AUB Group Limited (AUB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the AUB Group First Half 2023 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Emmett, CEO and Managing Director. Please go ahead.

Good morning, everyone, and thank you for joining Mark and I to discuss the AUB Group results for the first half of financial year '23. We've released a presentation pack to the ASX, which we'll talk to, and then we'll open the line for questions. Slide 2. Firstly, I'd like to thank all my colleagues for this result. The outstanding revenue and profit growth reflect the portfolio of businesses and the phenomenal team we have across the AUB Group. Revenue growth of 42.4%, EBIT margin expansion to 31.3%, growth in the underlying net profit after tax of 52.4% and EPS growth of 19.6%, summarize an exceptional first half. This was an important period for AUB Group and we set ourselves several challenges. One, to complete the acquisition of Tysers. Two, to demonstrate we can deliver a margin from Tysers in line or better than the normalized EBITDA margin of 19.9% used in our acquisition business case. Three, to achieve a rapid start to integration and to the delivery of the anticipated acquisition synergies of AUD 25 million per annum. Four, to continue progress made in growing revenue and expanding underlying margins of the legacy AUB businesses, particularly by optimizing Australian Broking and growing the scale in agencies. Five, to continue with strategic acquisitions, demonstrating we have not been distracted by Tysers and that we have continued acquisition opportunities in Australia and New Zealand. And finally, to deliver a turnaround of the underperformance trend for the New Zealand business and to go live with Lola, the New Zealand technology solution. As you will hear from Mark and I this morning, we have achieved all of these and more. So what drove the first half results? I'd call out several contributors. Firstly, Tysers' performance exceeding AUB expectations. Secondly, exceptional growth in Australian Broking. Thirdly, the accelerating turnaround in New Zealand. And finally, continuing profit growth in BizCover and agencies. This performance, coupled with successful continuous progress with our strategic initiatives and a healthy tailwind from a robust premium rate environment gave us confidence last week to upgrade our already significant full year performance outlook. We now expect full year underlying net profit after tax to be AUD 112.9 million to AUD 121.4 million, an increase on the financial year '22 of 53% to 64%. As a result of ongoing outperformance and our ambition to continue delivering exceptional value for shareholders, we've published a new set of medium-term EBIT margin targets. Most of the targets have been upgraded. And for the first time, we include a margin target for Tysers. I'd now like to hand over to Mark.

Thank you, Mike, and good morning, everyone. Moving to Slide 4. As summarized by Mike, the AUB Group has delivered strong underlying revenue growth of 42.4% to AUD 466 million in the first half with a 10 basis point expansion in the underlying EBIT margin to 31.3%. The underlying NPAT of AUD 46.7 million grew by 52.4%, supporting a 19.6% increase in the earnings per share to AUD 0.4818 per share. Growth and performance improvement in the first half follows a multiyear period of AUB Group delivering strongly across these performance measures. The Board proposes an interim dividend of AUD 0.17 per share, flat on the prior corresponding period, given opportunities for further investment in the second half and the opportunity to pay down debt. Slide 5 reflects the key components of the underlying net profit after tax growth of 52.4% against PCP. Excluding Tysers contribution, underlying NPAT grew 32.6% to AUD 40.6 million from continued strong organic growth of 9.1% and the profit contribution from acquisitions of 23.5%. The Tysers UNPAT after 3 months was AUD 13.8 million, partially offset by the incremental AUD 7.7 million cost of net corporate interest. On Slide 6, EPS increased 19.6% to AUD 0.4818 per share for the half. You'll note that the Board proposes to keep the interim dividend per share flat. This approach is prudent given the opportunity we have to optimize debt levels. Note that the quantum of the dividend payment will increase substantially due to the increased number of shares on issue following the successful capital raise to fund the Tysers acquisition. The Board anticipates that the full dividend for FY '23 will be within a 50% to 70% payout ratio. The net interest exposure and debt leverage positions are shown on Slide 7. On the left of the slide, you'll see that our share of interest-earning assets exceeds our share of debt. Meaning that increases in interest on borrowings is more than offset by an increase in interest earned on investments. At the end of December, you'll note our leverage ratio was 2.74, well within our debt covenant of 5.25, with a path to reduce this over the year ahead. Our accessible cash and debt at the corporate level were AUD 50 million at the end of December with this forecast to increase strongly over the balance of the financial year '23. We are confident that we have sufficient investable cash to continue making investments to support the strategy. I'll now hand back to Mike.

