Australian Ethical Investment Limited (AEF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Ethical Investment FY '23 Results Briefing. [Operator Instructions]. I would now like to hand the conference over to Mellanie Hill, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us. My name is Mellanie Hill, and I'm the Head of Investor Relations of Australian Ethical. I would like to begin by acknowledging the traditional owners of the country on which we work, the gadigal people, one of the 29 tribes of the Eora nation and recognize their continuing connection to the land, waters and culture. We pay our respects to the elders past and present. Please note that today's presentation is being recorded, and a recording will be made available on the Australian Ethical website. The slides used in the presentation are also available on our website. There will be an opportunity for questions and answers at the end. Questions can be submitted via the webcast using the ask a question box. We may also have media in attendance this morning. I'm joined this morning by John McMurdo, our Group CEO and Managing Director of Australian Ethical. Mark Simons, our CFO; and Ross Piper, former CEO of Christian Super and now our Chief Executive, Superannuation. Ross is also responsible for the operations of the broader business. John and Ross will take you through the highlights. Mark will cover off the financials, and then John will give an update on business strategy.

Thanks, Mel. Good morning, everyone. Thanks very much for joining us. I'm also joined this morning by our Chief Investment Officer, Luda Victeo; and also Alison George, our Head of Impact and Ethics, who are both also available to answer questions at the end of this presentation. Before I begin, I would like to first acknowledge the recent sad passing of our colleague and friends, Mike Murray, who so ably led our domestic equities team for a number of years. We miss you, Mike and are grateful for the legacy you have left in such a strong and expert team. Before Ross and Mark get into the highlights, I wanted to provide you with some important context for understanding our results today, particularly for newer investors. We're now 2 years into a strategy that is already transforming Australian Ethical into a bigger, more impactful business. We are seeing clear results that the strategy is working and we'll share these key indicators with you this morning. As part of this context, it's important to understand that Australian Ethical is not your standard listed financial services company. In addition to the value we create for shareholders, we deliver investor returns through ethical investing, which, in turn, creates a positive impact for people, planet and animals. This dual purposes in our constitution and the fabric of our organization. It's why people choose to invest with us and why people want to work for us because of our true authenticity. Importantly, the drivers for and the demand for this style of investing are clearly stronger than ever and only like to accelerate as both the existential threat to the plant and the urgency of humans to address these problems grows. In our 2021 results, we outlined our growth strategy, which remains consistent. We are already an acknowledged global role model for responsible and principal investing. We believe the shift to responsible investing will accelerate over the next decade, substantially growing our addressable market. And so we continue to invest in a strategic manner to remain at the forefront and be well positioned to take advantage of this opportunity for our stakeholders. Through our advocacy work, we aim to use our collective voice to advocate for a better world. And of course, we are building the capability of the business and investing in an array of growth options to scale our business and improve the sustainability outcomes of our portfolios in response to the increase in investor demand. It's been a remarkable year for us as we've continued to execute our strategic plan with focus and discipline. We unquestionably now have a stronger, more diversified, more capable business. We've been delighted in FY '23 to achieve both solid underlying profit growth and significant growth in our funds under management, positioning us very strongly for the future. For the full year, revenue was up 15% to just over AUD 81 million. Underlying profit was at the top end of our earlier earnings guidance at AUD 11.8 million. Statutory NPAT, of course, was down as planned as we invested to integrate the Christian Super, SFT and other areas of our growth. The fair value write-down of the Sentient investment, as previously reported, is also reflected in our FY '23 statutory NPAT. Our underlying growth was partly aided by investment performance, which was a pleasing AUD 610 million for the year. But of course, our full year results, while very positive actually only tells part of the story. The fourth story is that between continued organic growth, and the integration of the Christian Super customer base. We finished the year with 48% growth in funds under management. Our funds under management grew by AUD 3 billion. the largest absolute 1 year growth in our history to a new record high of AUD 9.2 billion. A clear demonstration of the resilience of our business, and the sound execution of our growth strategy. The scale of our business is becoming evident in the second half of FY '23, with second half revenue up a further 22% on the first half and underlying profit up 38% on the first half at AUD 6.8 million. That means our revenue run rate starting FY '24 was already at AUD 92 million. The improved profit and continued confidence heading into FY '24 has enabled the Board to declare a strong second half final dividend of AUD 0.05 per share, taking the full year dividend to AUD 0.07, up 17% year-on-year. Clearly, Australian Ethical finishes FY '23 with enhanced scale, improving operating leverage and momentum, which we'll share with you over the next few minutes. Ross, can I pass to you to share some of the operating highlights and particularly a perspective on Christian Super choosing to be part of Australian Ethical.

