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

Thank you. Good morning, everyone. Thank you for joining us. My name is Melanie Hill, and I'm Head of Investor Relations at Australian Ethical. I would like to begin by acknowledging the traditional owners of the country on which we work, the Gadigal people, 1 of the 29 tribes of the Eora nation and recognize their continuing connection to the land, waters and culture. We pay our respects to their 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 Q&A at the end. [Operator Instructions] 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; and Mark Simons, our CFO. John will take us through the highlights. Mark will cover off the financials, and then John will provide a business update.

Thanks, Mel, and good morning, everyone. Before Mark and I get into the highlights, of which there are many, I wanted to remind you of some important context for understanding our results today, particularly for newer shareholders. Australian Ethical is not your standard listed financial services company. In addition to the value we create for shareholders, we deliver customer returns through ethical investing, focused on positively influencing outcomes for people, planet and animals. This dual purpose is 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. We believe the drivers for and the demand for responsible investing is now permanent and only likely to grow over time as both the existential threat to the planet and the urgency of humans to address these problems grows. We have also been intentionally scaling the business up over the last 4 to 5 years to capture that growing addressable market for our shareholders and broader stakeholder group. We have been growing with a clear, consistent and disciplined strategy. We are now an acknowledged global role model for responsible and principled investing and have positioned the business to remain at that forefront, poised to take advantage of further opportunity for our stakeholders. Through our advocacy work, we use our collective voice to advocate for a better world. And of course, we have been building the capability and investing in an array of growth options to further scale the business and enhance the impact of our portfolios in response to the increase in customer demand. We have executed that strategy confident that as we transform Australian Ethical into the bigger, more influential business we are now becoming, that the results of that strategy would become evident for shareholders. I'm pleased to share that our disciplined execution has delivered a milestone year in FY '24. Over the last 12 months or so, I've sought to be clear that off the back of our recent organic growth and the successful integration of Christian Super that we would deliver higher revenues, improved profit and enhanced ongoing operating leverage. And so we are delighted this morning to show significant further improvement in all FY '24 metrics relative to FY '23. 24% year-on-year revenue growth enabled us to achieve the significant milestone of $100 million of revenue for the year, further positive net flows, which were up 30% on the prior corresponding period and positive investment performance contributing to that result. In FY '24, underlying profit was up a significant 57% on FY '23, delivering on the scale benefits we sought to achieve. Full year statutory NPAT was up 80% to $11.8 million. The one disappointment, for me, in a strong set of results is that we have taken a further and final fair value write-down of $2.16 million on our investment in Sentient Impact Group. This business has failed to deliver on its growth ambitions and has commenced an orderly disposal of its assets. That write-down of our minority stake, which was taken in 2021 is, of course, nonrecurring and noncash but has reduced our second half statutory NPAT to $5.6 million. In the absence of that, our full year results would have been even higher than the 80% NPAT growth we are announcing for the full year this morning. In terms of underlying momentum, however, it has continued throughout the year, with second half underlying profit, up a further 18% on the first half at $10 million. Our scale growth, as I said, has always been with a structural improvement and operating leverage in mind. So it is very pleasing to see a step change in our underlying cost-to-income ratio at 74% for FY '24, compared with 79% in FY '23. This momentum and the structural enhancement in our profit realization has enabled the Board with confidence to confirm a record high dividend of $0.09 per share for the full year, including a second half dividend of $0.06 per share. When we embarked on our growth strategy 4 years ago, we were clear that while our investment in the business might dampen short-term profit growth; that funds under management and revenue capture, if we were successful, would result in stronger medium- to longer-term profit growth and a business more capable of capturing further upside beyond that. As I sit here today, the Australian Ethical team are delivering on that promise. TAM capture has been strong. Revenue growth, even after sharpening our pricing over the 4-year period to intentionally create a better moat for customer retention, has been very pleasing. That has enabled us now to present 5-year underlying profit growth, running a 23% compound and to deliver a 5-year total shareholder return, or TSR, of greater than 160%. One notable aspect of that more diversified, more capable business is our growing M&A muscle, which has clearly added another dimension of capability and potential for further acceleration of AE. While the majority of our growth has and will continue to come organically, securing the Christian Super opportunity, the crisp integration of that business and the internalization of the asset management, from which the value extraction is now very evident, has been a significant success story for our business with quality execution, of course, being the key. Our M&A strategy is focused. It is for scale, tucking and values align businesses and distribution that fit our economic engine of investment management, Christian Super being a clear example of that. And it's for capability, capability that expands the strength and value capture ability of that economic engine. As we have shared with the market, we have leveraged that M&A capability to secure, we believe, a compelling further opportunity with the acquisition of Altius Asset Management. Scheduled to complete at the end of next month, this provides us the ability to add valuable and strengthened asset class capability, retained further manufacture margin as we continue to grow organically and acquisitively, and it is immediately EPS accretive. For me, even more important than the results we have now delivered, the unquestionably stronger, more diversified, more capable business we now have positions us strongly for further growth. To give you more insight into that momentum and position, we've now delivered more than 40 consecutive quarters of positive net flows through various economic and political cycles, inflationary environments and global pandemics, while many other fund managers have, at times, struggled. We have built, with intention, one of the most trusted superannuation brands in the country. We have one of the highest rates of customer retention, strong customer experience and satisfaction. We have a broader asset class and product offering with consistent awards for investment excellence and the quality of our people, and it's a great place to work. We're now receiving multiple awards across almost every facet of our business, for investments and superannuation excellence, responsible investment leadership, for growth and for our customer experience and service. We were recently awarded the highest-ever B corp rating in Australia and New Zealand for any business in any sector, given the quality of our business and our ability to acknowledge and deliver for multiple stakeholders, the highest score ever. So we have recognition of our growth, our customer delivery, recognition of the quality of our sustainably built and oriented company and recognition for our investment in ethical craft on, not just a local stage, but internationally. It's a deep pedigree, deeply embedded in all aspects of our business. Our investment portfolio continues to deliver positive outcomes, restricting 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. We use that pedigree and trusted voice to help deliver on our purpose and boardrooms with CEOs at AGMs via the media through sponsoring research and through submission to industry bodies and governments. And we do that, not only with businesses and assets we direct capital to, but also in sectors where we don't. These are often multiyear engagements and, very often, behind the scenes as well as sometimes very clearly and intentionally in the public domain. Our customers value this immensely. And to cap that off, we put our mouth where our money is and our money where our mouth is via the Australian Ethical Foundation to fund and advocate for a better world. It's all delivered by the most amazing team I've had the privilege to lead in more than 30 years of financial services leadership. 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 seen as an employer of choice and rated and regarded by Morningstar and others as one of a very small number of true global leaders in our domain. Mark, can I get you to take us through the financial highlights and results, please?