Slide 9 describes progress against our strategic priorities for FY '23 and high-level actions for the second half. I'd like to highlight that we continue to invest in acquisitions and equity step-ups to supplement strong organic growth. As many of our longer-term shareholders will recall, we put in place a program of strategic change about 3.5 years ago, which we've been working through with the primary objective to enable the business to deliver low to mid double-digit profit growth in the long term, irrespective of the premium rate cycle. I want to emphasize, we do not ascribe to the view that we are a cyclical business dependent on the premium rate cycle. Rather, we have a number of levers within our control that enable us to deliver sustainable, long-term, strong profit growth. We regard premium rate rises as cream on top, not something fundamental to our business. On Slide 10, you'll note that following the acquisitions of the past few years, we are transforming AUB Group into a stronger business with offerings across the insurance value chain, enabling us to offer more and better services to our clients and our networks. On to Slide 12. This reflects a view of the business I focus on the most. Our strategy is to evolve AUB Group to comprise a portfolio of scalable, high-margin, growing business units. We're striving to grow revenue, expand margins and strongly improve profits for AUB Group shareholders, whilst also better balancing the portfolio by accelerating the scale of agencies and New Zealand. At first glance, the EBIT margins for agencies and New Zealand may appear disappointing. And so I'd like to elaborate on each of these. For agencies, many of you will recall that at our full year '22 results, I spoke about the record profit commissions we received for that year and commented that these were higher than our forecast and unlikely to be repeated. I also referred to the high incidence of flood losses that would impact our profit commissions in the year ahead. As predicted, our profit commissions for the first half are significantly lower than those received in the first half of '22. If profit commissions are excluded from the agency results in the first half of both '23 and '22, then agencies delivered a very strong 400 basis point improvement in underlying EBIT margin. Similarly, in New Zealand, the EBIT margin deterioration is the result of the costs of Lola, our new technology system, which pleasingly is live at the first brokerage. Excluding these technology costs, the New Zealand business expanded margins by 250 basis points. Allowing for these 2 items, we delivered increased revenue, expanded profit margins and delivered strong profit growth across all legacy AUB Group divisions. I'll now speak to the specifics for each division. Slide 13. Clearly, the most compelling item on this page is the consistent and significant margin improvement delivered in Australian Broking. This is primarily the result of our portfolio optimization and consolidation strategy, which continues to progress well and pay significant dividends. The ongoing enhancement of our insurance partnerships and select bolt-on acquisitions complements this. You'll also note that while revenue has grown by 8.6% CAGR for the past 4 years, the revenue growth rate has accelerated each year. Slide 14. BizCover delivered 12.8% revenue growth in the half and a 17% uplift in EBIT, a decent performance in this volatile economic climate. The EBIT margin expansion has been counterbalanced by slower revenue growth than the prior period in the first half. In Australia, average income per customer reduced. In addition, intermediated channels have grown more slowly than expected. Specifically, leads from comparator sites have not grown and leads from brokers are growing more slowly than originally anticipated. In the international business, revenue growth is strong, however, off a very small base with higher marketing and sales costs impacting EBIT margins in these territories. A number of initiatives are underway to generate increased leads, including the relaunch of a new cyber product with 3 insurers and the addition of a major insurance partner to the BizCover platform later in the year. It's worth emphasizing that BizCover is highly cash generative and AUB receives significant dividends from this business. We remain very optimistic about the business' long-term growth prospects. Slide 15. Agencies performed well as our pursuit of scale continues at pace. Revenues increased by 25.5% and EBIT grew by 22%. In calendar year '22, we wrote AUD 830 million of gross written premium, well on our way to our ambition of growing an agency division with GWP in excess of AUD 1 billion. Our growth in general commercial has been excellent. While our recent acquisition of SUU will accelerate growth and scale in Strata, we anticipate a strong lift in the scale of our specialty agencies over the next 12 months, in part due to the access and capability within Tysers. Slide 16. I'm pleased to report we're seeing a positive turnaround in our New Zealand operations. We've put a lot of time into building the emerging recovery and we are now seeing evidence of the improving performance. During the first half, we increased our shareholding in AUBNZ to 100% as part of the implementation of our strategic plans for the division. This morning, I'd like to cover 4 aspects about our New Zealand businesses. Firstly, 2.5 years ago, we embarked on the build and implementation of a significant new broking platform to replace our existing aged system in use by all broker members in our NZ brokers' network. I'm pleased to say that the new system has been completed. The system is live and in use at the first brokerage and the team there have fully migrated from the previous system. Lola is a full broking suite, including integration to 2 insurers with 1/3 currently in build. Now that the system is live, we can commence rollout to the remaining 48 members of the network. Secondly, BWRS profit reductions. For several years, we have experienced shrinking revenue and profits in BWRS, our largest brokerage in New Zealand. In the first half, BWRS delivered a small increase in profit over the prior year. Additionally, in December, we invested in and merged ICIB, another leading New Zealand brokerage with BWRS to form ICIB Brokerweb, the fifth largest individual brokerage group in New Zealand. Thirdly, we continue to see very strong performance in the rest of the AUB portfolio of businesses in New Zealand. And finally, premium rates. For several years, the premium rates in New Zealand have been very low to flat. During the first half, we observed a strengthening of these by approximately 7%. Slide 17. Tysers is exceeding our acquisition business case, but we are more confident than ever about the strength and quality of the business, the long-term growth prospects and the incremental benefits for AUB Group. During the first quarter of ownership, revenue growth, particularly in marine, contingency and retail were strong, while costs were controlled despite the inflationary environment, resulting in an improved EBIT margin of 20.4%. This compares very favorably with our normalized EBITDA of 19.9% used for the acquisition case we communicated last May. The opportunity at Tysers is very much like the journey we've been on with AUB Group. There are opportunities to reduce complexity and cost to optimize the portfolio of broking teams and businesses, to enhance revenue growth and margins, to acquire bolt-on businesses and teams and to work with insurer partners to improve the partnership terms. Since the acquisition, we've already made several positive changes at Tysers. Firstly, Andrew Kendrick, a well-known U.K. insurance industry executive, has been appointed as Tysers Chair as well as an AUB Group Non-Executive. Secondly, the Tysers wholesale structure has been simplified. It now comprises 3 units; marine, non-marine and AUB wholesale to support AUB agencies and brokerages. Thirdly, we are in the process of separating out the retail business to enable a stronger and more distinct focus on this business and to support the likely future JV with PSC. Fourthly, a range of retention and incentive schemes for brokers and senior leaders have been implemented. Notably, all key brokers have been retained since acquisition. Fifthly, a small team with a specialized focus on Australia and New Zealand has been recruited to support the placement of AUB Group business and the expansion of Tysers market share in this region. And finally, the optimization of broking teams and businesses has commenced with the sale to Howden earlier this month of Tysers bloodstock interest, including the Tysers bloodstock broking team and the bloodstock underwriting unit, Galileo. On Slide 18, we've included a specific explanation of various FX exposures relating to Tysers and the way in which we are managing these. I'd like to hand over to Mark to describe these and the progress we're making with synergies.

