Centrepoint Alliance Limited (CAF) Earnings Call Transcript & Summary

Well, good morning, everyone, answer thanks for joining us today. Welcome to the Centrepoint Alliance investor conference call. [Operator Instructions] On the call today, we've got Centrepoint Alliance's CEO, John Shuttleworth; and CFO, Brendon Glass. I'll pass you across in a second to John to kick off our discussion of the company's latest announcements including the full year results and transformational acquisition. Today, we'll have a formal presentation followed by Q&A. [Operator Instructions] So to kick things off, I'll hand across now to Centrepoint Alliance's CEO, John Shuttleworth. Go ahead, John.

Good morning, everyone. I'd just like to formally welcome the investors and shareholders to the call. As Tim said, my name is John Shuttleworth, and I've recently been appointed as the CEO of Centrepoint. And today on the call, I have Brendon Glass, our Chief Financial Officer. Between the 2 of us, we've got the pleasure of taking everyone through the financial results and what I will describe as a very exciting time for Centrepoint, which we think is a terrific acquisition that's going to really change the game for Centrepoint. So what I will do, just running through the agenda, I'm going to first just touch on the business results and our overall strategy. I'm going to hand over to Brendon, who will go through the financial results. And then we'll talk through the acquisition of ClearView, very much, in my mind, this is a 1 plus 1 equals 3. And we'll go through why we think this transaction makes good sense for the business. So in terms of the business results. The snapshot of core earnings is $139.2 million in gross revenue, up 6% from last year; EBITDA of $3.1 million, up $3 million; cash as of the 30th of June, $11.1 million, slightly down on FY '20. Over the last 12 months, we paid $0.04 in dividend, a $0.03 special dividend and a $0.01 interim ordinary dividend. Coming into the business and just really looking at the results, talking to the management team and seeing what's going on in the industry, I would classify this is a really solid performance to Centrepoint in a challenging market. The business is well positioned in a rapidly evolving industry, and I'll go through more of that shortly. It's transitioned to a fee-for-service model and with the advisers, which has really been a key focus on the last few years. We've had very strong performance in the licensing solutions business. There's been some expected runoff of legacy funds. The announcement of the Enzumo acquisition has been embedded. And a highlight of this year in the tough trading environment has been just disciplined and strong expense management. I'm going to talk in a couple of slides about the future indicators because this is very much a story of what the business has done today and where we're going to go. But the first is building scale, and we're going to be focused on the organic growth, which we're doing well with the net number of advisers we're recruiting. But the inorganic path is also on the agenda, and today's announcement about the acquisition of ClearView Advice is testament to that. The other area I'm going to touch on is a large investment in digital technologies to improve adviser efficiency. At the end of the day, our business exists to provide services to advisers, and we are already well down the path of leveraging technologies, so advisers can have more face time in front of clients, less administration -- administrative burden. So you're going to see a recurring theme, and we'll come back in probably a couple of months into a more detailed strategy update, but I'll take you through where we're going to be taking the business in the directions we're going. I'd like to start with this slide because it's easy with everything going on to lose sight of the bigger picture. And the bigger picture is we operate in an industry where there's an incredible demand for advice. And if you look at just some of these steps, we've got $12.6 trillion in household assets, a pension system of $3.1 trillion around accumulation and retirement. We've got $8 million -- or sorry, $8 trillion in land and dwellings, about $2.8 trillion in non-super investments. And a really interesting stat, which is [ easy to be lost these days ], is large inter-generational wealth transfer of about $3.5 trillion. So you look at the size of the market and then you think what people are dealing with, the first is there's this great shift from accumulation to retirement incomes driven by the aging population. The other issue for investors trying to navigate this without help is there's so much complexity. And it's not just complexity of anyone here, it's the interplay of superannulation, retirement, tax, social security and how those areas come together. The challenge in getting advice is that with the changes that have been going on in the industry, we've got more demand for advice. But we've actually got these advisers, and so our advisers have seen increased demand, wanting to service more people but struggling with a lot of the administration burden. So productivity is a key. I've mentioned the size of the supersystem. What people often don't realize is that despite Australia's small population, we're the fourth largest pension pool globally. And the other big issue is we're all living longer. The risk about living retirement savings is real, so the need for advice to really help people plan for their future is absolutely critical. Now what I wanted to do is I'm just going to touch on this at a high level, but I want to talk a bit about what the business has been focused on for the last 3 years and what we're going to be doing going forward. So the first is really for one of the label described, Centrepoint has been through a phase of consolidation. And it's around moving to a sustainable model. The business has moved to fee for service. It's ended rebates