Centrepoint Alliance Limited (CAF) Earnings Call Transcript & Summary

Good morning, everybody, and thanks for joining us today. Welcome to Centrepoint Alliance's Investor Conference Call. [Operator Instructions] On the call today, we have Centrepoint Alliance CEO, John Shuttleworth; and its CFO, Brendon Glass. I'll pass you across in a moment to John to kick off our discussion to the company's half year results. For today, we'll have a presentation followed by Q&A. [Operator Instructions] So to kick things off, I will now hand over to Centrepoint Alliance CEO, John Shuttleworth. Go ahead, John.

Thanks, Simon, and good morning, everyone, and welcome to the Centrepoint Alliance half year results. Thanks for taking the time to join us on the call. We're going to provide an update on the business. We think it will take probably around 20 to 25 minutes to get through. The update today that we're going to run through is going to show a business that has got a strong momentum. It's a business that's completed a transformational acquisition, and it's a business that has strong prospects for future growth. And what I'll do in the first part of this presentation, I'll just unpack that for you, and I hope you understand how we're tracking. So the way we're going to run the agenda is, effectively, I'm going to go through the business results and then a high-level view of the strategy. And then Brendon is going to take you through some of the more detailed financial results. So let's kick off with the results. So the first half, solid financial performance. We completed our transformation acquisition. We had cost synergies from integration. And pleasingly, when we look at our performance as a licensee, we're now #3 in the market, and we'll show you what that looks like on a later slide. Our recurring revenue is 96%, up from 87% in the prior comparative period. Expectedly, some of the investment management margin has been down due to legacy fund outflows and some of the rising costs, and I'm going to dive into the investment management business in a bit more detail. Now a couple of important points when we're looking at the numbers we're presenting, there's 2 months of ClearView Advice revenue and expense in the results because the transaction was completed on 1 November 2021. So a couple of highlight metrics. Gross revenue, $95.5 million, which is up $24.9 million or 35% on the prior comparative period. Earnings before interest, depreciation and amortization, excluding legacy claims, LTI and one-off costs, of $2.5 million, again, up slightly at $0.3 million or 14%. We had cash at the end of December at $11.9 million, which was 7% up on the 30 June number and pleasingly, continue to pay a dividend which is $0.005. And $0.005 dividend strikes the balance between returning some of our profits to shareholders and also ensuring the business that's got the capital it needs to invest in some of the growth initiatives that I'll be outlining. So a pleasing first half. We thought it makes sense to provide an update on the acquisition of ClearView Financial Advice. So as mentioned, it was completed on 1 November. It's delivered really strong scale and efficiency. We had the organizational structure implemented from day 1 and also strengthened the leadership team as we brought the ClearView Financial Advice executives and line managers into the business and rolled out our new organization structure. We've had strong retention of advisers and as we'll unpack, we've had some material expense synergies. Now a few key metrics. Licensed advisers have grown from 315 to 511, which is up 62%. Self-licensed firms, pre-acquisition 151, now at 185. That 185 consists of around 700 self-licensed advisers sitting within those self-licensed firms. Pleasingly, our head count has only had a modest growth from 99 to 105, reflecting the good work we've done on the organizational design and the operating model. The cost-to-income ratio is starting to come down for the first couple of months of the acquisition, 86% to 82%, so 4% down. And the gross profit pre-acquisition to post-acquisition, up 14% to 14.1%. So we are very pleased with the way the acquisition is on and the integration we're doing. What I wanted to do was just run you through now and we don't have a lot of time, but just talk through our strategy and the focus of the business. And this is a slide I've used before, but I think it's incredibly important to just recap on it. And the industry we operate in is incredibly important. And the need for advisers have never been greater. If we start with the size of the business, we've got $13.4 trillion in household assets; $3.4 trillion in super; land and dwellings with people [ settlements ] and property, just under $9 trillion; non-super, $2.5 trillion; and a massive intergenerational wealth transfer. So the market is big now. You then overlay what people are going through. We've got this massive shift from accumulation to retirement driven by the aging population. And we have a very complex system, which is the interplay of a superannuation, retirement, tax, social security and to navigate that, it's hard to do without advice. The other issue is that there's a reduced number of advisers. Advisers are still continuing to lead the industry. So we have more demand and less