Thanks, Mike. Slide 18 shows the Tysers currency mix, how currencies flow and an overview of the hedging program. Key takeaways from the chart are as follows. 28% of Tysers revenue is in GBP, 55% of revenue is in USD and 91% of expenses are paid in GBP. GBP expenses in excess of the GBP revenue are paid by converting excess euro, Canadian dollar and other small currencies earned into GBP and by converting a portion of USD earned into GBP. 16% of Tysers net USD income is used for bonus, which is paid in GBP, partially offsetting the U.S. dollar GBP FX exposure. The primary FX exposure is thus the USD required to be converted to GBP to cover the balance of Tysers GBP expenses. To reduce risk, 51% of Tysers net USD income has been hedged with the program of FX forwards that runs until October 2025. Slide 19 discusses Tysers synergies and the integration of business flows. We reaffirm the scale of the synergies and have had a very fast start implementing these. Our initial focus has been on cost savings from headcount and insurance premiums. Actions already taken will deliver run rate savings of over AUD 5 million per annum with further plans in place. The consequences of these actions is a AUD 360,000 saving in the first half and a further AUD 1.8 million in savings in the second half. Delivery of revenue synergies will commence in July 2023 from the placement of AUB agency binders. In addition, we are seeing good progress with individual risk inquiries by AUB brokers into Tysers and anticipate that income benefits from these could flow through as early as May 2023. Now, I'll hand back to Mike.

Slide 21 reflects our medium-term view of the EBIT margin opportunities across AUB. At a Group level, since the first half of '19, margins have improved by 590 basis points, while most notably, margins in Australian Broking have improved by 1,020 basis points. Given the progress to date, we've upgraded most of our divisional targets, namely 38% for Australian Broking, previously 35%, 40% for BizCover, previously 38% and 40% for New Zealand, previously 38%. The target for agencies remains unchanged at 45%. We have also, for the first time, defined a margin target for Tysers of 30%. Our outlook for the second half is reflected on Slide 22. Last week, we upgraded our full year outlook and this was based on strong performance in the first half and continuing tailwinds we're observing across the business. Our strategic initiatives continue to deliver significant and ongoing financial benefits. And while much will be made at the premium rate environment, our market view is premised rather on the fact that our current and target clients perceive a greater need to utilize brokers and professional risk advisers than ever given the complexity of the insurance market backdrop. Increased premium costs, difficulties in sourcing insurance placements, strengthen our value proposition with corresponding increases in market growth opportunities and client retention and we envisage continued volume and customer growth as a result. We're pleased to have delivered these first half results. Our revenue growth continues to accelerate. Margin expansion provides positive leverage to the bottom line. Our debt levels are well within our capacity to manage. Our cash investments provide a healthy offset against future interest rate volatility, while our portfolio of businesses gives us scale and capability to better deliver value to our clients and insurance partners with consequential benefit to our teams and our shareholders. Thank you. And I'd now like to hand over for questions.

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

I just had 2 questions I wanted to go through. Just in terms of margin targets on the medium term. Just trying to understand why you've done that now, maybe would be something I might expect more a year-end and maybe a bit more behind what is behind the change as well.

Tim, yes, thanks for the question. So firstly, obviously, we wanted to provide a target for the medium-term margin for Tysers. And so as part of that, we evaluated our medium-term margin targets, the progress we've made. As you'll observe, for example, we actually achieved the medium-term margin target for Australian Broking in this period. And so we felt it was an opportune time to refresh those margin targets. We've done a fair amount of medium-term planning. And so we have quite a lot of confidence. We don't put out medium-term targets likely. And so we've worked through all of our plans, momentum in the business, et cetera. So it was purely the fact that -- I agree with you, in fact, originally in December or actually after the AGM when I was asked the question about when we would come out with the target for Tysers, I actually anticipated we would do that at the full year. But actually, we've been able to put together really robust plans and there's a degree of confidence that gave us comfort to put this out at the stage. Nothing more to it than that.