Thanks very much, John. For those of you unaware, I was the Chief Executive of Christian Super, and I'm now delighted to be responsible for the superannuation delivery of Australian Ethical along with being responsible for operations of the broader business. I'm really pleased to report that the Christian Super SFT has been successfully delivered. And when Christian Super was looking for an SFT partner, Australian Ethical has chosen for a range of reasons but a primary consideration was a deeply aligned investment approach and also a shared heritage of pioneering leadership over many years in ethical and impact investing. But the two funds also had a number of other areas in common including a highly engaged membership who care deeply about how their superannuation and funds are invested in line with their values and beliefs. The SFT has successfully brought thousands of Christian Super members into the larger Australian Ethical organization. And this is -- this brings the benefits of scale and blended capabilities to the combined membership and also opens up a significantly larger addressable market for continued growth. The SFT was delivered in near record time and capabilities built through this process mean that Australian Ethical is well positioned for future inorganic growth opportunities. But Christian Super joining Australian Ethical while a major highlight is only one of many highlights of FY '23. Our customer numbers grew both organically and via Christian Super to now be more than 127,000. Our organic retail flows, excluding institutional, were a further AUD 650 million in a period where many managed fund competitors were recording net outflows. We continue to receive multiple investments and other awards. Our brand familiarity improved overall and notably among advisers and our customer advocacy and satisfaction remained among the best in the country as did our employee engagement. Our awards include recognition for investment excellence for the quality of our super fund offering and also for our responsible investment leadership. John mentioned our authenticity at the beginning. This authenticity and pedigree is deeply embedded in our business. From our constitution to our ethical charter to the establishment of the Australian Ethical Foundation and to the various organizations we are actively involved in. It manifests in many ways. Indeed, we're proud of the first public company in Australia to achieve B-Corp certification many years ago and then to be recertified on the 13th of July this year as the highest scoring certified B-Corp in Australia and New Zealand. Our investment portfolio continues to deliver positive outcomes, avoiding investments in companies that are harmful to the world, contributing to lower emissions, more renewable energy solutions and contributing positively to the UN's sustainable development goals. But our influence extends well beyond the capital we deploy to positive companies. Our investors significantly value that we use our influence in boardrooms with CEOs at AGMs via the media and also through sponsoring research and through submission to industry bodies and governments. We do this with a strategic focus but also with multiyear commitments of time, energy and financial resources to achieve outcomes our investors can be proud of. And even in addition to all of that activity, we direct a further portion of our profits to wonderful courses via the Australian Ethical Foundation. I contend you could not find a more authentic, motivated and action-oriented responsible investor anywhere. And I do believe that's why we are rated and regarded by Morningstar and others as one of a very small number of true global leaders in our domain. This success is, of course, delivered and underpinned by an amazing team. Australian Ethical is focused and investing meaningfully to attract and build a deeply purpose-driven but also high-performing culture, and we are very excited about our ability to keep growing this amazing organization. Well, let me now hand you over to Mark, who will take you through some of the financial highlights for FY '23.