advisers, the superannuation, I've mentioned. And the other issue why people need advice as many Australians are living longer and the risk of outliving their retirement savings is real. So the thing to remind ourselves is we are in a very attractive industry at the right time. Now what I wanted to do was talk a bit more about our growth strategy, and the way I thought it made sense to do that was talk through the 3 key pillars. The first is our licensee and lending solutions business, and that's all about growing scale and expanding the depth of services. And you've seen that through the acquisition we've done where it's increased our license and self-licensed business. We also have a salary planning business. I'm going to talk and call out separately the lending/broking business shortly because that is a small business that has significant growth opportunities. We have an investments and portfolio solutions business, and that comprises managed funds and managed accounts. We're going to pivot that business from managed funds to managed accounts, and I'll talk you through that. The financial services technology solutions division is an area that is a really key focus for us. We have a strategy around sourcing and integrating cloud-based technology providers to develop the best digital advice capability. And we're progressively working through what we do with advice tech to improve the advice process, the regulatory tech side and also the digitization advice. Needless to say, if acquisitions emerge, that can accelerate the growth. If they're sensible, we will absolutely look at them, whether it's a further acquisition of the licensee, whether it's service providers, it's in the tech space or it would enhance and accelerate our business to build out the digital advice channels. Now what I wanted to do is just take you through, firstly, the licensee. And the headline here is Centrepoint is building scale in the market. This is a ranking its asset data. It's the ASIC Financial Adviser Register data. And what it is, the period I've chosen is just the end of January 2022 because there was a lot of last-minute adjustments made in December due to the FASEA exam where many of the licenses rolled off advisers that haven't completed the exams have left the industry. So pleasingly, you can see we're ranked #3, at 525 authorized reps. And we're actually the only licensee to show net growth. So we completed an acquisition as well as had good strong organic growth. Turning our minds to the self-licensed segment. We have a strong presence, and we believe there's significant opportunity to grow this and improve the yield in this segment. So a little bit about the market, there's around 2,000 self-licensed firms, which comprises about 6,000 authorized reps. So the self-licensed market is around 35% of the total market. When we completed the acquisition, we brought together Centrepoint's AAP business and LaVista. So we now have 185 firms, about 9% market share of firms and 700 authorized reps. So we've got a strong presence. Many of the small aftersales, we're seeing those numbers increase because some are seeking greater control of their business, yet they recognize that they operate in a very complex legislative and regulatory environment and they need assistance, which is the services that we provide. So our strategy going forward is we're going to relaunch the self-licensed business under the LaVista name and continue to develop LaVista's specialist brand. We're going to recruit new firms to attract to our network and improve the quality of our service offer and also aim to increase the depth of the relationship with new services. So we see the self-licensed market as a really significant growth opportunity. I wanted to then talk about our Lending Solutions business. Now it's an area that I would describe as a hidden gem that just need some investments. A little bit of context, firstly, if you look at the lending market, the size of the residential lending market is around $480 billion in loans. If you look at the margin made by brokers, and we've just taken that margin across the market, there's a revenue pool of around $3 billion and brokers are writing just under $300 billion. The commercial side is only a little bit smaller than that, $420 billion; margin slightly lower, but still a $2 billion to $3 billion revenue pool and brokers writing around $168 billion. So you've got a lending market where 60% of loans are written by brokers and around 40% direct to bank. There's around 16,000 brokers in the market, and I've listed underneath there some of the big aggregators, like AFG, Connective and Loan Market. So when you look at the broader market, if you take the 1% penetration, which is just loans on an annualized basis, $5 billion in loans, it's a $30 million revenue all at the average rate in margins, and you can see the commercial numbers underneath. Now when you -- with Centrepoint, this was an area that I was incredibly enthusiastic when I discovered we had this business when I first joined. We have the infrastructure distribution capability to really grow the lending business. So we actually are a boutique provider of lending services with our credit license, with our lending infrastructure. We've run the tech. We've got a lending panel. We do all