And then just a question on Tysers. I mean, some of this revenue synergies, in particular are sort of locked in around timing of expiries of contracts and agreements. Have you been able to sort of bring forward any of those revenue synergies?

No. So I think in terms of the agency binders that you're referencing, what we had an existing set of wholesaler distribution agreements. And so what we have done is we have agreed the termination dates of those agreements. And so we know with confidence that those all will be expired or finished by the end of June '23, in which case, we know that from July, the first binders will be renewed. So we have confidence that during the course of FY '24, all of our binders will be renewed through Tysers. Separately, the -- one of the slides I referenced the revenue synergies related to specific individual risk placements, we are making good progress on that, but too early to say. Our view is that -- we actually think there's possibility we'll see revenue benefits from about May on that. So that's the only early piece that may happen. Otherwise, we're assuming that the vast majority of the revenue synergies flow through in FY '24.

And is there any change to the size of those binders? It was AUD 200 million from memory?

Yes. So at the full year, we'll give a view, but our placement into London has increased each year. And so obviously, the size of the opportunity increases. But for now, our sizing and estimate remains at the AUD 10 million level. However, we are very confident about the size of that benefit.

The next question comes from Siddharth Parameswaran with Austbrokers (sic) [ JPMorgan ].

Siddharth from JPMorgan. Sorry, I was on mute there. Just a few questions, if I can, please. Just firstly, just on Tysers and in fact that the margins, I think, for the first 3 months came in a little higher than you're expecting, about 1% higher than your investment case predicated. Can you just give us any indication whether there's any seasonality in these numbers? If the run rate was continued, whether you'd be expecting any differences on that margin into the second half, leaving out any synergies that you get? So I was just wondering if there's anything that helped you in those numbers. And any impact from currency over?

So very little seasonality. I think against our forecast, we call out that -- there's about 10% organic or volume benefit in there compared to our forecast and about 2% is currency. So if you compare to the forecast we had that we built into our previous outlook, the 3 months October to December have 10%, let's call it volume, organic improvement against our forecast and 2% currency. In terms of the seasonality, there's very little seasonality in the Tysers business. In fact, for all intents purposes, no seasonality. What is included, so if I did a headwinds, tailwinds piece in that, there are about AUD 360,000 of synergy benefits included in those 3 months. And so we did achieve quicker cost savings implementation than we'd forecast. But then in terms of -- there are some one-offs and I'll describe those one-offs carefully. You'll recall in May when we did the recon to get to our normalized EBITDA of 19.9%, which equates to about -- as you mentioned, 1% lower than what we're running at, the first -- that quarter of 3 months includes roughly GBP 890,000 of costs that we reconciled out relating to the tail of both the regulatory uplift project, some of the IT projects, et cetera. Those -- you might recall in November, we mentioned that although we acquired the business early, our assumption around those costs that were in the recon in May ran through till December. So you could -- if you want to get to the underlying ex synergies number, you could deduct AUD 360,000 and you could add back the roughly GBP 890,000 as non-continuing.

Just second question, just on the rate environment. Just could you just comment on how that has changed and hopefully, just what is assumed in your revised guidance?

Yes. So I mean our assumptions and our forecast about rate are pretty much spot on. So it's high single-digits. So in that 7.5% to 9.5% type range. What is changing, which works slightly in our favor is the mix of rate is moving from financial lines being the high inflation premium rate cycle to more of the property and casualty pieces. Again, you've heard me speaking about the expected long-term rate rises from the effects of climate change, major events, et cetera. And we see that happening. So although, the overall rate forecasts are still within that 7.5% to 9.5% range, we do see the mix starting to favor the type of business we write. So yes, that's -- and that's pretty much steady with what we are predicting for the second half. So our original forecast of rate is the same as our current forecast that we've premised our outlook on.

And that was what we experienced in the last half [indiscernible]?

Correct, yes.

And just my last question is, the target for those divisions in the medium term. Just could you give us some indication now of when the medium term might be achieved?

What I said last year when we formalized this because we've been speaking about these, so as I've referenced them in investor presentations previously. But last year at this time was when we formally put out a slide with them on. And previously, when I've spoken about it, I've said it's a 3- to 5-year time frame. That's our definition of medium term.

Yes. But you've revised them, so I was just wondering if it's still 3 to 5 years from now or...

It's 3 to 5 years from now. I mean I'll have to represent that I'm [ precinct ]. I did not expect we would achieve the -- AUS brokers, Australian Broking targets as quickly as we did, to be honest. So the business is performing strongly and accelerate -- has performed more positively since we first outlined those margin targets than we expected at that stage. That doesn't mean, however, that we're coming out with targets that we think are for 18 months or 2 years' time, that just happens to be a period of stronger performance than we expected when we set those targets. We've set the targets anticipating a 3- to 5-year time horizon to achieve.

