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

Good morning, everyone, and thank you for joining us. I'm Melanie Hill, 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, 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 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. [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; and Mark Simons, our CFO. Also upfront, we have our Group Executive, Superannuation, Maria Loyez; and Group Executive Asset Management, Ludo Theau. Members of our executive leadership team are also present to assist with answering questions. John will take us through the highlights. Mark will cover the financials, then John will provide a short business update. Over to you, John.

Thanks, Mel, and good morning, everyone. It's great to be back together. This year marks 40 years of Australian Ethical, evidence not just of time, but of consistency. Founded in 1986, Australian Ethical was built on the belief that money can be a force for good. We generate strong returns while directing capital to future-focused companies and away from unnecessary harm to people, planet and animals. The ethical charter guiding our investments today is the same charter written 40 years ago. That gives us a distinctive market position. We're not a conventional financial services company with an ethical option attached. We are a pure-play ethical investment manager. And today, we're also a fast-growing ASX 300 business, delivering long-term value for investors and shareholders. We have demonstrated that purpose and profit can work together and be mutually reinforcing. Our strategy remains clear and deliberately consistent. We're focused on strengthening both growth engines, superannuation and investments beyond super, while rolling out the operating capabilities that enable better service at a scalable unit cost. Organic growth remains our priority. We've also executed and remain open to values-aligned inorganic opportunities where they strengthen capability, broaden reach or accelerate scale in a disciplined way. The point I want to emphasize is consistency. This is not a new strategy. It's a strategy we've been executing over multiple years and the benefits are increasingly visible in the quality and the resilience of the business that we've built. Our FY '26 financial results and strategic milestones build on the momentum of recent years. In superannuation, we completed the transition of all members onto the Grow administration platform. This reduces complexity, delivers cost savings and gives us a firm platform from which to enhance the member experience and grow member numbers. In the second half of the year, our enhanced digital marketing, website and onboarding experience were key contributors to lifting new member joins by 20% compared with the first half of the year. In investments, we deliberately expanded our capability by adding fixed income and private markets. This broadened diversification across our superannuation investment options and supported product innovation for middle market investors. When launched in March of this year, our Growth Opportunities Fund received Australian government backing through a $125 million cornerstone investment from the Clean Energy Finance Corporation. During the year, we also continued our focus on business resilience, governance, cyber risk and the work required to address APRA license conditions remain priorities. These are not distractions from growth. They're part of building a stronger, more scalable and trusted institution. Our long-term success also depends on a capable purpose-led culture that attracts, develops and retains talented people. And I'm so proud of our people and pleased to see their engagement and commitment to our strategy continue to strengthen year-on-year. So that engagement is set ahead of industry benchmarks is a real testament to them. Mark will cover the financials in detail, but I do just want to briefly frame the result. FY '26 was a record result, reflecting focused execution, continued organic net flows, record funds under management and earnings, stronger operating leverage and a more diversified platform. Underlying profit after tax increased 15%. Net profit after tax increased 29% and the underlying cost-to-income ratio improved by 1.6 percentage points to 69.8%. The strength of this result enabled the Board to declare a final dividend of $0.10 per share, taking the full year dividend to $0.18 per share, a 29% uplift year-on-year. Over the past few years, we have consistently demonstrated that we are a growth company, but also a company with strong predictability of earnings. These results were delivered while we continue to invest in the capabilities required for future growth. We are investing where it strengthens the business while maintaining clear cost discipline and a focus on shareholder returns. Our strong results reflect the quality of the offer we now have for our customers. With strong systems growth tailwinds, our superannuation growth engine provides revenue predictability and underpins further growth. Beyond super, we develop new propositions for values-aligned investors, seeking financial returns alongside measurable positive outcomes. Our Growth Opportunities Fund launched in March, and we plan to launch a new impact fund in the first half of FY '27, targeted at the very strong philanthropic sector. We continue to focus on customer engagement to support retention and acquisition, underpinning net flows, fund under management growth and operating leverage as we scale. Investors come to Australian Ethical through our expertise in assessing ethical investment opportunities, investing with discipline and delivering real-world impact through effective stewardship. Over the past year, we continue to scale elements of our ethical review process through the effective use of artificial intelligence, increasing the breadth of our ethical investable universe. We also help policymakers and companies to account on issues that matter for long-term investors. Our investment team navigated a challenging year well. Fixed income and private markets delivered above benchmark returns, while Australian equities were more exposed to the dynamics shaped by the war in the Middle East. Our ethical approach means performance can vary when the strongest market returns are concentrated outside our ethical investable universe, but it can also create opportunities when future focused sectors are undervalued. We remain focused on what has always defined us, staying true to the ethical charter, investing with valuation discipline, broadening capability and delivering values aligned returns over the long term. The Australian Ethical Foundation remains one of the clearest expressions of what makes our model different. Each year, we allocate 10% of profits to charitable organizations, primarily through the foundation to help protect and restore, address climate change, restore nature, empower First Nations peoples and communities. In FY '26, we allocated a record $3.4 million to the foundation. Since 2010, more than $16 million has been allocated to support that grant-making work. Through these grants, the foundation supports collaborative, evidence-based and community-led solutions addressing biodiversity loss, climate change and social inequity. My team knows that rather than blowing our own trumpet, I'm much more interested in what customers and the market are saying. And so I'm deeply proud of what the team has achieved as underscored by recognition across all facets of our business. Our super and pension products have won Money Magazine's Best of the Best Awards. The care and attention of our customer service team has been acknowledged by Roy Morgan and Finder. And the integrity of our ethical investment approach is widely recognized. We don't exist to win awards, but this recognition gives us confidence that our proposition is resonating. And this is not just about the past year. It's about sustained focus over the past 5 or 6 years. During this time, we have increased funds under management more than 3.5x. We also strengthened the operating platform, broadened investment capability, increased brand recognition and delivered strong returns to shareholders. The quality of that growth matters. It's been built through organic net flows, targeted investments in capability, strategic inorganic opportunities and the continued focus on operating leverage. After Mark takes you through the financial results, I look forward to returning and sharing with you a business outlook as I see the organization. But Mark, could you come and share the financials with us? Thank you.

