Centrepoint Alliance Limited (CAF) Earnings Call Transcript & Summary

Good morning. This is Angus Benbow, the CEO of Centrepoint Alliance, to update our shareholders and the market on our first year results for financial year 2020. So thank you for those people on the call. Thank you to our shareholders, to our community of advisers and to our dedicated Centrepoint staff for the efforts over the last 6 months and especially over the last 18 months, as we've reset the Centrepoint business. Disclaimer, this is part of our results, and moving on to our summary, the highlights of the financial results. The proactive position we took to move to a fee-for-service model for our adviser fees has yielded a 37% increase in our adviser fees. During the revenue transition, this revenue transition, which we'll go into in detail, we have achieved positive EBITDA result, excluding one-off impact of legacy clients. We have a strong balance sheet, positioning us well for growth in a market that's going through a consolidation phase. Industry opportunities. We've had 55 new advisers joining our license, which has seen a 10% increase in net adviser numbers over the last 6 months, against the backdrop of an industry that is shrinking and going through a transformation. We continue to focus on supporting our community of advisers and investing in our core services. The prior -- immediate priorities have continued to organically grow our license and self-licensed advice business, pursuing organic opportunities during a time of industry consolidation, an opportunity. We're also exploring capital management initiatives to drive shareholder value, given the strength of the balance sheet. Moving, firstly, to our financial results. Our gross profit or revenue to Centrepoint was down $2 million compared to prior comparable period. This is driven largely by legacy rebate runoff and investment margin contraction that has been well-documented in our last few results. Expense management, we've maintained flat expenses whilst continuing to transform the core business. This has delivered our positive EBITDA result before legacy claims. There has been a one-off increase in legacy claims, primarily related to the AFCA time extension. $600,000 of the $800,000 there is related to that AFCA time extension. That time extension expires on the 30th of June of this year. Going to the revenue drivers in more detail. The first half -- this is the first half that we're reporting on the Centrepoint transition away from legacy and subsidized revenue to a direct fee model for advisers. We're the first large licensee to make this change. We're very transparent in the way we've been doing that. It's pleasing to see the impact with 37% increase in our direct fees. This is moving -- this is progressively increasing our -- for the next 6 months. These are reoccurring in nature with subscription-based fees that our advisers pay. This is offsetting and will continue to offset the continued decline in the rebates and margin that's contracting. The strengthening of our revenue model is extremely important to Centrepoint, and it's been the foundation of the strategic refresh that we announced 18 months ago. Largely anticipated, the challenge that the industry is facing and the transition to a legacy-free and unsubsidized world that it's moving through. This is moving Centrepoint to a sustainable, reoccurring fee-based model. You can see the progress we've made. It's important to us that we continue to be transparent about the progress we're making in this regard. Our cash flow. We've got a sustainable cash position. The investment loan repayment from Neos, we did, and we continue to make some small investments in the core business of delivering services through our advisers. The balance sheet. This brings us to the balance sheet, $7.1 million in cash. We have $5.9 million in loans receivable, $5.2 million of which relates to Neos. As you saw in the [ press release ], the [ $800,000 ] was repaid in the first half, and we expect another $1.8 million -- we expect to be repaid by June 2020. Substantial franking credit balance available of $0.12 per share. A strong balance sheet. We're exploring inorganic and capital management initiatives. Now moving to the market opportunity and our strategy update for Centrepoint. We announced our strategy 18 months ago under the banner of Strategic Refresh. I've talked to the progress we're making from a revenue transition now in the market and positions us for growth. We anticipated the risk to our revenue and have strengthened our revenue mix appropriately. We've also recognized that we need to recreate a new offer for advice -- our advisers, and we've invested in the core business of providing services to advisers at scale. We're actively exploring consolidation opportunities to grow the business at more accelerated rates, and we'll see that coming through in the adviser numbers that I'll talk through now. This has been our adviser growth. The investment in our core business is delivering results. We organically attracted 55 new advisers in the first half, which has increased our net adviser numbers by 10%. This is against the backdrop of a shrinking market. We've also stabilized advisers leaving. A large number of advisers left in the second half of 2019 financial year as a result of the fee increase. Many of these exits were authorized reps or limited authorized reps that is still in the [ underlying ] advice practices but not -- no longer providing advice given that we moved to a direct fee model for every individual adviser. We have a strong community of advisers that value our services, with more in the external market increasingly attracted to a quality scale provider. I'd like to turn now quickly to what it is that we actually do. So this infographic represents the services or support that we provided over the last 6 