Next question comes from Julian Braganza with Goldman Sachs.

Just to round out on the -- just the margin piece. Can you just provide any color in terms of -- to get to those margin targets, what does it assume in terms of sort of inorganic growth versus organic growth in your forecast to help you get there?

Julian, I'm not going to give the split. Obviously, we have various permutations. However, what it does assume is excluding -- it assumes continued mix of strong organic growth complemented by acquisitive growth, but in the bolt-on and equity scale up style acquisitions, not a -- dare I say, a transformational style acquisition of Tysers. So it assumes -- we think of our core strategy as being about how we organically grow our existing businesses and we use bolt-on acquisitions and equity step-ups as part of our normal growth profile. So it assumes those activities in a normal part of our strategic initiatives. It doesn't presume any outlandish significant acquisition.

Just in terms of leverage, I'm sorry, it's my second question, in terms of leverage, you cite there in your slides, just paying down debt, and you've articulated quite clearly that your leverage is well below your covenant. So I'm just trying to understand how you're thinking about, obviously, your payout ratios are still intact. But just that reference there, I mean is there any reason in terms of paying down of debt, just to call that out there, given you're comfortable from a gearing perspective and you also have headroom?

Yes. So it's really just prudent. I think as the cost of debt increases, the way in which you think about how you deploy capital effectively shifts, right. So I think certainly, you shouldn't read too much into it. I think the Board -- we believe that we have effective ways in which we can deploy capital and so we are paying the interim dividend because it's an interim dividend in a way that gives us optionality around the way in which things may track over the second half. We have various permutations around fairly significant cash flow inflows that may precipitate during the second half. And we also want to keep our powder dry for investment opportunities that we can foresee. So it really is more a reference to being prudent about the way in which we deploy the capital.

And just my last question, just on Tysers. I think you clearly articulated a 30% medium-term target there for the margin. Can you just talk through exactly -- I mean, obviously, you've done some benchmarking versus peers. You probably have a pretty clear view in terms of what's required to get there, but organic -- just restructuring the business from an organizational perspective versus scale and operate leverage? Just trying to understand exactly, one, what is it that you need to do to get there? And then 2, how much of that you already have very clear visibility of given the cost out that you're bringing through and any planned additional costs that might come through?

Yes. So I think there are 3 components to that. The first is Tysers was the worst performing of the large brokers when it came to a margin -- EBIT margin. So there's a piece which is about normalizing or moderating to the norm. So I just need to cough, apologies, everybody. Very sorry about that. So there's that piece. So actually, the portfolio operate -- the market operates at a higher margin, so it's normalizing to the market. The second piece is that -- actually, sorry, can you just mute my mic, I need to cough some more, sorry everybody. Sorry about that, Julian. The second piece is, clearly, we have a view of the synergies, both cost and revenue and those will improve the margin inherently. And thirdly, we have, in any event, some views in terms of the way in which the business can be restructured. And I referenced earlier in the presentation that -- you should think of Tysers, although it's a single brand and a single organization effectively made up of roughly 20 different broking components. And as you'd expect, that's a portfolio business, some of them operated higher margins than others. And so we have ways in which we can leverage that. And without making too big a point of it, our reference to exiting the bloodstock pieces relates to how we optimize and get -- have clarity around exactly which business areas we want to focus on and where we see our future broking opportunities. And part of that is about margin optimization.

The next question comes from Elizabeth Miliatis with Jarden.

Just the first one, if I could just circle back on the AU breaking medium-term target. If you could just sort of give some color regarding -- obviously, you've got that number out, but just relative to your main competitor, they're sort of operating at a margin of 35% roughly at the minute. Obviously, that target is ahead of where they're currently and how do you feel about your need to invest over the medium term versus reaching that sort of higher margin target?

Yes, Elizabeth. So firstly, I think there are 3 listed broking groups. The broking businesses in each of them operate at different margins. The other major competitor or partner appear in the market operates at a higher broking margin than that. So I think the reality is our target is -- would be set within -- between the 2. But again, without making too big noise about it, the fact is we swim in our own lane and we can see ways in which we can improve the margin in our Australian Broking business to achieve that target. And we think in parallel in that period, our competitors will lift their margins as well. So the reality is we're concentrating on what we can achieve and the portfolio of businesses that we have. We're very proud of the portfolio of businesses and broking business we have in Australia. And so we're very confident about achieving the margin.

And just again on AU Broking, your optimization of brokers' strategy, are you able to give us color on roughly where you're at with that at the minute. I think the -- also the goal was to sort of cut down the broking agencies to around 30 or 25 in the medium term?