the compliance, audits, training. We provide a community for the advisers. We've got a $3 billion loan book, which is small relative to the market. There's about 80 brokers in the network. We've had good growth, 48% increase on prior comparative period, and the business is profitable with earnings $750,000. But we're small. We do operate across residential, commercial and equipment finance. We've done an exercise to try to model out. If you take our licensed advisers and our self-licensed advisers, and there's around 1,200 of those and you assume an average number of clients and look at homeownership and lending, we estimate that there's around $54 billion in loans in our network in a given year. And we know from market intelligence that there's both roughly around 20% refinance of new loans each year, which is $11 billion. So if we take the average margins that broking making upfront and recurring, there's $65 million in upfront in a good year and around $16 million recurring, which is the total opportunity in our network. So our first strategy is we're going to grow the broking business and how we're going to do that is going to enable advisers to participate in lending. We're going to increase the number of brokers and enable advisers to become accredited to be advised to write loans and then they, in turn, can provide their advice clients with a refinancing group pricing service on their loan, which is a natural extension of advice. The other area that is not hard for us to do is, with our technology focus, assess the fintech lending opportunity, building a digital front end on top of our infrastructure, and everything we have is not difficult. So whilst the immediate priority will be increasing the number of brokers and providing a service to advisers. Shortly after that, we'll be looking at exploring the fintech opportunity for this broking market. So a really interesting opportunity for the business. The final area that I wanted to touch on before I pass on to Brendon for the financials, is really just talking about the asset management side now. In our market that we compete in, the platform market has around $990 billion invested on platforms. And the majority of money is on platform, some across from our portfolios off the platform, but certainly in the large licensees, most is on platforms. What we've also seen over the last few years is an incredible growth in managed accounts, what I refer to as separately managed accounts or managed portfolios. And the forecast by the Institute of Managed Account Professionals is that, by 2024, that will be around $240 billion. Now for those who don't know, managed accounts and non-unitized managed investment schemes are effectively diversified portfolios. They're really efficient for advisers and investors because you've got professional investment managers that are rebalancing the portfolio and taking this issue away from the advisers and professionally managing the portfolios. Again, you look at Centrepoint's network, we conservatively estimate that we're probably across our self-licensed and licensed business have over $40 billion in funds under advice. We have an asset management business venture that's been for around 20 years. And we have around $730 million in funds under management, and we offer funds as well as managed accounts. We have around $400 million in our venture and managed account portfolios. So that's a bit of a snapshot of our businesses that exist today. Now what I did want to say is, whenever we talk about this, it's really important to set the context. We are an open architecture business. We had very strong research capability, which includes anything that we have internally. We have 1,100 products on our approved product list, 10 major platforms, 900 managed funds, 28 SMAs, 9 life insurance providers. So we're open architecture as long as the underlying product or service is a quality one. Our strategy is really around how do we offer the highest quality asset management competitively priced in diversified portfolios. So the key things that we're doing in the asset management space, firstly, we've taken a strategic decision to divest the legacy funds business to Russell Investment Management. Russell are a high-quality investment manager. They're the underlying manager of those funds business to us, like the natural owner of the funds. So we're transferring the investment rights to Russell. We've signed an agreement which we need to complete, but that just gives you an indication of where we're heading. The other thing we're going to do is we're going to relaunch our venture and managed accounts portfolios with refreshed investment options, improved pricing and functionality. And thirdly, due to the demand, and we have a lot of demand for our research portfolios from the research teams, putting those into an SMA structure and working with our partner platforms to distribute those just makes complete sense for our advisers and their clients. So a little snapshot on what we're doing there. So with that, that I'm now going to pass on to Brendon. We obviously just touched on some of the areas of the strategy to give you a feel of where we're heading. So now I'll just pass on to our CFO, Brendon Glass, who will take you through some of the detailed financial results.

