AUB Group Limited (AUB) Earnings Call Transcript & Summary

Thank you for standby, and welcome to the conference call for AUB's equity raisings. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Emmett, CEO and Managing Director of AUB Group. Please go ahead.

Thank you. Good morning, and thank you for joining us today. This morning, I'd like to provide you with an update about the continuing strong trading performance for AUB Group and to upgrade the guidance range or financial year '23 underlying net profit after tax. I'd also like to notify you that we will not be progressing with the sale of 50% of the Tysers U.K. retail business to PSC Insurance. And as a result, we're this morning, launching an equity raising, comprising a AUD 150 million underwritten placement together with the share purchase plan of up to AUD 15 million. I'll now discuss these items in more detail and refer you to Slide 9 of the investor presentation pack distributed earlier today. Over the past 4 years, AUB Group has been successfully delivering against our strategy to a very pleasing effect. Strong growth in gross written premium, which has risen by 53.1% CAGR, has supported high revenue growth. This, coupled with margin expansion of 440 basis points over the same period, has delivered pleasing underlying profit and EPS growth for shareholders. All parts of AUB Group are performing very well with the continued execution of accretive M&A, providing further impetus to this profitable growth and a strong pipeline of future M&A opportunities ahead of us. As a result of continuing momentum across the AUB Group, we are upgrading our guidance for financial year '23 underlying net profit after tax to a range of AUD 120 million to AUD 124 million, up from the previously announced range of AUD 112.9 million to AUD 121.4 million. The key drivers of this upgrade are as follows: the legacy components of AUB Group are all performing very strongly with pleasing organic growth across every business. Tysers wholesale is performing ahead of expectations and bolt-on and step-up acquisitions made during financial year '23 are contributing to profit growth. This partially diluted by the impact of some strategic disposals we've made earlier in FY '23. There is no impact on the upgrade from our decision to retain 100% ownership of Tysers U.K. retail. And this is because our assumption is that the incremental profit for May and June would have been offset by the reduced interest costs we would have enjoyed. Tysers is performing ahead of AUB group expectations with cost synergy realization on track and revenue synergies to flow in financial year '24. Tysers revenue is 9.6% ahead of AUB group forecast for the first 6 months of ownership to March '23, and the EBIT margin continues to improve, having exceeded 22.5% over the 6 months, up from the 20.4% in the quarter ended December and progressing well toward our previously communicated medium-term margin target of 30%. Following considerable discussions with PSC Insurance Group regarding the potential Tysers U.K. retail JV, AUB has decided not to sell 50% of the U.K. retail business to PSC. Tysers U.K. retail is a highly attractive business with meaningful scale, deep client relationships and strong organic and inorganic growth potential. Tysers U.K. Retail now operates as a separate legal entity with strong leadership and a separate board. Retaining this also results in strong strategic alignment with the Tysers wholesale business and the rest of the AUB Group. Had we proceeded with the sale of 50% of Tysers U.K. retail, AUB would have received AUD 100 million and used these proceeds to support a strong pipeline of acquisitions. Due to our decision to retain 100% of Tysers U.K. Retail, we are launching a fully underwritten AUD 150 million institutional placement and a non-underwritten share purchase plan targeting up to AUD 15 million. AUB expects to continue to pay dividends of between 50% and 70% of underlying net profit after tax and expect leverage of less than 2x by 30th of June 2023, assuming the net proceeds of AUD 150 million from this raising, together with a strong cash generative nature of the business. The impact [Audio Gap] from the deployment of capital in bolt-on acquisitions. On Slide 10, we highlight the outstanding gross written premium growth and the EBIT margin expansion that has underpinned AUB group growth over the past 4 years and the various strategically focused and accretive acquisitions we've made. We summarized on the top left that all parts of the group are performing very well, either meeting or strongly beating our ambitious expectations. During the first half of financial year '23, these businesses contributed to outstanding underlying net profit after tax growth of 32.6% over the prior year, excluding the additional positive impacts of the Tysers acquisition. Slide 11. As mentioned, the AUB Group has delivered strong and accelerated underlying net profit after tax growth of 17.1% CAGR over the past 4 years and EPS growth of 14.3% CAGR over the same period. The AUB Group is now a highly diversified business with significantly increased scale, a broader footprint and investments in complementary businesses that support our commercial insurance clients wherever they may operate. On the top right of this slide, you will note, that as a consequence of the continued strong momentum in the business, this will be the third in a series of guidance upgrades this year. Slide 12 highlights Tysers' overall performance for the first 6 months of ownership to 31 March 2023. Pleasingly, on a constant currency basis, revenue is 9.6% ahead of our initial forecasts. The positive contribution to growth in wholesale coming from Marine and Aviation, Contingency & Entertainment and International Property & Casualty, which includes Australia and New Zealand, while Tysers retail is also growing strongly. As mentioned, the EBIT margin strengthened to above 22.5% over the 6-month period, up from 20.4% over the December quarter, which is what we announced the February results. On the right of the slide, we've included information about the income mix for Tysers. We will note that 16% of Tysers' income is from U.K. retail. An important element of the past 6 months has been embracing the strong pool talent in Tysers. We are pleased to have implemented an LTI scheme that aligns the interests of a large group of senior brokers with AUB Group's interests over the next 3 years. Slide 13 describes Tysers U.K. retail performance in more detail. The bar graphs reflect that the strong growth in GWP of 12% CAGR has translated into revenue growth of 13.8% CAGR and that this income is spread across a broad spread of customers with low customer concentration. Over the past 6 months, we've created a separate legal entity to house all retail operations and teams. Retail is led by a strong and experienced U.K. retail leadership team and a separate board for the retail business has been put in place. In addition, AUB is establishing a new global retail leadership structure comprising the AUB broking leaders in Australia, New Zealand and the U.K. to enhance our retail operations across these geographies. We see the Tysers U.K. retail business as highly attractive and synergistic with the rest of the AUB Group and are excited to continue to own 100% going forward. Slide 14 is the same slide used in the AUB results presentation in February, showing Tysers' synergy plans and progress. Specifically, we anticipate achieving cost synergies of AUD 15 million per annum and expect these to be fully implemented on a run rate basis by December 2023, although the full benefit will flow into 2024. As at the 31st of December 2023, we had already implemented the equivalent of AUD 5.1 million of annual run rate savings, which will flow through the calendar year 2023. Revenue synergies of AUD 10 million have also been identified, and the implementation of these is well underway with the first financial benefits to be achieved in early financial year '24 with full implementation of these anticipated by July 2024. At the top left of Slide 15, I'd like to draw your attention to 2 observations. Firstly, you'll note that the organic growth rate of AUB Group has increased consistently over the past few years, with this continuing into FY '23, which is not shown on this slide. You'll also note that acquisition growth has been an important complement to the strong organic growth. At the bottom left of the slide, you'll see the profile of acquisition spend over the past 4 years. Please note, this excludes the Tysers acquisition as well as any disposals we have made over this period. Our M&A pipeline remains very strong. And in FY '23, we anticipate having made a record number of bolt-on and step-up investments. Given our decision to retain 100% of Tysers U.K. retail, we are raising capital in order to refresh our capacity to continue making acquisitions in financial year '24 and beyond as well as to reduce our leverage. At the end of March '23, our leverage ratio was 2.57x and we had AUD 59.8 million of cash and undrawn debt available. As a result of the equity raise, together with the inherent strong cash generation of the business, we anticipate the leverage ratio will reduce to less than 2x, and available cash and debt will be AUD 250 million providing strong capacity for continued acquisitions in the future. Slide 16 describes key elements of the equity raise. We are launching a fully underwritten institutional placement to raise AUD 150 million. 6.25 million shares will be issued, representing 6.2% of issued share capital under AUB's existing placement capacity. The offer price of AUD 24 per share represents a 7.2% discount to the last closing price and a 9.3% discount to the 5-day volume weighted-average trading price. In addition, AUB will offer eligible Australian and New Zealand shareholders the ability to participate in a non-underwritten share purchase plan targeting up to AUD 15 million. Shares offered under the SPP will be at the same offer price as the placement. And finally, the equity raising timetable is reflected on Slide 17, for your information. Thank you. And I'll now hand back to the moderator for questions.