Thank you, John. I agree FY '24 has produced strong results as we deliver on our strategy. The many financial highlights include breaking through the $10 billion in FUM and $100 million in revenue barriers, record profit, record dividend, highest-ever donation to our foundation and our improving operating leverage. Let me begin with a snapshot of the annual financial results. As John mentioned, our underlying profit was $18.5 million, up 57% for the year. This increase is the result of successful integration of Christian Super and disciplined investment in the business, resulting in improved operating leverage, which is a core focus. The statutory net profit of $11.8 million was 80% better than the prior year. Our underlying profit excludes nonbusiness-as-usual costs. During the year, these costs included the transformational super administration transition project, due diligence and transaction costs in connection with the Altius acquisition, along with preliminary due diligence costs on the M&A pipeline aligned with our strategy, and as John mentioned, a final fair value write-down on our investment in Sentient Impact Group of $2.16 million. The underlying cost income ratio for FY '24 was 74%, a 5 percentage point improvement compared to 79% in the prior year. FUM continues to grow year-on-year and reached a record $10.4 billion at year-end, another significant milestone in our 38-year history. This represents 3x growth as we look back 5 years to the $3.4 billion FUM we recorded in June 2019. FUM has grown -- is growing at a compound 5-year compound rate of 25%. Average FUM is a key driver of revenue and grew 25% during the year. We're pleased to announce the acquisition of the Altius Asset Management business in May, which will add approximately $2 billion of FUM in fixed income and is EPS accretive. The transaction is on track to complete by the end of September. Despite what was a challenging year for investment managers, our organic growth continued with $607 million in net flows for FY '24. Net flows were primarily driven by our super net flows, which tend to be more resilient than managed funds in challenging market conditions. This demonstrates the benefit of our diversified business. In FY '24, we achieved record super guarantee contributions in year-end voluntary contributions, a benefit of our increasing customer base. As always, we are focused on engaging and retaining our customers and have one of the lowest net outflow rates across the super fund industry. Our fee strategy is a key component of our growth strategy to ensure our products are competitive for current and future customers, while at the same time, driving profitable growth for our shareholders. At the time of the SFT in FY '23, we implemented a material fee reductions for our super members, and there has been no further reductions in FY '24. In the managed funds space, we targeted improving the high conviction fund returns by reducing its fee by 11 basis points to 0.69%. The overall fee margin has been relatively stable with revenue margin at 30 June '24 of 1.02%. On an annual basis, we benchmark our fees against competitors. And as we scale, we will continue to balance profitable growth with delivering a more competitive offering to our customers. Upon completion of the Altius Asset Management business acquisition, we expect our overall fee margin to naturally decrease to a pro forma margin of approximately 0.9%. It is great that we have now passed the $100 million revenue milestone. Revenue for the year was up 24%, with the second half revenue being 7% higher than the first half. Revenue growth was driven by the full year impact of the Christian Super SFT, continued positive net flows, ongoing growth in customers and investment performance. Revenue has now grown at 20% CAGR over the last 5 years, underpinned by the FUM growth, partially offset by strategic fee reductions. At the end of financial year, our revenue run rate is $106 million based on the closing FUM in the current revenue margin. In order to best position ourselves for the growth opportunities that lie ahead, it has been critical that we continue to build a scalable institutional-grade business platform. In the last year, we have added capability to support our investment-led product offering, progressed our super administration transition to grow, invest in our technology strategy to enable a data-driven digitalized business and operational efficiency through automation and innovation. We've prepared the business to transition to our new custodian and investment administrator, State Street, in November. And we are partway through upgrading to new front and middle office investment systems. Our operating expenses increased 16% to $74.4 million, including fixed and variable costs. Investment in new capability, combined with the run rate of the FY '23 hires, which included the Christian Super staff that were taken on in November as well as salary increases resulted in a 24% increase in employment costs. Our FTE has increased from 118 to 125 at year-end. The new hires were primarily in the investment in FX teams and the data and technology teams. We also enhanced our risk and governance function. The run rate of these hires will flow into FY '25. In FY '25, we will welcome 6 new Altius team members and be adding FTE to continue to strengthen platform in a disciplined manner. Unrelated expenses, which are variable in nature, increased 26% and were primarily driven by the higher average customer numbers and FUM following the SFT as well as the increase in regulatory levies. And this was partially offset by savings achieved through the reaching of various scale thresholds. IT expenses increased 21%, driven by the build of our core -- stronger core technology platform with new front, middle and back-office licenses in line with the team growth and strategy as well as the cost of improving our cybersecurity defenses. Offsetting these increases were marketing costs, which decreased 22% primarily due to the rationalization of the employment platforms distribution channel. Continued spend on brand remains an important component of driving our brand awareness and growth. However, timing of brand campaigns resulted in lower brand spend in FY '24 compared to the prior year. We continue to retain a stronger balance sheet with excellent cash conversion, no debt and surplus regulatory capital. We're currently running a $13.8 million regulatory capital surplus, retained to fund the Altius Asset Management business acquisition, increases in regulatory capital requirements and potential inorganic opportunities. These charts show our pleasing growth over time for key shareholder metrics with our underlying profit growing at a strong 23% CAGR since 2019. Net profit after tax has grown at a lower CAGR of 13%, as you would expect, given the investment in the business and as we deliberately chose to invest in strengthening the business platform. Our 5-year total shareholder return is over 60%. And Confidence in our business and momentum has resulted in the board declaring a final dividend of $0.06, which brings the full year dividend to $0.09, up 29% on last year and is a record dividend. I'll now hand over to John to provide a business update.