and commissions. It's open architecture on products. We've off-boarded advisers that don't fit into the new world. We've recruited advisers that have the right cultural fit, who are aspiring to grow their businesses. And there's been a significant investment in technology. If you think about going forward, what we want to do is, firstly, grow the license solutions business and build scale and profitability. And if we say why do we need to do that, a more larger business is a more profitable business that enables us to continue to invest in the services that we need to provide and innovate in the new services we want to develop. There's many dealer groups or advice businesses that are subscale. And so this acquisition puts Centrepoint into a level where the business is far more sustainable. The second is investing in financial services technology. This is all about improving productivity and efficiency, can we get to a world where we have everything you need to run an advice business in the cloud. And it's all about being more -- about having an efficient advice process supported by technology. And the third area is really providing the highest-quality portfolio implementation solutions at the lowest cost. So when it comes to advice, we've got advice generation, but we've also got the implementation of those on platforms, there's new technology emerging and what are the most efficient investment structures that we can run. So a little bit about what's going on in the industry. There is no doubt there's been significant disruption, and the number of advisers has been reducing, as you can see in that chart, from FY '18 24,000 down to around 19,000. Advisers are leaving the industry for a multitude of reasons: tighter educational standards; the compliance burden; pressure on their operating margins. But despite that, there is still a huge opportunity. One is, firstly, extending our services to the existing adviser network, innovating to improve advice -- the advice process. So the first thing I'd say is let's make sure we do a really good job of servicing the advisers we have, keep them before we worry about getting new advisers. The second thing is attracting disenfranchised advisers with the right fit to our license. As the consolidation has occurred in the industry and the advisers from some of the banks have moved and ended up in new arrangements, some of them are not getting the service they need. So there's a big opportunity for us to improve the service, attract those advisers from the mid- to large institutions to Centrepoint. And finally, the third area is the self-license market. It's 25% of the total adviser market. It's -- they need support, and there's a lot of work that we can do. We already have a large footprint within that group but continuing to invest and build the services in consultation with the advisers to make sure we can support them and provide services that they need. With this chart, I think it is a terrific one because, at the end of the day, we are a service company, we're a business-to-business company, we exist to provide services to advisers, and there's been a lot of demand for those services. Just to give an overview, over 21,000 inquiries in the last 9 months, 93% resolved within 2 days. And the chart on the left gives you an idea of what those services actually are. They are everything from research to technical, to advice around how they develop their practice, to investments. And the Centrepoint business is absolutely focused on providing service excellence to the advisers and doing it in such a way that we can really help them run their business and look great in front in front of their clients. The last slide before I pass on to Brendon is really [ something about ] if you look at what Centrepoint has been doing over the last 3 years, we have been a leader in the provider of advice technology, and that thing is going to continue. So if you go back and you just look at that time line across the top, Compass is the Centrepoint's customized version of the Xplan. Centrepoint has recently partnered with Intelliflo, which is a new adviser technology solution. We made an acquisition of Enzumo last year. And Enzumo is really a professional services business that helps customize Xplan, Intelliflo, an adviser software, into an adviser's practice to make it as efficient as we can. The business is also really focused on leveraging cloud-based technologies. So we're a big user of Salesforce. We use Microsoft Azure in the cloud. And so a consistent theme in our business is the investment in technology. And if I look at how we differentiate ourselves with and where our focus of technology is, it's investing in those areas that help advisers spend more time with clients, reduce their administration burden, run an efficient practice and, importantly, leverage technology to help them stay compliant. Going forward, and we're -- as I've said, we will provide more information on this, but we're going to really focus on digitizing the advice process and the end-to-end advice process. That's from the time you're generating an advice proposal through to implementing the software, how the technology integrates with platforms and, ultimately, the vision of all the services you need to run an advice business available in the cloud. So as I pass on to Brendon, I think the key themes I'm hoping we get across to the investors and shareholders is a business that's got a really strong foundation. It's doing well in the market. We'll talk shortly about the acquisition we're making which is going to give us some scale and accelerate our growth plans and, importantly, growth to ensure that we can continue to provide the services that are in demand from the customers we serve. So with that, I'll just pass on to Brendon, who will take you through the financials. And then I'll sweep back, and we'll talk you through the acquisition and just the key highlights of what we've announced today.