Thank you, John, and good morning, everyone. FY '26 was another year of strong execution, delivering growth in funds under management, revenue, earnings and dividends alongside our continued improvement in operating leverage. Revenue increased 9%, supported by higher average funds under management. Underlying profit after tax increased 15% and net profit after tax attributable to our shareholders increased 29%. Our underlying cost-to-income ratio improved by 1.6 percentage points to 69.8%. As underlying profit adjustments more than halved in FY '26, total expenses increased by only 2%. A key differentiator of Australian Ethical is the predictability of our earnings. The majority of our funds under management is in super with growth supported by the recurring member contributions and long-duration member retention through market cycles. We closed FY '26 with record funds under management of $14.5 billion. This growth continues to be driven by positive net flows and investment performance. Approximately 3/4 of our funds under management is in our superannuation. Alongside our core superannuation business, we continue to broaden our investment capability and product range to attract new middle market and institutional clients. Organic flows increased 13% to $664 million. Superannuation remained the primary contributor, generating $527 million of net flows despite disruption from the final migration of members to Grow. Only 7.4% of members are in pension phase, which is below the broader industry and reduces the impact of benefit payments. Our annualized superannuation outflow rate remains low at 7% of funds under management. Outside of super, newer channels are contributing meaningfully to our growth. These include NGOs, charities, foundations and businesses seeking a values aligned investment manager. We are also seeing traction from our institutional investors, including the $125 million we received from the Clean Energy Finance Corporation into our Growth Opportunities fund. Our fee strategy is central to keeping our premium products competitive for current and future customers. We carefully assess price elasticity while maintaining a focus on profitable growth for shareholders and a compelling offer for customers. Average revenue margins were stable in FY '26. The spot revenue margin at 30 June '26 was 89 basis points following fee reductions in the fourth quarter, and this margin is expected to remain consistent during FY '27. Operating revenue increased 9%, driven by 11% growth in average funds under management, marginally offset by a lower revenue margin and fee adjustments. Revenue was supported by a full year of Altius business, the insurance administration fee introduced during the year and continued expansion across our newer channels. Our revenue base is broader and more diversified than it was several years ago, spanning multiple customer segments and growing range of products. This diversification supports both future growth and revenue stability. To capture the growth opportunities ahead, it has been critical that we continue to invest in a scalable business platform. In FY '26, we balanced continued investment with improved operating leverage, reflecting scalability, efficiency from our platform transformations and disciplined cost management. Operating expenses increased 7% compared with the operating revenue growth of 9%. Employee expenses increased 11%, reflecting enhanced capability in ethics, product, investments and governance and the full year impact of the Altius team and wage inflation. Fund-related expenses decreased 1% compared with the average funds under management growth of 11%, which reflects the more competitive administration and custody rate cuts. Technology expenses growth reflects continued investment in digital and data capability, artificial intelligence initiatives and stronger cybersecurity. We are already seeing artificial intelligence free up capacity and accelerate ethical research and assessments, allowing our people to focus on that higher-value work. The business is entering its next phase with a stronger, more scalable and operating platform and enhanced cost flexibility. We have significantly improved our operating leverage over the past 5 years. We achieved this while continuing to invest in the business platform needed to support future growth and delivering fee reduction for members and investors. We retain a strong balance sheet with no debt, strong cash reserves and capital well above requirements. This provides resilience and the flexibility to continue investing in strategic priorities. It also provides optionality to pursue attractive growth opportunities while maintaining a disciplined capital management approach and dividend profile. The successful execution of our strategy has delivered another year of strong shareholder outcomes. Full-year compound annual earnings growth of 27% enabled us to deliver compound dividend growth of 32% over the same period. We are proud to deliver strong financial results underpinned by our high-performing team and culture, our resilient business model, trusted brand and successful strategy execution. I'll now hand you back to John for the business update.