Thanks, Mark. In terms of business update, the reminder to start with is that we continue to be very intentional about the build of this business. We are positioned for 2 major structural themes and tailwinds, the growing addressable market for responsible investing, not only domestically, but globally and the mandated systems growth in superannuation in Australia. And while responsible investing growth won't necessarily be linear with green washing and other dynamics, no doubt causing periods of pause and then surge, we remain convinced that we are only in the early stages of a megatrend to this type of investing as the world responds to the existential threats facing humanity and as consumer behavior and preference continues to favor and even expect this investing approach. We're making very meaningful progress in every element of our strategic execution. We have an expanded investment in ethics capability and team, positioning the business in new asset classes, products and opportunities, further diversifying and strengthening our business. The addition of Altius next month will augment this further. Our advocacy is, most importantly, making a positive difference in the world, but also building our brand and reputation. The experience we are delivering for clients continues to strengthen from an already strong base as evidenced by the growing numbers of awards we receive. And clearly, having grown our funds under management from circa $4 billion only 4 years ago to $10.4 billion today and $12.4 billion pro forma with the inclusion of Altius upon completion next month, we are a larger, stronger and more impactful business already. And yet, for all the success we've clearly enjoyed in the last 4 years, we still feel there is much more to come. We are now at a size that's enabling us to continue to invest in the quality of our business and deliver increased profitability and operating leverage. Our business model build and brand positioning has been deliberate, a strong, differentiated, trusted retail brand; an economic capture model built around high-quality, high-margin, differentiated largely active investment management with all of the natural operating leverage potential that comes from an investment management operation at scale. But it's augmented and positively compounded through a multichannel distribution strategy focused on the high-margin and sticky retail channels with a particular strength and focus in the high systems growth, retail or B2C superannuation market. And so when I combine the macro structural thematics of system and addressable market growth, our 38-year history and track record of investing ethically, our brand trust and our intentional business model and overlay that with periodic disciplined and accretive M&A, we do see significant opportunity ahead of us to continue to compound this business and deliver attractive shareholder and stakeholder outcomes. My added confidence comes from being able to do that with great people capability and a strong ungeared balance sheet. Our medium-term opportunity is exciting to us. This includes further optimizing our existing position capabilities and valuable channels, but we also see new revenue opportunities through asset class and product expansion in areas like private markets and international equities. But it's also exciting in the here and now as much of the behind-the-scenes groundwork we have undertaken in FY '24 lands in FY '25. This includes our administration platform consolidation, custody scale benefits available to us, transition of our customer, the acquisitive growth with Altius, which will all start to deliver run rate benefits in terms of either revenue uplift or unit cost reductions during FY '25. We are very confident of continuing our upward profit growth trajectory. Thanks for joining us this morning. We appreciate your interest in and support of Australian Ethical. And Mark and I are also joined this morning by John Woods, our Deputy Chief Investment Officer; and Alison George, our Head of Impact and Ethics. And we do, all of us, look forward now to answering any questions that you might have.