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

Just a few. So in terms of the 6-month margin that you've called out, it implies the March quarter is ahead of what you reported that December half, which is obviously from that same quarter. Can you talk to any seasonality we should be thinking about that improvement that is coming from organic growth or synergies, I would be glad.

Yes. So Tim, the January to March quarter in Tysers is the -- from a wholesale point of view, is the highest revenue quarter across the year and -- but it is not significantly seasonal. And so broadly, if you took their revenue as AUD 200 million a year, just for our numbers sake, it would be about AUD 48 million a quarter, 4 quarters using our quarter numbers, 1, 2 and 4 and then the balance in quarter 3. And so yes, part of the -- and the reason that we said over 22.5%, we've attempted to slightly normalize. So the 22.5% you can take as the underlying margin excepting seasonality.

Yes. Okay. That's clear. And it may be too early to ask this question, but you had set a sort of 30% medium-term target for Tysers just retaining the -- what was going to be part of the joint venture -- the retail component sort of make you reconsider that number either through an impact from scale or mix of business?

Good question, Tim. I think too early to say. The only thing I'd say is we're making pleasing progress. I don't think last May, I'd have anticipated that we'd be saying now we're running at above 22.5% margin given where we were there, and I think they were running at a 6% margin. So I think we're making pleasing progress. We can see a lot of work to be done, but the 30% in our sites. You are correct. I think you would think that optimizing retail would mean that we could possibly accelerate our achievement of that medium-term target.