Well, we don't have a goal. What we do want to do and I've described it as evolution rather than revolution. What we want to do is we want to ensure that we are catering for 3 different factors that firstly, we have the ability to cater for succession planning. Secondly, many of these businesses have ambitions of being bigger, exponentially larger. And a number of them are very well run, strongly managed businesses that have capacity to grow. And really what we're trying to do is facilitate that by consolidating. I need to cough again, so -- so what we're really trying to do is facilitate this portfolio of businesses where you have senior brokers in different stages of their career and different ambitions. And then thirdly, we do have businesses where either because of a specialty focus -- or sorry, areas where we have a specialty focus or scale and both of those drive higher margins. And so we really see it as a way of facilitating. Now, whether the answer is 50, 40, 30 or 5, we don't -- that's not what we're trying to hit to. What we're trying to do is every time we consolidate or optimize one of these businesses, the margin improves and the growth prospects improve. And in many cases, the optimization is borne out of identifying ways in which we can go and seek out acquisitions, targeted acquisitions that we can bolt in to existing businesses to achieve that.

And then just a question on BizCover just from a revenue perspective. You've already made some comments around the intermediated part of that business. If we look back over the last few years, that division sort of used to run at north -- well, north of 20% revenue growth, but it's really come down this half but also the prior half. How should we think about that sort of revenue trajectory over the next few years? Do you have confidence that it will ever get to close to 20%? Or should we think about it as an early double-digit going forward?

Yes, it's a great question. A difficult one to answer explicitly or definitively. I think the first is, it is a business where it's the vast -- its clients and the target market that BizCover services generally are businesses smaller than our average AUS broker client. As a consequence, they tend to be more buffeted by macroeconomic conditions. And as a consequence, what you've really got is a portfolio of customers that are more willing or have to cancel policies, et cetera, than our average medium-sized SME client of an AUS broker. So what you'll find, therefore, but it's also a segment that grows really quickly. And so for example, BizCover's post-COVID recovery was faster and earlier than the rest of our business, et cetera. So it is simply a portfolio of clients that respond more quickly to macroeconomic environment. Secondly, as I highlighted, the comparative sites, the reality is the comparator sites have refocused their advertising dollars on mortgage loan comparisons and energy comparisons. That's predictable. But that too will pass and the interest in insurance will revert. So again, I think there are these macroeconomic impacts on the business. However, there are ways in which we can accelerate growth again. And that's some of what I referenced around new sources of lead generation and ways in which we can drive top line growth again. What I do like about the business is the fact that there is a -- it is a very easy business to -- they're very flexible around their ability to then flex cost. So they have quite a lot of variable costs that they can control. And so hence, to compensate for the revenue growth being below forecast, they reduced their expenditure, particularly the variable side to improve the margin. So the bottom line impact tends to be neutralized. So that's really positive. Just we remain very enamored by the business [ to answer ]. It's a very well-run business, continues to grow market share, very dominant in the marketplace. And I would emphasize, I think if you took the current EBIT and the price we paid, I think it's now -- we effectively got a go-forward business at a roughly 9x multiple, which is an excellent outcome.

Next question comes from Jason Palmer with Taylor Collison.

I had a couple of questions. Just in respect of the Tysers first half number. I think you might have answered that there might have been AUD 0.5 million of net cost at that underlying number still included. I'm just -- and I think you also might have said that there's [ not an ] overall seasonality in terms of sales and earnings at Tysers from a first half, second half. So I'm just trying to understand the jump up in underlying NPAT expectations from the run rate in the first half or the second quarter that you actually own the business to the second half outlook, please?

Sure. firstly, to be explicit, there's GBP 890,000 pretax of cost that included in the first half of Tysers result that relate to items we were in the reconciliation for the EBIT margin, the normalized EBIT margin we communicated in May. So that's the first point. Those relate to costs and projects that came to an end at the end of December. And therefore, you could refer to those as non-continuing. And then I did emphasize to Sid that there is AUD 360,000 worth in there of cost synergies that were in the first -- in that first half that weren't in our original forecast either. So that's -- that piece explicitly. Sorry, just repeat your second question, if you don't mind.

Well, I think that implies around that sort of AUD 15 million NPAT range or thereabouts. I'm just trying to reconcile that versus the midpoint of guidance for Tysers for the second half, which I think is more around the AUD 37 million.

Yes. So there -- it's not seasonality in terms of the typical business seasonality. I think it's a mixture of cost actions and synergies that flow through. I mentioned the AUD 1.8 million or so of synergy benefits that are in the second half. And then there is a piece which is around -- so if you normalize for the roughly GBP 900,000 I spoke about, if you normalize for the cost synergies and then there is just a bit of organic growth as well in there.

I had 2 more questions, if I could, please. Just in terms of Slide 18, that Tysers currency overview slide. You've given some details around first half, second half hedging that's in place. And Mark was talking about how sort of half the book was roughly hedged out to October 2025. Are you able to sort of talk to sort of what rates you sort of hedged out on that residual book?

We're not prepared to give the rates past end of 2H '23 as is on Page 18.

Is that what you're asking, Jason? Are you asking -- so we've disclosed the rates for -- to June '23, you're talking about longer-term rates?

Okay.

Yes.

Very similar rates to the second half, Jason.

And then the last question was in respect to the New Zealand technology implementation of that first equity broker. My understanding was that there was a component of that program, which saves -- saved licensing costs because, obviously, it was licensing costs from outside the group, now come within the group and now there's also a component of additional commissions that were paid by way from the insurers. Have you started to see any of those commissions come through from the 2 that are on the platform?