Thanks, John. [Operator Instructions] John, we've had a question in already. "You've clearly had strong growth over the last 4 years. How does the Board feel about how the strategy is going?"

Thanks, Mel, and thanks for the question. Look, in terms of our confidence of the strategy, we are confident we're on the right path and have built the right business model and differentiation strategy to continue to be successful. And I've touched on some of that in the presentation. Perhaps if I look at that a different way for you and I parallel maybe what we've created relative to the listed funds management sector more broadly. Elsewhere, I see institutional mandate-driven FUM at typically lower margins, much more susceptible, in my view, to economic cycles, performance cycles, shrinkage in available clients as super funds progressively internalize investment management. And some of them are often beholden to the so-called rock star sort of portfolio managers who command a significant draw on that value chain. But we have built and continue to optimize in our strategy, something quite different, which is a strong, differentiated, trusted retail brand, an economic capture model built around high quality, importantly, high-margin and differentiated, largely active management with all of the natural operating leverage potential that comes from investment management at scale. But as I've said, augmented and positively compounded, we believe, through a multichannel distribution strategy, which is focused on the high-margin and sticky retail channels with a particular strength and focus in that high systems growth superannuation market. So this is a very different model with a deliberate strategy bias, which we already see delivering strong relative outcomes. And the Board and management team continue to be very confident about our prospects going forward.