Thank you, John, and good morning. So if we could just turn, John, to the financial results summary. So just start by the profit before tax of $1.5 million, up on prior corresponding period at $3.7 million. That's principally underpinned by effective replacement of our platform rebates with our advice fee revenue. It's also driven by disciplined fiscal management on our cost base and, importantly, a significant reduction in our claims, which I'll go through in some more detail in a moment. In relation to our gross revenue, that was up 6% on prior corresponding period, and that's driven by 3 things. The implementation of our fee-for-service pricing structure, our final rollout of that in July 2020. Importantly, as John mentioned, the mix of our advisers, so the quality of advisers is showcased by the gross revenue that has been derived by the business, so high-quality advisers, high gross revenue. We've also had a significant contribution from Enzumo. So Enzumo was acquired in June 2020. We've had a really strong team-based approach in relation to our customer service solution to Enzumo, leveraging Enzumo's specialist team as well as support from our team. So we had a really strong contribution from Enzumo. Our gross profit is down slightly on PCP at 4%. Now that's -- what that is driven by is the cessation of rebates. They have been broadly replaced by adviser fees, and I'll go into that in the next slide, as well as Enzumo, as I've mentioned. Management fees and expenses are down 2% on PCP. But importantly, they're down 10% when you exclude Enzumo. So Enzumo obviously wasn't in the business last -- in 2020, so backing out in Enzumo, the management expenses are down 10%. Our cost-to-income ratio of 89% has been maintained at those levels over the last 3 years. So notwithstanding our revenue challenges and our replacement strategy with active cost management, we managed to keep our cost to income at the same levels. And that's been driven by some strong initiatives in relation to some outsourcing in HR and payroll. We've also consolidated and rationalized our premises in Sydney in relation to having a fit to purpose with the new working style for the organization as well as positioning for future growth. And we've also, importantly, transitioned our auditor from Deloitte to BDO, who is a fantastic partner. John, if you could just -- sorry, the PBT, as I mentioned, at $1.5 million, and that's principally driven by the lower claims expenses. In 2020, we had $3 million on the balance sheet. And the only change in the provision this year, which I'll go into in a minute, is in relation to settlement of claims. We haven't incurred any expenses in relation to 2021. So that's the key driver of the PBT. If you can just turn to the next slide, please, John. So in relation to revenue and expense details, just a couple of quick call-outs. As I mentioned, the -- you can see there that the rebates have dropped off by $5.6 million to prior corresponding period. The platform rebates ceased in December 2020, and they've been obviously discontinued. We have -- you've seen -- as you can see there from the chart that adviser fee growth of $3.1 million has somewhat offset that. And we've had significant contribution from Enzumo, as I said, at $2.5 million into the year. The investment margin contribution was down, and that's in relation to lower net flows and some pricing pressure in the market and a cessation of the platform investment margin. That will be -- the investment margin will be a key focus going forward. In relation to key expenses, I mentioned the 10% improvement, taking out in Enzumo. Some key points of interest there, employment is down $2 million or 11%. And if you take Enzumo out, the FTEs have gone from 95.4 to 81.3, so a really strong testament to our staff in doing more with less in transforming this business to where it is now. We've also reduced our professional fees through a combination of using less consultants, so again, a strong testament to our staff and the change of auditor, as I've mentioned. Travel and marketing is down 41% and that's due to the COVID restrictions. We look forward to being able to actively engage in person with our advisers going forward. The next slide, please, John. So the balance sheet shows, yes, some really strong -- a very robust position for us and the ability to do a few really meaningful things this year in relation to leveraging the balance sheet. So we started the year at $12.2 million in cash, and it finished at $11.1 million. I'm going to go into some detail on the next slide on cash. The loans receivable has reduced by $2.4 million in relation to the Neos Life repayment which we received last financial year. And the remaining loan receivable is to be repaid in December 2021. The reduction in claims is driven by the cessation of the claims window. So at the end of June 2020, the AFCA extension closed. As I mentioned, our balance sheet was $3 million at the end of 2020. It reduced by $1.1 million in the financial year 2021, and that was driven by the closure and settlement of 30 legacy claims that were on the balance sheet end of 2020 to a historical low of 2. So it's been a really impactful year for us in terms of working through our legacy claims, taking those off balance sheet, closing it down. Our net assets decreased by $5.7 million, but that was on the back of dividend that was paid to our investors. If we can go to the next slide, please, John. So I just wanted to just walk through the cash in some detail given what's happened in the year. So we've had strong cash from operations of $3.8 million. I've mentioned the Neos loan receivable, but we've also received some small payments as well to complement that. We've had a dividend receipt from a small investment in Ginger, which is -- it will be wound up in this financial year, which has a balance sheet investment of about $100,000. So it's effectively a very past investment. We've also managed to recover, in partnership with RFE, loan recovery installments for an impaired loan that has been fully impaired historically. Our dividends -- the dividend payment of $5.8 million, there was a $0.03 special dividend paid in February as well as a $0.01 interim ordinary, both fully franked. And as I mentioned, we've paid out in cash $1.2 million in provisions in claims for the financial year. So that's the summary, John, in terms of the key financial highlights. We could then go on to the ClearView acquisition.