Well, there's only one broker on the platform at this stage and our plan is for a further 2, so it will be 3 by the year-end. But -- so too soon. But yes, certainly, there will be a slight uptick in commissions, as you say. I think the reference to the license fees related to the Australian technology platform, iaAnyware. So no, we will still be paying license fees because the system in New Zealand uses a platform called JAVLN, which is an external New Zealand tech company. And so we'll be paying them license fees versus paying the license fees for [ E-Global ] too. So from that point of view, their productivity savings and income increases for business on the new platform. That's the business case for New Zealand. But again, very fresh off the mark, Jason. But certainly, my previous assumption that said in FY '24, at the very least, the project will be cost neutral because -- sorry, the costs will be offset by the revenue increases.

Sorry, can I just ask one in respect to Tysers, just in its form in terms of the outlook, have you had a look at the January numbers? And are they more closely aligned to the run rate that you need to get to for the jump up in the second half?

We're comfortable that if you tracked October through to last week's trading that the trajectory is such that we have confidence in our outlook.

The next question comes from Nathan Zaia with Morningstar.

Apologies in advance. I just had another question on the margin in Australian Broking. We've obviously already delivering good margins and confident more leverage will come through. Can you just talk about how you think about technology spend, marketing and supporting your brokers? And is there any point where you might see major technology investments like we're seeing in New Zealand now, which hits margins? Or is it more a matter of you pay licensing fees and there's just annual type increases and that sort of thing?

Nathan, so I think the first thing to emphasize is New Zealand really is the next step in the evolution of technology we commenced in Australia a few years ago. So in Australia, our strategy has really been about buying companies that have the technology that we want to use and therefore, we own the technology and we deploy it. So our ExpressCover platform, which is our SME quote-bind-issue platform uses BizCover's sort of under carriage. We also acquired a business called iaAnyware, which is the technology provider. It provides the broking system for the insurance adviser in that business, which -- so there's about AUD 1 billion of premium now in iaAnyware across our network. And so over time, we have effectively a highly performing very effective system for quote-bind-issue with automated interfaces into insurers, et cetera. And we have, if you like, a new broking system that is genuinely, we believe best-in-class and then we have our older broking platform. And so what we did in New Zealand was we said, right, let's take all of the things that we have delivered and learned in the Australian business. The difference in New Zealand is, currently, no one has broad platform integration into the insurers. And so we said, look, that's where most the cost is going to be. So we're going to invest in that and we're going to implement a full service solution that replaces our existing technology as we roll it out to the brokers. And so that solves the challenge in New Zealand because in New Zealand, they don't have the Sunrise platform, which in Australia, there's a level of technology consistency across the insurers. While in parallel, in Australia, we're building out in the BizCover section of the presentation, I referenced, we're going to have one extra -- another major insurer join the platform, the side of the financial year, et cetera. So all the time we're building out our technology. So the reason we've called out the technology and spend in New Zealand is because our practice is to expense all of the technology costs. And so in New Zealand, we didn't buy a business that had the technology. We've worked with the partner and we've got a classic technology project going on, which is why we have disclosed all of the spend. In Australia, we're leveraging assets we already own and we regard that as just ongoing spend. And so as part of our normal cost, we're investing in technology day in and day out in Australia. So short answer is there is no cliffhanger event that's going to require a massive technology spend in Australia. We've adopted a different strategy and we have a portfolio of very strong assets that actually allow us to roll them out to some of the other -- so for example, in the U.K., we're exploring how we can deploy some of our Australian assets.

Just a much simpler one. Can you talk about how many AUB brokers are using BizCover for those really small customers that they might not have serviced before?

And so the second part to that question is hard. What I can say is, every day, and obviously, it changes. But on average, about half of our network are writing business on ExpressCover but in terms of small customers that they have not serviced before, I don't know the answer to that.

[Operator Instructions] The next question comes from Olivier Coulon with E&P Financial Group.

Congrats on the result. Tysers with the margin -- medium-term guidance here of 30%. Is that pretty much only the wholesale business? Or does that also include the retail business because it did seem to recall the retail business might have been running at a slightly higher margin?

Yes. It's the portfolio, but it obviously factors in that we're assuming we'll own half of retail. But yes, it's the portfolio.

And then presumably, that captures the synergy realization. I think previously you said...

Correct.

Half of the uplift in revenue goes to AUB Australia, half goes to Tysers? Is that right?

Correct, Olivier.

Yes. Okay. So back solving, you're kind of targeting like a 3-ish-plus percent increase in the underlying kind of margin pre-synergies is like roughly?

Our numbers are 5%. So I think we're working on a 5% enhancement to the margin plus synergies.

And then synergies on top for that. And then sorry, on Tysers, I think you did 12% in the quarter that you owned like GWP growth in the quarter that you owned it. Did I view that correct that you're not assuming that level run rate relative to plan in the second half in your numbers?

No, I didn't say it like that. What I did say is I think Jason's question was, why do we expect such a big uplift in UNPAT contribution from Tysers in the second half? And it is because we expect continued organic growth, together with cost and -- well cost synergies, in particular, kicking in.