Yes. And then just a final question for me. It's because you've called out that gross AUD 149 million of bolt-ons. You have recycled sort of some network numbers where you haven't matched external bids? Just trying to understand maybe the materiality of that against that AUD 149 million and just the earnings yield on the exits versus the cost of debt?

Yes. So probably a question I would prefer to go into in more detail at the full year results, where we'll talk to what the net growth is in underlying profit from acquisitions, which will be net of disposals versus organic. So -- but the short answer is, as you'd expect, the disposals we're making generally are lower return businesses than the acquisitions we make.

Yes. So it's fair to say that the multiple you're earning on the exits also is higher than the -- what you've applied to the acquisitions?

Given who might be listening, I probably won't comment.

The next question comes from Elizabeth Miliatis with Jarden.

The first 1 is just on the retail business and just why you're wanting to retain that, not why you're wanting to retain that, but sort of what drove to the decision to retain it? I think somewhere in your presentation pack, you've flagged that you had actually decided to step away from discussions. But just wondering, was it a discussion of price or the core business of the retail business? Or what was really the key decision driving there?

Yes. From our perspective, right, obviously wanting to be -- and I would emphasize PSC were fantastic in the course of the process of negotiating this. So I think really where we got to is -- and always been uncomfortable characterizing other people's strategy. So I think fundamentally, they wanted to be 100% owners of the business and we didn't want to fully exit the business. I think that was where the fundamental difference of opinion. There were other items still to be still being discussed and point of difference. However, that was the fundamental one, which is -- and just as a reminder, I think fundamentally, we didn't want to exit retail in the U.K. We crafted a deal that we felt would make the balance of the market context with Russia roving tanks on to the Ukraine's front lawn and a large offshore acquisition there, I would say, the Slater and Gordon market effect. And so we constructed a deal that we felt would be represent a balance of risk and return to shareholders and therefore, would meet their risk appetite. We always felt the retail business in the U.K. is a very, very high-performing opportunity and therefore, why we didn't want to exit it fully. But -- so that's really the context of it. And so we -- the key unresolved item that we couldn't get resolution on was PSC's desire to own 100% of the business and our desire not to relinquish our ownership of business.

Okay. Got it. And then just a follow-on question on that. So you've kindly provided us with the 6-month revenue numbers for Tysers or by the key buckets. And if you sort of back solve to the March quarter for the retail business, it does seem that relative to your initial expectations, things aren't as robust as they were perhaps at the start of that 6-month period ended December quarter. Is there anything in that, that we should be reading into perhaps some seasonality?

No. So it's actually purely about our own forecasting conservatism, right? So as you'd imagine, in October, our forecast for the first quarter of ownership of a large complex business, was more conservative than our second quarter forecast, which is then a bit more conservative than our third quarter forecast. And so I think there's just an element of conservatism built into that first quarter where, frankly, we under -- we intentionally built in more contingency into our estimates than turned out to be necessary. But I think just good sensible conservative forecasting. And it's the same reason why the range in our guidance reduces over time. In November, we've asked why the range was quite large. Well, the reality is more moving parts, larger uncertainty and therefore a bigger range as we progress through the year and we've seen better performance, particularly from Tysers, we've narrowed the range feeling more confident in the accuracy of our forecast.

Okay. Got it. Any difference in the December quarter is much larger versus March so that all Makes sense. And then just 1 final question. Just on that AUD 149 million bolt-on acquisition spend you've got for FY '23. Are you able to give color as to how much you've already done or is sort of already captured within the first half numbers and what we should expect in the second half? And then also, are there any particular areas that you're looking to make those bolt-ons potentially the STRATA business or?

So I'll answer that as 2 separate questions. I'm oversimplifying and rounding, but roughly first half acquisitions and bolt-ons were about AUD 90 million and the second half, AUD 60 million. So that's the split of the 150-odd, with some of the AUD 60 million to be spent in the last month, and -- that is a forecast. In terms of your second question, great question. I think on the 1 slide where we show all the logos of the acquisitions we've made, every 1 of those logos, what we don't do is buy businesses that bring us up and say we're for sale. We target businesses that we'd like to invest in because they complement our portfolio of businesses. There are times when we make what we describe as strategic investments. And the 2 key strategic investments we paid over the last year the Tysers in this cover, they represent new verticals in our business landscape, like in our operating model. But the rest of the acquisitions are all linked to specific capabilities that we need either because of scale or because of product or geography, et cetera. And so SCU or 360 or et cetera, et cetera. And so the acquisitions we're making are all about increasing agencies, particular specialty areas in broking in Australia, building out our broking scale in New Zealand. And then I'd anticipate some bolt-on acquisitions in retail U.K. So those represent broadly the ways in which we would deploy capital over the next 18 to 24 months.