Sure thing. All right. Thanks. Thanks, Brendon. And look, the comments that, yes, being a new CEO coming in and seeing the work the team has done, hopefully, there's good strong evidence of the solid foundation we have as reflected in the strength of those financial results. The acquisition of ClearView Advice is quite a defining transaction to the business, and I'll take you through a few slides just to help you get a sense of what that is. It's really a case of a 1 plus 1 equals 3. When we're looking to grow the business, the point that I really want to emphasize is we want to be very selective about the businesses that join us, whether it's an adviser coming on or a practice or it's an inorganic strategy of having someone to -- that we decided to buy or potentially down the future merge with. And the reason is that we want to make sure we've got a very high compliance bar. We want professional advisers to take their responsibility seriously. And therefore, when we're choosing someone who partner with or come into the business, we need to be selective. And the good news is with the ClearView business, we think that's a particularly strong business, and I'll run you through some of the rationale. So the transaction details are we're acquiring ClearView for $15.2 million. I'll come on to the consideration and the breakdown. A little bit about ClearView. So there's 3 subparts of it is ClearView Financial Advice; there's the Matrix Planning Solution; and there's LaVista, which is the self-licensed B2B business. There's a total of 281 advisers. 169 are licensed. 106 are self-licensed. The self-licensed business through LaVista is reasonably new, and they've actually been very successful growing that. And I'll come on in a minute and talk about Centrepoint, but we also have a good self-licensed business. So between those 2 footprints when we put them together, we start having a meaningful footprint in that market. There's 6 salaried advisers that are also within the group. With the Matrix, the business has actually been recognized in the industry. And it has, for the last 3 out of the 4, won licensee business of the year, so it's a very strong business that's coming across. It's a complementary business. So when you look at the business, there's some parts that just are very similar to ours, but there's also strengths that the ClearView Advice business has that will enhance what Centrepoint has, so some new capabilities we're bringing. Importantly, it's culturally aligned. They've got a very strong technology capability. They've invested heavily in automating compliance in the monitoring solution using some software called Lumen that integrates with Xplan and flags and in compliance alerts. And just given the environment we operate in, strong compliance is absolutely critical. The transaction deal, with how we broke up the $15.2 million, there's $12 million in shares we issue at $0.25, which is 48 million shares; $3.2 million in cash. ClearView becomes a strategic shareholder. And the important point, if you have had the chance to see ClearView's announcement, they clearly want to remain in the sector. They see real benefits in participating. They recognize that it made more sense for their advice business to be part of Centrepoint rather than running a diversified business. And then you can focus on running the life business and super and other things that they do. Simon Swanson, the ClearView CEO, will join the Board. If you look at the purchase price, it's within industry multiples of 1.2x, and it's significantly accretive in value to shareholders. Now the next slide is really my -- the 1 plus 1 equals 3. So I won't go back through. I've already explained what Clearview is on the left. But if you then look at Centrepoint, we've got 315 licensed advisers, 707 self-licensed. We, as I indicated in the previous part of my presentation, have actually really been investing in advice technology with Enzumo, Xplan, Intelliflo, looking at cloud-based solutions. And we've got some big plans about what we're going to do there. So if we add those 2 together, the footprint is 1,300 advisers, 490 licensed, 813 self-licensed, operating leverage and scale. And, again, coming back with why is that important, if you're investing, you're thinking about the increased profitability of the business. Certainly for our advisers, it gives us the capacity to make sure that we can continue to provide high-quality services and invest in new services we're building. There are immediate synergies from the operating expense reductions because the businesses are similar. We absolutely -- we believe that it would be hard to find anyone else in the similar business to us that would have a better footprint on the technology when we combine the assets of both groups. We have a strong institutional shareholder and partner that joins us, that holds 25%, and a stronger balance sheet to leverage further opportunities. So the final slide, I'll hand back to Brendon just to go through maybe some of the post-acquisition metrics and some of the key points just around the logistics of this transaction and timing.