And then the GWP, I guess, the premium rate cycle that you assumed in Tysers, you're saying that it's a bit more favorable than it has been because of the type of lines that it's writing. Has that been fully factored into the outlook? Because it sounds like it seemed kind of more positive than your initial acquisition case?

It's a good try, Olivier. I'm not going to upgrade our upgrade.

The next question comes from Scott Hudson with MST.

Michael, just a couple of questions and apologies if you've covered these before jumping across calls today. In terms of the agencies business, could you just explain the profit commission impact on the margins in your agency...

Well, so I mean, fundamentally, obviously, the -- so firstly, last year, you might recall at the full year, I referenced that we had, had a record year of profit commissions massively higher than our historic long-term average payout or receipt of profit commissions. And I actually explicitly said unlikely to ever be repeated. I use that exact phrase. Secondly, I also called out that because of all the flood claims that we were seeing, that we anticipate that FY '23 and possibly FY '24, we'll we'd see muted profit commissions coming through. As a reminder, the profit commissions are commissions that are part of our binder arrangements that are withheld subject to -- so it's still -- it's a commission, but it's withheld subject to loss ratio performance on the portfolio. And obviously, loss ratio performance is partly the quality of the underwriting and partly just the phenomenon of cataclysmic events, et cetera. And last year was particularly tough in terms of flood claims and that tends to affect our broader portfolio of underwriting agencies. And so as a consequence, I also disclose that, certainly for the year ahead, we saw profit commissions being muted below our long-term average. Now to be explicit about it, if you look in the agencies page, you'll see under other income, AUD 4.9 million in the first half of '22 versus AUD 2.3 million in the first half of '23. That difference is pretty much all profit commission reduction. So if you add -- if you just -- if you normalize, then you can see that actually the business is performing really, really well, but for that.

I notice in your sort of top priorities, [ ANZ ] is no longer part of that sort of slide pack, I guess, from a strategy perspective, all the steps are in place to drive that margin to your long-term target?

Exactly. So please don't misread that our strategic initiatives are always about where we want to focus. It doesn't change -- Australian Broking has been a core strategic priority ever since day 1, right? So the fact is we just see the momentum in the business. We've made a bunch of steps. The processes in place. We've got all the people in place. The strategic initiatives often about where we want to have particular focus in the year or half year ahead. So agencies is absolutely critical, achieving that AUD 1 billion premium target, which candidly, we're getting to much quicker than I'd anticipated. When I first set the AUD 1 billion, I think we were at AUD 300 million-odd or something, AUD 270 million, I think, from memory. And so to be AUD 830 million in the calendar year past is extraordinary. And of course, that doesn't include the full year impact of SUU. It doesn't incorporate some of the facility increases and capacity increases we're anticipating as a result of Tysers assistance on the binder renewals in FY '24, et cetera. So I'm tempted to give a new target for premium, but it's going to be higher than AUD 1 billion. So we're very, very positive and agencies is a critical part of our portfolio.

Is SUU delivering you the scale that you needed in that sort of...

Yes. So both SUU and Longitude are performing very positively. We're very pleased with the SUU acquisition, great team, and we believe that's a market area that will go from strength to strength.

Michael, just on New Zealand, just to clarify that you still got, I guess, a second investment in the second half is quite a similar magnitude to your first half?

Yes.

And then does that cost come out completely in '24? Or is it just neutralize...

Well, the cost comes -- it doesn't come out because the cost transitions from a build cost to a rollout cost. Our assumption on the rollout cost is it reverts roughly to our prior year's sort of spend rate. However, our forecasting says it will be offset by incremental income and that the real tail of incremental net benefit happens second half of '24 through to '25.

The margin profile is expected to be fairly similar to '24 in the uplift?

Well, from the tech piece, but the core business, we have -- we'll see positive momentum because of the things we're addressing in other parts of the business.

There are no further questions at this time. I will now hand back to Mr. Emmett for any closing remarks.

Thank you very much, and thanks, everybody, for joining us this morning. I mean, last year, I described our results as a cracker. And given how much better today's result is I'm tempted to call it a super cracker. So slightly tongue in cheek, I know. All parts of the business are performing very well. The momentum is strong. Our strategic initiatives are continuing to deliver ongoing benefits. And as a result, as you know, we've provided a healthy and upgraded outlook for the full year and we've upgraded many of our medium-term margin targets earlier, I might say, than we'd originally anticipated and we've defined a margin target for Tysers. Our strong cash conversion and increasing headroom means we're well placed to continue to supplement the organic growth with good acquisitions. And the dividend, as spoken on the Q&A earlier is a prudent part of building the optionality for our future growth. The strategy to this point has provided us with a huge set of opportunities. The secret continues to be about continued execution. We've got a tremendously talented team of people. They're all aligned to deliver. Our outlook is very positive and I would emphasize irrespective of the rate cycle. Thank you so much for joining the call. I look forward to seeing many of you over the forthcoming week, and I hope you enjoy the rest of your day.

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