Thanks very much, Mark. The financial results that Mark has just shared outlined and show the benefits of a clear strategy executed with discipline. This is the strategy that will continue to guide us over the coming years. Importantly, work is already underway in FY '27 to position the business for its next phase of growth. In superannuation, we're developing a member app, evaluating advice options and expanding employer channel capability. Together, these initiatives are expected to improve engagement, support acquisition and retention and increase member lifetime value. In investments beyond super, the Charles River rollout is being completed across asset classes, strengthening our institutional-grade operating platform. We also look forward to bringing further product innovation to market in the coming months. There's a significant opportunity to enhance how we use data, artificial intelligence and smart technology to serve members, investors and advisers more efficiently and effectively. We intend to assess these opportunities in the first half of FY '27. And we continue the work required to strengthen business resilience, governance practices and risk management. As I think about our outlook, we continue to feel very positively about our opportunity set in both the short and the longer term, subject to market conditions, of course. But Australian Ethical does occupy a unique position among fund managers and listed fund managers in particular. Unlike many traditional fund managers that depend on discretionary investment flows, we have intentionally built a business underpinned by structural superannuation inflows that continue through market cycles. Regardless of short-term investment market conditions, I expect the underlying momentum generated in the second half of FY '26 and new customers and flows to continue. This will be supported by further enhancements to our superannuation value proposition and continued product innovation and investments beyond super. I'm confident in the strength of our brand and the product and channel growth engines we've built to meet strong long-term demand for values aligned investing. We'll continue to invest sensibly in the business while maintaining strong cost discipline, targeting expense growth below revenue growth, subject, as I've said, to market conditions. We'll also maintain line of sight to operating leverage with an expectation that underlying cost-to-income ratio falls to the mid-60s over the medium term. Again, thanks very much for joining us this morning. I really deeply value the support of our shareholders and our broader stakeholders, and the team and I look forward to answering any questions that you might have. Thank you.

Thank you, John. We will now open up for Q&A. [Operator Instructions] The questions come in. I'll hand this to you Mark, as the CFO. You've had significant profit growth during the period. Did the Board consider paying a higher dividend?

Thank you for the question. The Board was particularly pleased with the profit growth over the FY '26. That profit growth is obviously underpinned by the underlying profit of 15% and statutory profit growth of 29%. With that confidence in the company and the growth in profit, the Board was comfortable increasing the final dividend to $0.10 per share, which has taken our total dividends for the year up to 29% from the prior corresponding year. This is a show of strength. What this is, is the payout ratio continues to be 80% of our statutory NPAT attributable to shareholders. And that gives us that capital flexibility to ensure that we can invest wisely into the business, reinvest and also look for inorganic smaller opportunities as they exist.

All right. Thank you, Mark. A question for you, John. How is the organization thinking about AI?

Look, we're excited about the opportunity of AI as a tool to enable our business. We, as a team, are looking up and down our whole value chain and probably in 2 sort of unique ways. The first is what's the opportunity to leverage and accelerate our unique IP and value proposition and differentiation in the market. And the second, of course, what are the efficiencies and speed dividends that might apply in the business. So we're excited about that. One example is in the use of our ethical universe with our investment team and ethical team looking to accelerate and expand our investable universe. But I might -- if we can get the tech working, Alison George, who's our Chief Ethics and Investment Officer out of our Melbourne office. Alison, briefly, if you were able to share the example you've been working on, would be helpful.

I'd be glad to, John. During the year, we've been working to better leverage data and technology in our ethical workflows, including piloting AI approaches. And this has really helped us to prove up where and how AI can add value in augmenting our in-house ethical experts and help us to scale our research activities while maintaining our ethical standards. It supported us to increase our research output in FY '26. We added more than 190 new names to our investable universe, giving the investment team a broader set of ethically assessed opportunities to consider.

Yes. I think, look, it's a great example of one of the domains I referred to where we look to accelerate and leverage further our unique IP. We're also, of course, right across the organization, embedding AI in our ways of working to create efficiency and speed for the team. And so as I said, I'm excited about that. I think what I'll also say has CEO of this organization, I see some other companies talking about what they're doing and investing and sometimes there's even, I think, fanciful ideas or projections of what may or may not happen. We will be very disciplined about what we do with a clear eye to benefit for the organization and for our shareholders, and very aware of the changing cost curves that will naturally play out on AI. But we're very positive about it, starting to use it widely, and we will embrace that in our organization over the next period.

Great. Thank you, John and Alison, for that. Questions come in about superannuation flows, and I'm going to hand this to you, Maria, as Group Executive, Superannuation. Question is, can you provide more detail on your Super flows for the FY '26 year? And what's your outlook?

Yes. Thank you. Look, we're really pleased with our FY '26 results. We're seeing strong SG and voluntary contributions year-on-year despite the disruption of the transition to a single administration platform, which completed in the first half of the year. With clear air in the second half, we made changes to our digital marketing and web experience, which saw our joins lift, as you saw in the presentation. And we continue to focus on making sure that we get our customers -- our new customers to roll over as soon as we can after they join. In terms of outlook, we're really focused on building on those foundations of that new platform. So we are looking at building out our member experience, particularly our health and content -- our content and looking at options for advice. And as John said, we're also looking at how we might improve our employer engagement as well.