Thanks, John. Yes, so I'll just point to, as you said, the metrics post acquisition. So combine the 2 businesses, we end up with a very healthy gross profit of $41.3 million with adviser fee contribution of $20.4 million. In terms of the EBITDA guidance on an annualized basis, given it's a completion target at the end of October, the annualized objective and strong objective is more than $8 million. There's been a lot of work put into this by both teams collaboratively, so we have confidence in that number. Our current shares on issue of 144.3 million will become 192.3 million on the basis of shareholder approval. Just some key points on the transaction and placement summary. John has mentioned that, the combination of the 2 strong brands and the leveraging of the best practice customer solution, so I won't go into those. But in terms of the -- just some nuances within the -- in the transaction, we've mentioned the scale of 300 advisers and the expectation around earnings of EBITDA annualized $8 million. Just want to call out the one-off transitional and transaction costs. That is driven by advisory fees with our expert advisers that have worked tirelessly with us in the last period of time to deliver this outcome as well as a collaborative agreement in relation to sharing of costs -- one-off costs to transition the business. So bringing together these 2 businesses with 3 trading entities into the business, there will be some short-term transitional costs over a period of 6 months, which will be effected through a transition services agreement, which we're working through. The net tangible assets from ClearView per the agreement is $3.4 million, which is principally cash. The completion date, just to clarify this, the effective date that we're looking to achieve is 31st of October, obviously subject to shareholder approval on the 1st. The reason for the 31st of October is to have a clean month-end cutoff for both businesses and to really start to hit the ground running and not be distracted by inefficiencies of pro rata accounts. We've got an independent expert report that's engaged, and that is underway. And we'll be going through that process into mid-September on the basis of an appropriate outcome for that. We'll then dispatch the Notice of Meeting of the AGM and the explanatory memorandum to the transaction to our shareholders 5 weeks in advance of the AGM, which is, again, subject to approval on the 1st of November. The shares are issued subject to a voluntary escrow for a period of 1 year. And John has mentioned that we're very pleased to have the Group CEO of ClearView, Simon Swanson, who we've worked very closely with in this transaction, join the Board. So that's the key summary.

Yes. All right. So with that, that sort of concludes the formal part of the slides we're going to take you through. But for me, it's really a story of a business that's taken the last 3 years building a very solid platform, a business that is absolutely focused on a growth agenda but being very considerate in the way we pursue that. This is probably the first of the strong tangible things that we've done around bringing the ClearView Advice business in. And as I mentioned, in a couple of months, we'll hope to provide investors with a further update on how we're progressing on the transaction but also some of the other investments we'll be doing kind of more broadly and what we'll be focused on. So with that, I think we might have a few questions. I'm going to stop sharing the screen. And Tim, over to you to just let us know what questions we've got from some of the participants on the call.