Thanks, Ross and John. It certainly has been a successful year with the delivery of the SFT, our disciplined investment in strengthening our business platform, the emergence of operating leverage, and we continue to retain a strong balance sheet with excellent cash conversion, no debt and a surplus regulatory capital. All of which has underpinned our solid results for the year. We've seen incredible fund growth over the last 4 years with a compound growth rate of 28%. We have grown by more than AUD 5 billion in the last 3 years. During FY '23 alone, we have achieved a record AUD 3 billion fund growth, which has included a very pleasing combination of organic retail net flows, investment performance and the inorganic growth by the SFT to land at a record fund level of AUD 9.2 billion at the end of the year. Customers have also grown 28% per annum compound over the past 4 years. Super members are up 65% in the year. And this is a result of the combination of the new SFT team members, alongside strong organic member growth of 27%. Volatile market conditions have impacted short-term managed fund investor growth due to the discretionary nature of this investment. However, it is good to see our managed fund and average balance per investor has increased during the year. With an overall 54% increase in customers across both Super and managed funds, we currently have over 127,000 customers providing us with increased scale and setting us up well for the year ahead. Despite what was a challenging year for investment managers, our organic growth continued with AUD 650 million in our retail and wholesale net flows. As part of our strategy, we continue to promote a diverse range of products alongside channel expansion to ensure more customers are aware of and invest in Australian Ethical. As we grow our Super members, we grow our Super Guarantee contributions, which is our annuity revenue stream. In this financial year, we reported a record AUD 450 million in Super Guarantee contributions. As always, we are focused on engaging and retaining our customers. We are particularly pleased with Super members retention following the SFT was ahead of our expectations. Our fee strategy is a key component of our growth strategy to ensure our products are competitive for current and future members and customers, while at the same time driving profitable growth for shareholders. Since 2015, we have seen funds increase almost eightfold as our funds margins reduced by 99 basis points. On an annual basis, we benchmark our fees against competitors, taking into account the cost of using external specialist asset managers. As at 30 June, our Super margin is 0.99%, and our managed funds margin is 1.03%. As John mentioned, we are very satisfied with our 15% revenue growth, underpinned by average fund growth of 17% for the year, having passed the AUD 80 million annual revenue milestone. As the team focused on delivering the SFT in the first half, the price is always in delivering a more meaningful revenue run rate in the second half of the year, and this has resulted in 22% half-on-half revenue uplift. The managed fund revenue reduced the result of the institutional redemption, but with the end of year fund up the starting run rate for this product is improving. Pleasingly, with the significant fund growth experienced in FY '23, we started FY '24 with a revenue run rate of AUD 92 million. Operating expenses for the year increased by 15%. During the year, we continued to strengthen our capability, adding 19 new FTEs, including retained Christian Super roles and key strategic leadership roles. Following the SFT and our new CIO's appointment, we continue to strengthen our investment team capability to build out strategies and create more capacity. 50% of this 15% increase relates to the increase in variable costs relating to fund and customer growth. During the year, we also made a decision to continue to invest in our brand and to expand our channels to capture greater share of super members by the employment platforms. This investment has yielded strong organic customer growth in difficult market conditions. With disciplined cost management and sharp negotiation, we've contained other cost growth despite the inflationary environment. Let me provide you a snapshot of the annual financial results. On a like-for-like basis, with no performance fees earned in the year. The underlying profit before performance fees increased 17% over the course of the year. You'll note that including in our underlying profit adjustments or integration costs relating to the FFT with Christian Super. The payback on this cost is under a year given additional revenue and marginal cost uplift as a result of this transaction. On account of the SFT, we are now turning our focus to extract further middle and back office synergies through the transition of the superannuation administration services to a single provider. The second half underlying profit was up 38% compared to the first half with operating leverage starting to emerge as our cost-to-income ratio reduced by 3% to 78%. Our focus into FY '24 is to improve this operating leverage ratio as we continue to build a scalable business. We're currently running a AUD 13.5 million regulatory capital surplus, supporting a high dividend payout ratio and funding for potential future inorganic opportunities. We continue to retain a strong balance sheet with excellent cash conversion, no debt and surplus regulatory capital. The next two slides reflect the strong set of financial metrics, seeing the revenue doubling over the past 5 years with a clear pathway to more than AUD 100 billion in the short term is very pleasing. I'll now hand back to John to provide a brief business update.

Thanks, Mark. In terms of business update, we are making very meaningful progress in every element of our strategic execution. We have an expanded investment capability and team, able to position the business in new asset classes and opportunities, thereby further diversifying and strengthening our business. Our advocacy is most importantly, making a positive difference in the world but also building our brands and reputation. The experience we are delivering for clients continues to strengthen and the additional scale we have amassed has enabled us to deliver a competitive fee proposition at the same time our shareholders are benefiting. And clearly, having grown our funds under management from AUD 4 billion only 3 years ago to in excess of AUD 9 billion today. We are a larger, stronger and more impactful business. And yes, for all of the success we have enjoyed in the last couple of years, we still feel there is much more to come. We expect the shift to responsible investment to continue, among an increasingly informed investor base across Australia. It has been encouraging to see over the past year increased regulator focus on our sector, which we welcome. We believe that customers who choose to invest in environmentally, socially responsible and well-governed investments should have absolute confidence that their money is contributing positively to the world. And so with our 37-year history and track record of investing ethically, we have many immediate and medium-term opportunities in front of us to grow scale, to embed efficiency and to create new options for the future. And we do that with great people capability, a strong platform and a strong ungeared balance sheet. Thanks very much for joining us this morning, and we do look forward to answering any questions you may have of us.