Thank you, John. Taking a look at the financial results summary. The gross revenue is up by $24.9 million. And that's a testament to the quality of our incumbent advisers, those recruited and those we welcome from the ClearView acquisition. Our gross profit is down 9% on pcp with the expected rebate drop-off and investment margin runoff being replaced by newer size adviser fee revenue, which has ultimately driven our recurring revenue to 96%, up to 97% pcp. Our management expenses are down 13% on pcp or 20%, excluding ClearView Advice acquisition. And that's principally driven by $1.2 million in employment expense savings from a complete structural redesign concurrent to the acquisition. And this just demonstrates that cost management has been a consistent focus for the last 12 months. Our cost-to-income of 82% is an evidence that we have really focused on that fixed cost base. And as we increase our scale, that will continue to improve that ratio. Our EBITDA of $2.5 million is up $300,000 on pcp, and that's principally driven by $300,000 in LTI costs in 2020 -- first half of 2022, and $0.5 million, including advice acquisition transaction costs. Our profit before tax of $900,000 is down $300,000 on pcp, and that's due to the $0.5 million in acquisition costs. Now looking at revenue and expense analysis in a little bit in more detail. The rebates are down $1.4 million, as we mentioned, due to the cessation of platform rebates from 1 January 2021. Our investment margin is down $1.3 million due to higher custody fees and lower margins from the platforms, we've also had cessation of arrangements with BT, IOOF and Navigator. This has been offset by ClearView Advice acquisition -- or partially offset by the ClearView Advice acquisition not only for just 2 months from November to December with $1.7 million in contributed revenue for that period. Now we need to take 2 months from signing the SBA to completions due to the independent expert report and shareholder approval. So those earnings will continue to improve in the second half. In relation to key expense movements, they're down $2.6 million or 20% on pcp. Professional fees are down $400,000, and this is due to a consistent focus on preventing leakage of cost and also leveraging the strength of our management team without having to focus on external costs. We've had a small reduction in travel, marketing and other costs due to COVID in-force restrictions. Our employment is down $2 million or 22%. Now importantly, our head count is only up 6 to 105.2 after our transformational acquisition of ClearView. And that very small head count increase, [ held us the ] delivery of expected labor synergies. The profit will also increase further with scale due to the diligence focus in partnership with ClearView Advice, pre and post acquisition. So looking at the balance sheet. Our cash of $11.9 million was up $800,000 on June 2021 primarily driven by cash from operations. Our loans receivable reduced by $1.9 million -- $1.1 million, I should say, with the final settlement in the Neos loan -- Life prepayment, and that was partially offset by an increase of $0.5 million for a small number of adviser loans, which were taken up with the acquisition of ClearView Advice. Our intangibles increased by $15 million with the ClearView Advice acquisition, and this is comprised of $6.7 million in goodwill, $800,000 -- sorry, $8 million in identifiable client list, which pertains to the salaried advice planning channel, and $600,000 in trade names. Now very importantly, our claims provisions have dropped to a historical low with 3 open legacy claims, which compares very favorably to the pcp number of 20 and even more favorably to the 30 at the end of June 2020. Our net assets increased primarily due to $0.5 million in net profit generated during the first half of 2022 as well as $13.3 million in increased issued capital from the ClearView Advice acquisition, offset somewhat by $2.9 million in dividends paid for the period. Now looking at the cash movement over the calendar year 2021. Cash flows at December 31 at $11.9 million. Our cash from operations was $5.4 million, which includes $1 million included funded future leave liabilities for the stuff we got across. We had the divestment of -- sorry, the final settlement of the Neos Life settlement, and we had some recoveries from the RFE loans and other dividend and interest coming through. We also had, as you can see, with the acquisition unusual impact from cash, with cash in and out of $3.2 million. We had dividends paid of $8.7 million, being $5.8 million for the second half of 2021 and $2.9 million for the first half of 2022. We paid out $0.5 million in claims which is a release from our balance sheet, but we had a cash settlement [ of $0.5 ] million for the period. And we had $900,000 in other finance costs, principally lease payments. Over to you, John.