months to advisers in our adviser community. We have self-licensed advisers, 200 practices out there or the over 300 advisers in our licensed side of the business. I often get asked if I think this infographic best describes what we do, is provide advice and business services at scale to small financial advice practices and mortgage brokers. These are services that they can't provide -- can't conduct themselves as efficiently or effectively as we can. Advisers, especially in these -- the transformation the industry is going through at the moment, which I'll talk through shortly, need the support and confidence of a reliable partner who can provide services at scale like we do. This is the core business that we've been investing in. And you can see through the data or the numbers coming through here the volume of work that we provide and support our advisers with. This represents the fee-based model that we're also already moving to in terms of the value the advisers get from a licensee such as Centrepoint. Advisers [ value the ] support of a strong licensee now more than ever. This is a look back of some of the challenges that advisers are facing at present in the industry. These are well publicized, so I won't go through them in detail. But it does highlight the intense pressure on advisers, [ plus ] small business owners ultimately, mostly, and hence, some of the demand drivers back into a large licensee such as Centrepoint in terms of what we provide in terms of support and services in the community. Education requirements, well publicized, 83% of advisers in the industry will need to do some formal study. Centrepoint provides support around education. We provide gap analysis. We help facilitate some of the educational requirements needed. Code of ethics come into place from the 1st of January 2020. Single disciplinary body will be in place later this year, early next year. This is a change in the profession, intent of which is incredibly good, which will end up seeing more people value and get advice in the Australian community, but that does require a transformation of the industry. Obviously, we've got more Royal Commission changes coming through with some significant operational changes going to impact the advice businesses from the 1st of July 2020. The way that fees are collected and ongoing advice is notified to clients to the reporting of misconduct and to the banning of grandfathered commissions taking effect from the 1st of January 2021, all of these changes and the volume of changes all impact the individual advisers. Their revenue models are impacted. Their costs are impacted. So the ability to partner with a scaled provider is incredibly important and beneficial so that they can focus on serving their clients and continuing to make multiple businesses as a small business owner. The impact of all of these changes on advisers has been quite dramatic. The left-hand side of this chart we've looked at, which is quite interesting, adviser sentiment. Historically, adviser sentiment broadly tracked the ASX. The market is not unexpected. It also is very tracked client sentiment as well. From the Royal Commission, that has effectively decoupled. It hasn't come -- the correlation is no longer there. That decoupling is a result of all of the things we've just gone through on the previous page. It's been well documented over the last week in terms of the shrinking market, advisers' intentions over the next 3 to 5 years to exit the industry. So as I said, this has been pretty well documented, so I won't go into it. There is a bit of noise in the numbers over the last 12 months because we had a rush in to register those advisers in December of 2018. But if you look at the overall market over the last 3 to 4 years, overall market for advisers has shrunk. What perhaps is more insightful, which I'd like to spend some time is -- on is to go into each of those subsegments of the market in turn. So the top left here is large licensees. This is effectively what Centrepoint does under our license. This large licensees is an area of the market that are growing. As you can see, currently only 9 licensees out of Big Six that have got 200 advisers or more. On the banks, in the classified AMP and IOOF in this group of -- we'll call it the Big Six, that's obviously shrinking with the exit -- exiting of ANZ to IOOF, BT, Westpac out of advice as well as CFS. Bottom-left box says small licensees are fragmenting. These are licensees who operate effectively as Centrepoint does in renting out their license and providing services, but that we would see a subscale of only 11 to 250 ARs. The cost of providing licensee services are increasing. The expectations of the regulator are increasing. And we see increasing changes in terms of fee disclosure statements, annual opt-ins, educational requirements on advisers, all driving costs into the licensee going up as well as expectations from advisers and the services that they're being provided for or they're paying for. So we do see consolidation opportunities in this part of the market, given the increase in fixed costs and basic concept of marginal cost and marginal revenue playing out in a scalable business. On the self-licensed side, again, this has been well documented. Self-licensed, [indiscernible] over the last 4 to 5 years, it has stabilized over the last year or 2. But this is a part of the market that Centrepoint provides services to as well. So let me now move into -- that's a snapshot of the market from a segment perspective. What does that mean for Centrepoint? So amidst all of this disruption and change there, we do see a lot of opportunity in these subsegments of the market. So specifically to Centrepoint, from a large licensees perspective, this is our core business. Strategic advantage is what placed Centrepoint in good position. We're the first large licensee to move