Thanks, John, Mark and Ross. We will now take any questions you may have. [Operator Instructions]. I've had a question in regarding the SFT, which I'll talk to you, Mark, has the SFT with Christian Super been a success from a financial perspective.

Thanks for that question. The SFT has been a success across all measures, including financial and other. The speed of execution has been incredible. The strong member engagement and retention seat has exceeded our expectations. We have internalized 85% of the investment management of the fund that was with Christian Super. We've only added marginal additional costs, strengthening our investment and platform capability. And this increased scale has allowed benefits to be shared with members and also with the shareholders. with profit uplift and EBITDA uplift. We're quite happy with the larger future addressable market. So we're very happy with the SFT and the future that it has given us.

Thank you, Mark. I've had another question in which I think I'll turn to you, Ross. What is Australian Ethical stand as a company on the voice [referendum]?

Thanks for that question. Look, we face a challenging time as a nation, I suspect, over the next few months. And as ethical and values-driven investors, Australian Ethical cares deeply about issues of justice in our society. And in fact, our conviction is that these issues have a strong and direct correlation with building a sustainable resilient and, if you like, prosperous future for all Australians. And as an ethical investor, we've always sought to advocate on issues where we believe that change is needed or beneficial. And so it's from this position that we have wrestled deeply with issues of the upcoming voice. But in fact, we are very pleased to affirm organizational support for a yes position on the upcoming referendum. Informing that, we've had some great opportunities to engage with First Nations stakeholders and various others to inform that position. And supporting this, there are a range of external and internal initiatives with our staff and members and investors to help build awareness and understanding on relevant issues regarding the referendum. We continue to be actively engaged in broader activities through our foundation and our reconciliation action plan.

Excellent. Thank you, Ross. Another one has coming for you, which I'll show it to you, Ross. In terms of the superannuation performance test, and how our business stands in relation to this test, if you could talk to that.

Look, there's been a lot of commentary about the performance test. And in fact, we welcome any initiatives that help consumers make informed choices about how their superannuation funds are being managed and invested. It's also really important to restate that a long-term perspective on investments is critically important. We track and monitor performance against the performance test closely, we have no issues at this point. But we also recognize that we want to retain a long-term focus in all aspects, and we have a great conviction that the portfolio settings we have will deliver long-term value for members of that fund.

Excellent. Thank you, Ross. I've got one about the average dollar figure of rollovers, have there been any trends, Mark, relating to how rollovers have fared this year from new members versus the previous year.

Thanks for this question. The average rollover has -- is slightly down over the course of the year, but it finished slightly, and that's a result of the overall market's volatility investment performance in some of the stocks. Portfolios that people are investing in. But we're very happy at Australian Ethical, our average rollover has been [AUD 39,000]. So it's part of our Analyst Pack, we have presented that information. And so we're quite comfortable with where that stands. Our average balance across all members is in the plus over AUD 60,000 per member in growth.

Thank you, Mark. So one for you, a question has come in regarding the importance of the employment platform to the business, which we touched on. Can you talk more about how important it change the business in terms of customer acquisition and how that channel is going?

No, no, good. Look, it's actually a small part of our success, in the last period. Our growth has still been substantially driven by our B2C model, our direct acquisition model, also our advice channel. But there has been a small contribution from the employment platforms. That's been part of our test and learn. We decided over the last year to test and try this platform with a couple of partners. The experience of that has been mixed. Some of the customers have been lower quality than we'd like. What we have been pleased with is one particular partner that experience has been stronger and is generating a good quality of clients, a good return on our investment. So I expected something that does continue to contribute to our financials going forward, but it's been a small part of our FY '23 results.

Excellent. Thank you, John. We've had a question in regarding the geographical spread of our investors? And do we see any advantage to expanding physical presence of our company given the brand recognition. So over to you, Mark.

Okay. Overall, the geographical spread of our customers are across Australia. So we're quite comfortable that we've got the geographical spread across the whole. We have -- from our presence, we have an office down in Melbourne, which has been growing and expanding. We've got about 20 people in that office, and they're engaging with customers and advisers and various channels in that market. We've also got the Queensland coverage, but our business development management personnel covers the whole of Australia, and we're quite comfortable with how we have spread our team.

Excellent. Thank you, Mark. That's all the questions we've had in for today. Thank you again for joining us, and enjoy the rest of your day. Thank you.