Thanks, Brendon. And that takes us to the end of the formal part of the presentation. So maybe just to sort of sum up, we feel that we've got a business that has strong momentum. You can see some of the benefits of what we regard as a transformational acquisition starting to flow through in the numbers. And we think we've got a business that's got a really strong core licensee, self-licensed business. But we've got other areas to diversify our revenue growth that I've tried to illustrate just in a great time we've had together today. So what we might do is we might just open up for and see if there's any questions so Brendon and I would be happy to address. So over to you, Simon.

[Operator Instructions] Okay. There's one here from [ Travis McMahon ]. If M&A opportunities come up, should we expect further acquisitions to resemble ClearView Advice? Or would you look to add something different?

Yes. Look, the way I'd answer that is that, as I sort of indicated in the strategy meeting side, we're always interested in exploring acquisition opportunities, but there's a few key things that are really important for us. Firstly, if it happens to be a licensee business buying i.e. acquiring a high-quality licensee business is of paramount importance because you want to make sure that we had a network with really good high-quality advisers. It makes no sense to acquire a business and then end up with no potential plans or remediation activities. And the ClearView Advice business was absolutely high quality. The other thing we need to look for is a business that is totally aligned, which was the case when we did the ClearView Advice business because you can put things together that make sense on paper, but if they're not culturally aligned, then these 2 business looks were absolutely, then you're in trouble. But the other issue is that we have to make sure that we, if we're acquiring a business that we've got the potential for further earnings growth, and we're acquiring more than just a business that gets us on to slightly larger with more earnings, but we're a larger version of the same. So we're always looking for the 1 plus 1 equals 2. We -- in some of the technology space is why we're partnering, it's not just restricted to the licensees. As we're trying to grow out our business, we look across other areas that could accelerate some of our capabilities. Because sometimes if you're trying to build things yourself, you have the build risk that you also have the execution risk that can speed up some of our plans would entertain that. I don't know, Brendon, if you've got anything else to add to that, whether that's...

No. That's very comprehensive. It's exactly what we're talking about.

Thanks, John. I've just got one more here from Sam. How have ClearView Advice and Centrepoint Alliance integrated culturally?

Yes. Look, as I sort of alluded in the previous question, the cultural integration has been really good. I guess from the very first start, we engaged in discussions with the executives and we're working through how we were going to bring the business together. If you haven't told people and they were observing in the room, it would be hard to differentiate who were the ClearView Advice employees and who were the Centrepoint Alliance employees. So culturally very good. The people that we really look for in the business that really believe in the advice industry, believe in financial advice and people with a good service ethic because we are a professional services company. And I think we've managed to bring the 2 businesses together. So we're all working out of common offices. They're all integrated in teams working together. And I think it's been one of the highlights of the acquisition has been the strength of that. And a lot of people say that when acquisitions don't work, it's the human relations on the cultural side is the part that doesn't work. And I think certainly, from my observation, we started with a quality business that was very much aligned to ours. So it's thought well.

Yes. What I'll add to that is that we spent a lot of time working with ClearView Advice clearly before the acquisition and after the acquisition. So all that preparation was done, and we work really closely together to deliver that really successful outcome.

Yes. Just got another one come through. What do you feel the quality of the loan book is for Centrepoint Lending Solutions? Can you give any statistics, LTV, arrears, nonperforming?

I'd probably have to take that under advice but I don't know, Brendon, if there's anything we can share. But certainly, when you look at the -- my understanding, when we looked at the books, it's -- we've got a small network of quality brokers but we'd have to take that under advise and come back on that one.

All right. Thanks, guys. There are no further questions at this time. I'll now hand back to you, John, for any closing remarks.

So look, that's -- I'd just like to thank everyone for your interest and support with Centrepoint. We'll keep providing updates to the market as things progress. But thanks for just taking 0.5 hour out to hear how we've been tracking in the first half and some of the things we're working on. So with that, I think we can end the call. Thanks, everyone.