No worries, John. Thanks for that. We have had a few questions coming in, both ahead of time and during the call. So thanks, everyone, for your questions. [Operator Instructions] Just looking first at the base business and bearing in mind that you've -- I understand you've just outlined some organic as well as inorganic growth strategy. So [ John ] asked some pointing out -- you point at the EBITDA for the 2 halves of FY '21 was around $2 million for the first half and $1 million for the second half. And he asked about the initiatives that you've got to turn this trend around.

Would you want me to take that, John?

Yes, sure.

Yes. Look, there's -- we haven't sort of pointed at that in the slides, but there's predominantly some one-off costs in there. So with resignation in executive staff, we've had one-off costs that we absorbed in the last quarter. So that's -- there's a -- that's a principal reason for those costs that have been incurred as well as the runoff of rebates into the second half of the year. So there is some normalization. The normalization in the business as a whole was around $1.6 million. So again, we don't -- we just call ourselves to account in terms of core earnings, but there was one-off costs throughout the year and particularly in terms of looking at opportunities in the market, so transformational opportunities with adviser as well as one-off expenses that will not recur into the future.

Thanks, Brendon. [ Peter ] asks, how is Centrepoint handling operations during the current lockdown? And how does this compare with how you went about things during the previous lockdown?

It's a good question. I wasn't here. I might make some comments on coming nearly into the business because it's an interesting scenario. I had the benefit of doing some consulting with the Centrepoint Board and the executive team and was in the office. But then when I've actually joined as the CEO, everything has been virtual lockdowns that we're in. I'm actually amazed by how effectively the business can run. We use all the Microsoft kit. We use Teams for meetings. To some extent, I think the productivity goes up because it's very easy when you're working from home to just click into one meeting after the other. Building a sense of camaraderie and keeping people connected, I think the leaders in this business and all the staff have done a really good job of doing that. So I've been actually really impressed by how effectively the business can function virtually. It does make you think about the amount we spend on office space at times and certainly not utilizing it at the moment. I'm personally someone that does like to have people working together, particularly collaboration is a key part of what I think is important. But maybe Brendon can make a comment and give his observations.

That's a really good comment. But I just would use the ClearView transaction as a really pertinent example because, yes, we haven't met in person.

That's true.

And it's really a strong testament to -- it's incredible. I can talk to you generally about the collaboration and the cultural alignment between these 2 businesses and how we've worked together remotely with dogs jumping in the backgrounds. But our external advisers over weekends, yes, it's -- as I drive home last night, I thought if we'd actually have to go to offices and see people, we might haven't had time to get the deal done. So it's -- yes, it's actually a great question. Thank you.

That's good. There are swings and roundabouts, aren't there? So just a follow-up from [ Peter ]. Brendon, I think you already said quite a bit of detail on the balance sheet slide about legacy claims, but [ Peter ] just want to clarify, have all the legacy claims been settled and paid off?

Good question. So we -- as I said, we had 30 claims at the start of -- at the end of 2020 June in relation to AFCA extended window. In the course of 2021, we've closed and settled 28 of those claims. So we have 2 non-legacy claims still there, and we have a small number of -- sorry, we have 2 legacy claims in the balance sheet, and we have a small number of non-legacy claims. So we have a provision in our balance sheet. We're very comfortable with that in partnership with our audit team and Board that we have the capacity to absorb claims in the future. And you can see with the results this year, by the provisioning on our balance sheet and a really well-managed legal team and external team supporting us, that we have managed down that balance sheet, and we haven't incurred any shock in the business in terms of costs this year, which is why our profit before tax is so much stronger.

Thanks, Brendon. Now looking to the acquisition, so a few questions I'll combine here [ Ron ] and [ Brendon ] have both asked. Can you break down the $8 million plus of EBITDA for the merged group? How much of that is from the base business? How much of it is from ClearView? And how much of it is attributable to synergies on revenues and in cost-outs?