"Congratulations on the strong earnings growth. Is something close to your recent 20-plus percent earnings cumulative average growth rate sustainable, do you think?"

Good question also. And of course, I won't be giving guidance this morning. That said, the short answer to that question, in my view, is yes. With 40-something now consecutive quarters of positive flows behind us, it's clear we have a strong brand and a well-developed B2C direct acquisition marketing engine. We're playing into the part of the market being the retail super sector that does have strong mandated systems growth at attractive margins. We have growth channels, including our advised distribution, our employment platforms and the genuine potential to expand our presence further into the employer market and what we call sort of values aligned organizations, all at retail or at least, mezzanine margins. And then with further product and asset class diversification prospects, be that, as I've said, private markets or international equities or thematic products, we're very positive about the emergence of new revenue streams as we move forward. Add to that, the unit cost improvements available in the near term with our middle and back office transformation agenda, the natural scale level in our investment management engine. And so you can see it's not hard to anticipate both further top-line growth and improving unit costs. and therefore, the jaws of operating leverage further widening over the next medium-term period. So while 2024 has undoubtedly been a milestone year for us, we believe we're well set up for growth and further profit growth in FY '25 and well beyond that as well.

Thank you, John. Mark, there's a question that's coming for you. "You both alluded to unit cost savings that we're expecting following our transformation program, in particular, the $4 million annual savings. So wondering, Mark, if you could just provide a bit more detail and how that's going to play out next year."

Yes. Thank you for the question. As I said, we have been investing in our scalable and efficient business platform. And that incorporated, actually, negotiating compelling rate cards with our key service providers. And in the context of the question, we've -- as a reference to our -- as we've referenced, super admin transition happening to grow. We have that negotiated, a more compelling rate card. It's more FUM-based and it's actually going to provide a unit cost saving compared to the current incumbent. And as John just mentioned, our transition for our back and middle office are scalable solutions with service providers that we're getting a compelling rate card. So the unit cost saving is commencing from the period, which we will complete those transitions, which are both going to be in FY '25.

Thank you.

Thank you, Mark. I've had another question in -- with a, "Congratulations on the great results. What do you mean by growth in private market opportunities? Is this private credit or social infrastructure?" And I hand over to John Woods to take the question.

Thanks for the question. So private markets, by its very nature, is a very broad asset class. We've recently hired a new Head of Private Markets, Adam, to develop this strategy further. Late last year, we also launched our first offering in this space, the infrastructure debt fund. And we see a number of ways to expand it further here domestically as well as internationally.

Thank you, John. And John McMurdo, just wondering if you can provide some color on the recent investment performance and whether you think it will impact flows.

Yes. It's, by definition, with our business style and model that we're very benchmark-unaware. So there'll be periods, be it for a month or a quarter, where we either significantly outperform various benchmarks or at times will underperform that. And we're familiar with that sort of situation. But there's no doubt, our investment approach philosophy is well tested, well proven. If I look at our long-term track record, be it in our diversified funds our single sector funds, they're extremely strong on any relative basis. And I haven't even given my own team this info, but a spoiler alert for everybody, our Australian shares fund next month reaches its 30-year mark since it was initiated and the performance of that fund is in the order of 9.7% compound for 30 years against its relative benchmark of 7.5%. That's after all fees. So a 2.2% alpha compounded for 30 years, we're extremely confident in the ability and process of our team.

Great. Thank you, John. Mark, there's a question for you relating to the Sentient investment. So can you just elaborate a little bit more on the write-downs and confirm whether it's now valued at 0?

Thank you for the question. As John mentioned, with the Sentient investment, we entered into that investment back in 2021, with the clear context that this is going to extend our impact capability. That investment hasn't gone according to plan and has been a disappointment. We did invest $5.2 million into that investment, and it's been written down by $4.8 million, recovering $0.4 million. And that investment has now been written down to 0.

Thank you, Mark. So we've had no more questions. So we will wrap up, and I'd like to thank everyone for joining us today for our Australian Ethical FY '24 Results Announcement. Thank you.

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