The next question comes from Siddharth Parameswaran.

Couple of questions. Just maybe if I could just ask about the strategy with the retail business in the U.K. given that you don't have a partner now who had perhaps more experience in the retail broking market in the U.K. Does this change your -- how much scale you think you need in the U.K. in this segment? Like I mean, would you see more scale on the retail side? Does the fact that you don't have somebody else who perhaps has more experience change your approach to managing this business at all?

No, I think -- well, so some of the items I referenced earlier, I think we wouldn't have set up a global retail leadership structure if we proceeded with it. So I guess there's a bit where effectively, we do see ways. And interestingly, we see ways in which our Australian and New Zealand retail businesses could benefit from understanding some of the things that the Tysers U.K. retail guys do. So the first thing is, yes, there will be some capacity consumed from our respective Australia, New Zealand and U.K. retail broking leaders as they work together at a group level. But effectively, Tysers Retail is a midsized broking group. They have the right scale, what they lack is greater geographic distribution. And so the opportunities are for us to effectively buy branch bolt-ons that match their product and customer mix. They tend to have quite a lot of high net worth customers. They turn to have quite a lot of some specialty areas around certain industries in the SME and mid-market space. And so simple logic would say, well, if you've got 4 branches with commonality around industry and segment of customer, then buying a branch in further north, Northern England or West England, et cetera, et cetera, or even into Scotland and Ireland. Those are perfectly plausible bolt-on acquisitions that you're buying geographic footprint effect. So that's the most likely way in which we would expand there. But I would emphasize, we've got a very strong operating leadership in Tysers retail. And we've done all the heavy lifting around separate legal entity. We've transitioned all the assets and we've -- in the U.K., there's a process called TUPE, which is the transfer of employment of teams, all of that piece has been done. There's a new separate Tysers Retail Board, which includes -- I'm on that board, for example. We literally are establishing and we'll run the first of these global retail leadership piece. So it's just a different approach. We probably would have had a more hands-off approach to it had we proceeded with the JV. But I don't think it's anything to do with limitations around scale, et cetera.

Yes. Okay. Okay. That's quite helpful. Maybe just an additional question then just on the runway from here for further acquisitions. So I mean, I think you make -- you say you've got AUD 250 million of cash and debt capacity to do them post the raising. I was just wondering if you could perhaps -- just help us understand where you're most likely to deploy that capital? Is it expanding more of this retail side? Is it in Australia? And just maybe some comment on differences in multiples if there is more to be spent in the U.K.? And also just multiples that currently in Australia.

There is not a comment on sequence. But effectively, what I was trying to get across when I was answering Elizabeth's question was, was this -- which is effectively the prioritization or weighting in terms of the deployment of capital, it would be agencies. And I say agencies because we want to grow that in Australia and in New Zealand, but we do see opportunities to expand in agencies in the U.K. as well. So there's agencies across all 3 territories. There's specific specialty broking businesses in Australia. We have identified clear product or industries where we'd like to bolster our capability and scale. So they're particular very clear targeted businesses that we'd be interested investing in. There's general broking scale in New Zealand that we'd like to invest in to increase our scale there. And then there is bolt-ons, as I've just described in the U.K. around retail. And then there are key teams. I'd say teams, not necessarily team lifts, but certainly, there are some scale capabilities that we would either buy smallish niche teams or businesses in the U.K. around wholesale. So those represent the -- there's some areas around particular niche reinsurance capabilities, et cetera. So it's really around -- I describe it as a jigsaw. I'm sure it's more technically a matrix. But effectively, the gaps that we've identified in our portfolio, 1 lens is geographic, 1 lens is product, 1 lens is industry, and we're trying to plug those gaps through investments in acquisitions. So that's the -- if we're talking in terms of implied sequencing, then that's the way we deploy the capital. I think the other point about it is, at the moment, debt is expensive. Our debt facility is not a cheap one. And so there are also -- part of this is, as we've mentioned in the presentation, as at the end of June, we'll have roughly AUD 250 million of cash and debt headroom and so that also reduces our short-term cost of debt, and that gives us opportunities, but it's really taking an 18- to 24-month view of opportunities ahead of us and factoring in the cost of debt and the current market context.

Yes. And the question that I asked just about the multiples, just in those different regions and -- versus history?

Well, at a headline, you'd say that multiples in the U.K. are higher than New Zealand, which are higher than Australia. I hope you were ranking them. But I think that's -- I think the range of EBIT multiples is 7.5% to 15% across all 3 territories. And we don't buy things at 15%. So I think there's a big range, and it's really up to the acquirer define ways in which -- I like to fish in an acquired part of the lake, where there's not a lot of noise and chatter and competition, frankly.

The next question comes from Olivier Coulon with E&P Financial.

Can you hear me?

Yes, we can.