to a fee-based model. We've been very public and transparent about that revenue transition, which is attractive to advisers, is that -- given that transparency and moves us to a sustainable footing. We've also got a scalable service platform that not only do we provide to licensed advisers, but we can also leverage that scale across to our self-licensed market, which I'll talk to shortly. As I've talked about, the banks are exiting. We've been able to attract a number of advisers from this mass exodus, primarily saw what -- saw that coming through the numbers in the second half of financial year 2019. I think that for the financial year 2019, we put on about 68 advisers, with a quite few of these -- those coming through from Westpac and CBA aligned licensees. Small licenses are fragmenting, as I've talked about, and that will continue to come under pressure from a scalability perspective. So we see this offering up 2 opportunities for Centrepoint. Second is, obviously, inorganic growth opportunities in terms of the acquisitions or mergers with subscale licensees. But a new offer that we've had success with in the first half is a sort of wholesale offer rather than individual advisers joining as practices that come across as a single line of business. We had approximately 30 advisers join under this model, which provides significant scale advantages to them and to us. This is an area that we'll continue to pursue. Self-licensed firms are proliferating, as I've talked about. Growth opportunity there is a market that is a large market, has had a lot of new entrants over the last couple of years but require services to operate their license. The licensing conditions on a small self-licensed firm are exactly the same as on a large firm such as Centrepoint. There are certain fixed costs, as I've said, that are required to operate your license. We can leverage the work we've done as a large licensee and provide those at scale to the self-licensed market who can't afford to perform those tasks themselves. To bring that back, a lot of opportunities there for Centrepoint. How do we make money out of that? How do we make it work? This is a business model slide in a sense. Starting down the bottom, that's our scalable service platform. Now the infographic I talked about before demonstrates all of the services that we do and just also give the sample of all the things we do for advisers. Whether you're on a -- as a licensee or a self-licensed adviser or our new wholesale licensee offer, it's all leveraged off the single scalable service platform. Let me talk about each of these discrete segments or opportunities in turn quickly. I think it's important in [ what is our ] revenue new model and what we've transitioned to over the last 12 to 18 months. Under our licensee business, it's our core business where we saw those 55 new advisers joining -- sorry, where we saw advisers joining in the last half. Large licensee for individual advice practices, target segment being small firms, 1 to 5 advisers. The client need is they need an AFSL. To provide financial advice in Australia, you need to have your AFSL. We also provide advice in business services. The offering that we provide here is a packaged offering. This is a core offer with fixed fee, and that's the revenue model. It's a direct fee to the advisers. It's subscription-based in nature and is reoccurring. It's a very sticky revenue stream. As I said, it's reoccurring and subscription-like in its nature. Then moving to the self-licensed business. Again, target segment, small firms, 1 to 5 advisers, but are those firms who have elected to take on their own AFSL, so it's an AFSL but it's around advice and business services required to run their business or support them in running their AFSL. It's [ offered ] as a core package but more module in nature. But whilst those modules are more discrete, there are also annual subscription or reoccurring in the type of revenue stream that it provides. The last segment, which is the new emerging segment, is the wholesale licensed offer. This is targeted at the medium-sized licensee firms of 20 to 100 advisers. They can come across to us as a single business line. Again, they move on to our AFSL, but we provide outsourced services at scale, so it may be a more bespoke or tailored package associated with that single business line. Again, though, it's reoccurring in nature, which makes it very healthy revenue stream for the group. All of these leverages the scalable platform that we've invested and built over the last 18 months. We've effectively done the hard work -- we've done the hard work over the last 18 months of -- under the Strategic Refresh, which positions us very well for the opportunities in the market that we're seeing. So in summary and in conclusion, we have the right strategy on the Strategic Refresh that we announced 18 months ago. We're focused on our community of advisers. We've invested in the core business to create a scalable platform, and we're seeing significant opportunities for growth in the market. We continue to drive organic growth in our licensed and self-licensed network, whilst also pursuing industry consolidation opportunities and inorganic opportunities that are prevalent in the market and will continue to be so, especially in that small licensee market. We continue to refine our cost base, manage them in a disciplined way whilst transforming the core business and transitioning to a recurring fee-based model. We're also exploring a number of capital management initiatives, which leverage a strong balance sheet that we've possessed and have maintained through this transformation. Again, I would like to thank everyone on the call. I'll be making calls to many of our shareholders over the next couple of days and look forward to meeting many of you through that process. Thank you, again, for your support.