots and automation tools have been deployed to much of our network. In New Zealand, we've commenced Project Lola, a new broking and quote-to-bind solution for rollout later in FY '22. Not all has gone to plan. Our desire to add personal lines products to ExpressCover has been delayed to match ensure technology rollout plans. But notwithstanding this, we now have a portfolio of compelling technology solutions that enhance the way in which our brokers operate and complement other aspects of our partner proposition. Moving to Slide 23. In addition to technology, additions to the Austbrokers and NZbrokers propositions have included new and exclusive insurance products and [ learnings ], renegotiated and improved commercial insurer contracts and remuneration, claims delegation authorities and payments from insurers, bespoke assistance from AMS analytics, enhancing customer retention and optimization and complex insurance risk placement support. The suite of service is now delivered by Austbrokers member services has led to increasing inquiries and interest in the market for access. As a result, we've launched the Insurance Alliance, which is a nonequity network, initially partnering with the broker co-op to deliver a subset of these services to independent brokers. Most of Slide 25 will now look very familiar to you. As they say, if it aren't broke, don't fix it. And so in FY '22, we will again be laser focused on the following: we'll continue agency reinvigoration by increasing scale, penetration into AUB networks and improving margin. We'll continue network optimization momentum, particularly in Austbrokers. We'll invest in carefully selected businesses that complement our portfolio and accelerate our strategy. We'll drive adoption of our new technologies to benefit clients in our portfolio of businesses and further enhance partner propositions by building scale, adding new nonequity members and working with external partners to offer propositions that are important to our clients and a benefit to our network. Slide 26 is a more complex outlook slide than we ordinarily provide. Reading from the left, you'll note we are using underlying net profit after tax of $65.3 million and reducing this to adjust for FY '21 noncontinuing receipts from JobKeeper and Altius. Using the result and underlying net profit after tax from continuing operations of $60.5 million, we anticipate FY '22 underlying net profit after tax to be in the range of $70 million to $73 million, representing profit growth of 15.7% to 20.7% from continuing operations. This translates to similar EPS growth with an EPS outlook of $0.9426 to $0.983 per share. In determining this outlook, we've assumed the following: the premium rate rises for the AUB Group portfolio during FY '22 will be between 5% and 6%, the same assumption as FY '21. Minor bolt-on acquisitions and step-up investments, as is our standard practice, are included in the outlook and reflected in the waterfall. However, major acquisitions are excluded and will be disclosed with relevant guidance updates if they were to arise. Our main assumption is that the broking market continues to emulate prior years. We don't know whether the current Delta outbreak will have a meaningfully different impact on the Australian economy than was the case with previous outbreaks. We do, however, know that the business was very resilient last year, and so we're assuming operating conditions in FY '22 similar to FY '21. Thank you very much for listening. And I'd now like to hand back to the moderator for questions.

[Operator Instructions] The first question is from Tim Lawson of Macquarie.

Just really on the M&A side. Could you expand on your comments, maybe addressing things like the seller's appetite multiples. Were you looking to add the hubs and also your interest in brokers versus agencies?

Yes. Sure, Tim. Thanks for the question. So three parts to that. I think the first is, we remain interested in broking and agency businesses across Australia and New Zealand that complement our existing portfolio network. So there isn't a size preference. And in terms of multiples, there have obviously been some quite high-profile deals over the last few weeks -- announced over the last few weeks that are all in the 10 to 12.5x range. And having said that, we think the factors are the same as they've always been, which is high-margin, high-growth businesses that are national and upscale will attract higher multiples than smaller businesses that historically are bolt-on style acquisition. So we don't think the multiples -- I mean it's possible multiples of migrated upwards slightly, but we don't see it as being more than potentially half a turn, maybe a maximum of one turn. That's the first thing about that. I think for us, it's all about acquiring businesses that match our appetite and also fit and complement our network. Our ideal is to expand existing members of the network through acquisition and it's like -- or enhance our capabilities either geographic or product or service so that we're building out our proposition to clients. But that doesn't mean we're not always interested in any acquisition opportunities, but we're very -- everyone says, they're disciplined about acquisitions. I think we are very disciplined in terms of what we believe is an appropriate acquisition and a purchase price to pay.

Has the recent sort of high-profile acquisition and the sort of network activity from your major competitor increased opportunities for you?

Look, I don't -- we don't really see a difference now versus 12 months ago in terms of the types of opportunities available. So I think that if we talk specifically about Coverforce, I think that the price was what we expected it would be. And so I think in terms of the multiple and also the estimate of profits were in line with what our understanding was. So I don't know if it necessarily raises opportunities that are different to pre that transaction if I understand your question.

[Operator Instructions] Our next question is from Naveen Patney of E&P.

Congrats on a great year of results. I just have a couple of questions. Firstly, on BizCover. It looks, obviously, the full sort of 12 months contribution for this year and you had 5 months last year. I'm not sure if there's seasonality in that business. But if I sort of annualize the last year's numbers, it looks like you sort of did 25% revenue growth, but in your appendix, you're sort of talking about June up 34%. So I don't know if there was a noticeable acceleration of run rate in growth or was it any macro factors? Or should we just assume that sort of the rate of growth more generally is going to continue into '22? So just some color there in terms of run rate of growth.

So I think 2 things there from what I understand. So firstly, the very useful thing for us is, BizCover is a strong lead indicator for us about changes and moves in the economy. So as you might recall, called out that in April, May last year, the early stages of COVID there, cancellation rates have increased, and the new business rates have dropped. But then once that settled down, so in about late May, that profile returned to pre -- let's call it, pre-lockdown or pre-COVID type levels. And so if you normalize for that unusual blip, then the growth rate is pretty consistent with what we've called out, which is around about at the 30% level in terms of revenue. So if you just normalize for that. So we would anticipate that significant lockdowns like we're happening currently we'll see similar trends, but equally, it will reverse really quickly. So it's quite -- because of the mix of their business very, very -- many of their policies are monthly policies. So there can be -- new business can stall and then it can pick up really quickly. So you don't have that annual cycle that's reflective of the rest of our network.

Okay. That's great, very helpful. So I guess, to your guidance, you're assuming a macro standpoint being pretty similar to '21. So cancellation rates probably elevated, I imagine, during this period maybe, but more normalized rate for the remaining part of the year.

Exactly.

Okay. Great. And in terms of margin profile, clearly, that business has got very high EBIT margins, and thanks for the disclosure there. I mean how should we think about sustainability of margin or operating leverage of that margin going forward? I mean, obviously, it's also an area of investment, I imagine, particularly with ExpressCover and trying to roll out the technology more broadly. But how should we think about margins for that business going forward?

Yes. So I think the current margin. So the margin last year was 39%. So if you just looked at absolute percentages -- you say the margins deteriorated, that was slightly artificial because there is a bit of lumpiness to some of their costs. And so on a full year basis, the 37.5% or thereabouts for the past year, we believe is a normalized margin. In that business, certainly, without blessing the desires for growth, even if that means a slight reduction in margin. And so I think the revenue growth and the profit growth versus margin is the strategy for that, which is different to the rest of the business where we do see opportunities for us to increase margin. So this is very much about a mixture of topline growth and scale to drive benefits to the bottom line.

Okay. Great. Excellent. And just my last question was just in terms of the agency business. Margins improved over the year. I need to have a look at how it is in second half versus first half. But just some of the drivers we're talking about in terms of margins for that business from -- what were the type of initiatives that you felt you can introduce in that business to introduce margins? Or is it just largely operating leverage from rates driving that.